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On what basis we should decide to invest in which mutual funds?
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#Mutual fund as an investment vehicle is an easy answer for all these worries. For every time horizon for our investment, there is a category of mutual fund.
Mutual fund caters to investors of all risk appetite. From a fresher at a job to a middle aged employee, retired pensioner to a small retailer.
Mutual fund has schemes designed which manages wealth depending upon the risk profiles of diverse set of investors with various time horizon for investments.
For example, an investor who wishes to get fixed returns like bank deposits on his investments and has a investment horizon of less than one year can opt for debt funds like – liquid funds, ultra short term funds. These funds have very low risk and manages to offer better return than savings account and short term deposits. These funds invest in money market instruments, ultra short term government securities etc.
An investor with time horizon of 1-3 years can invest in short term debt funds, dynamic bond funds. These funds are also low-risk products and offers higher return compared fixed deposits of banks of the similar tenure.
An investor who has a medium term horizon 3-5 years can opt for balanced/hybrid funds which are debt centric. But also have some exposure to equity giving it better capital appreciation with a limited market risks. Investor with over 5-7 years horizon can look at equity based hybrid funds.
Where the downside risk is mitigated by the debt portion and opportunity to take advantage of the upside of equity markets.
For an young investor or any investor has a long term goal, pure equity mutual funds – like Large-cap funds are the best option to begin with. Over long term equity mutual fund is expected to give much higher inflation adjusted and risk adjusted returns.
Why we are obsessed about ELSS mutual funds
5 reasons of choosing mutual funds over direct investments
1. Individual good quality share comes at high price, where in mutual fund SIP can start with as low as Rs. 500 for monthly instalments
2. Buying and selling direct equities within a year attracts capital gain tax, and high brokerage, mutual fund managers can keep transacting at any point of time, investors don’t need to pay any taxes of he holds the equity scheme units for more than a year.
3. Investment in mutual fund is manged by a experienced research and find management team which is difficult doing at individual level.There is a guideline defined in the asset allocation capping exposure to individual companies as well as sectors.
4. Mutual Fund team has a risk mangement team in place which assures the quality of the investment and proper due-diligence to mitigate various risks which also enable fund managers to manage funds and sell risky security at right time.
5. Liquidity – Mutual funds can be easily bought and sold online over few clicks and the payout is 1-3 days, making it convenient for investment.
#Mutual funds #equity schemes
As usual, once the redemption pressure comes, suddenly a hot cake fund/ category becomes stale and out dated, same thing is happening with the fixed income fund category. Before making these odd judgments with half knowledge, we must look at what prompted the outflow, take away and the opportunities ahead.
Key take away –
1. Unlike equity mutual funds, where we talk about SIP and staying invested for a long term, debt funds/fixed income funds considered for short -medium term and the funds see an upsurge in returns in the falling interest rate scenario.
2.Series of rate cuts by #RBI over last 2 years, the long term debt funds, medium term short term debt funds saw big upswing, giving investors handsome returns, and the chances for further rate cuts may not be aggressive as last few quarters hence it’s wise to book profits. And wise investors did so.
3. There is no panic situation in the debt fund category just because guilt funds, long term debt funds saw redemption. Investors are parking their money in credit opportunities fund (category – you can find in moneycontrol. Mutual funds section)
What is credit opportunities funds? Why should I invest?
Credit opportunities fund is a category within the fixed income funds, investing in high credit quality corporate bonds by mostly non financial companies which offer higher returns compared to the g-sec, tax free bonds, government entities.
A good mutual fund company with a strong compliance team would invest in companies with high credit rating papers ntssuch as AAA or AA, will ensure asset backing for the debt. These funds also come in brackets of short term, long term category depending on the tenor of the debt investments,there are about 57 credit opportunities funds in the list however with a basic research would easily guide is on which tenor funds we should look at this point in time.
Mutual funds companies like ICICI PRU, Franklin Templeton, DSP BR are my personal favorites because of their meticulous processes. Don’t go by past returns of the funds, higher returns could also mean higher risks fund manager might have taken deviating from the mandate and could lead to extreme volatility in returns.
By no mean I am saying put all your cash in this instrument, every instrument comes with its own set of risks, so do corporate debts. These debts run higher credit risk, market risk and liquidity risk. All I am saying is debt funds are not a high and dry category and investors can look at allocating some portion of their investments in these funds to see some upside compared to bank FDs.
Check the list of funds for reference-
http://googleweblight.com/?lite_url=http://www.moneycontrol.com/mutual-funds/performance-tracker/returns/credit-opportunities-funds.html&ei=3r0p83CD&lc=en-IN&s=1&m=970&host=www.google.co.in&ts=1476723583&sig=AF9NedkoAQaVyGxfhovCj-LhqrxO8Mscbg
In the recent past, especially post August 2009 (banning of entry load in Mutual Fund) media has bashed the MF industry many a times predominantly on net negative flow on equity funds despite remarkable market rallies. But if we closely analyze market data, there is a strong SIP movement fuelling up underneath this vulnerability. The new investors are taking SIP (systematic Investment Plan) way to create long term wealth.
Data from industry sources show that there has been consistent upward movement in the SIP folios in last one year in all Metro investors, Non metro cities (next top 25cities) and the smaller cities. The ticket size of average SIP has moved up from Rs. 2100 to Rs. 2200.
Micro SIP category (below Rs.1000, which is dominantly from semi urban and rural India) has seen a surge of 16% from the earlier 13% market share. Though the industry suffered a negative flow in equity funds, the financial year has seen a healthy growth trend with 3.24 Lakh new registrations.
Mutual Fund SIP – Beginners’ route to create a long term wealth
Systematic Investment Plan is a disciplined way of investing into mutual funds. Where in investors have option of investing a fixed amount of money in weekly, monthly or quarterly interval into a specific fund. It can be done by submitting dated cheques or ECS from a specified bank account (Electronic Clearing Systems – Used by banks for transferring fund from one account to another)
For eg. An investor investing as small as Rs. 1000/- per month making a total investment of Rs. 12, 000. Instead of investing Rs. 12,000 at one go, investors now have option of putting the amount in 12 equal installments.
And during volatile market movements, the cost of investment will be average and can see a consistent appreciation of the investment over long period of time.
Beginners’ first step of investment can start with Mutual Fund SIP. Here is why –
1. Small Installments – The new investors who do not have big money ready to invest and allocate in different things, can build their portfolio with a weekly/ monthly/ quarterly SIP over a long period of time. Eg . a ECS deduction of – 1000 per month make a investment of 12,000 in a year.
2. Disciplined Investing – The investors are seeing this an opportunity for a long-term investment as the amount needed for every installment is low and has the benefit of investing through a long span.
3. Beating the volatility of equity market– Investing equal amount every month (similar to saving in a recurring deposit) gives the investor a chance of averaging the risk of losing money through beating the short-term volatility by committing to a long-term disciplined investment.
But, we must look at few reasons why there is net negative outflow in last 1 year –
Reason 1. Advisors are less motivated to sell MF schemes as, as the easy brokerage has stopped coming in
Reason 2. Post market correction of 2008, the 2009-10 rally has made extra ordinary profits in many schemes, so the old investors are booking profits, which had grown multi folds over many years.
But yes, before investing, one should definitely choose the fund carefully.