On what basis we should decide to invest in which mutual funds?

On what basis we should decide to invest in mutual funds?
I found this question on quora, and for a moment I found this question inadequate to respond. Then I realised that this is a common question i come accross from many of my friends and relatives. And decided to write a post which may not be exactly comprehensive, yet it will lead to a better idea about mutual fund investments.
So my reply —
This is a very broad based question. Still to answer you, mutual funds is an amazing investment tool. It is very flexible way of investment for investors where one can choose equity, debt, gold etc as an underlying asset depending upon the financial goal. 
Broadly in India, there are equity mutual funds, debt funds, gold funds and hybrid funds. There are sub categories under these to suit investors’ needs.

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If one have an ultra short term goal of 0–12 months – chose luquid funds/ ultra short term debt funds
Goal – 12- 24months – you may look at short term debt funds, dynamic bond funds, credit opportunitues fund, even long term debt funds
Goal 24 – 36 months – you may look at debt hybrid funds, 0–30% equity 70- 100% debt. These funds give stability of debt rerurns, yet give an opprtunity to invest in equity which has higher return potential. However, it has a tax treatment like debt investment.
Goal – 36 – 60 months – one may consider  investing in (SIP) equity oriented hybrid funds with 60–70% equity and 20–30% debt. They give a significant exposure to equity with a nice cushion against volatitility with debt exposure. These funds give tax free return after 1 year.
If you have goal 5 – 8 years away, choose a large cap fund and invest through SIP.
Any goal beyond 8 years, do some research in mid-cap small cap funds.
If you are more specific and comfirtable sharing details interms of your goal, your age etc, would be able to help you with more specific information.
If you want to know more specific, do mail me at debashree.ad@Gmail.com or tweet me @debashree_ad

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Ladies, Yes you can buy mutual funds, check which one suits your needs

    This article is dedicated again to the beautiful ladies often puzzled between the investment options. The point is not that which product is right. Every product has a certain objective and investment philosophy attached. Every individual is different and so are their investment requirements. Few of us need to keep extra cash in hand, few of us are planning a trip abroad after 2 years, and few are saving for child’s higher education. For every stage of life we have certain area to focus on. For these goals, one need to invest in the right investment vehicle.

    Financial awareness important for women

    #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

    Include Dynamic Asset Allocation Funds in your portfolio to create wealth and cushion against equity market volatility

    Ideal for moderately conservative investors who wish to have some equity exposure, can build a retirement kitty with mutual fund using #SIP to invest and Systematic withdrawal plan to get a monthly income) reap maximum benefit of this fund category.
    In my previous posts I have written about #debt and #equity mutual funds and the advantages of investing in #mutual funds. In this post I would like to share some insight about the equity oriented hybrid funds which offers best of both worlds. These equity oriented balanced funds/ hybrid funds/ dynamic allocation funds should be part of core investment portfolio of an individual investor of any age

    What investors can expect from these funds?
    1. Tax free returns after 12 months, and exit load free after 12-18 months depending on the fund house
    2. Much higher return than Bank FD with lower downside risk compared to pure equity funds, mostly matching index returns over long term
    3. Doesn’t matter you are 22 or 42, Ideal as long term wealth creation with moderate risk, can build a retirement kitty with SIP and use SWP (Systematic withdrawal plan) to reap maximum benefit of this fund
    4. Even the worst fund in the category has given 10% return in five years. The top 5 have averaged return over 15%
    5. This category is expected to deliver less volatility with consistency compared to the equity market
    What investors should not do?
    1. Not compare it with a largecap/ midcap/ thematic funds, they may swing higher both sides and have a different investment approach and objective
    2. Do not consider hybrid funds to be risk-free, all investment instruments come with own share of risks, however, due to its diversification between asset class, it generally experiences less downside compared to benchmark. Not to get lured by past performance and very high returns, it is possible that fund management is taking higher risk than the fund mandate and may expose you to risks you do not wish in this category
    What are #dynamic allocation/#balanced funds?
    Here, I am focusing on equity oriented balanced funds. These funds have about 65% exposure in equity and rest in debt and cash. Thumb rule good investment practice, buy at low and sell at high is automatically adhered to because of its scheme mandate, mitigating risk for the investor. And during low phases it adjust its portfolio with higher equity buy and lower exposure in debt. The USP of the product category is capturing the downside risk. The chart defines how it actually benefits the investors.
    Debt oriented balanced/hybrid funds also part of the hybrid funds category which is ideal for conservative and retired investors. These funds are treated as debt instrument for taxation purpose.
    Who should buy equity oriented dynamic allocation funds (#balanced funds)?
    The category is for everyone. This carries lower risk compared to pure equity plays, still enjoys tax free returns as any #equity fund. The investment philosophy is simple but extremely effective “buy low and sell high”, as the equity market sees a upswing, fund managers book profits to rebalance the portfolio and vice versa when market falls. This is much easier said than done but the investment mandate is such, that automatically fund managers follow the rules and avoid temptation of exposing the fund into higher risk area.
    ICICI Prudential balanced advantage fund, the fund with the largest AUM in the category has beaten the category average and nifty 50 returns in the past 5 years and given return of 16% annualised return.
    Portfolio allocation of ICICI Prudential Balanced Advantage Fund shows higher commitment towards protecting the investor’s money along with generating surplus return. The equity portfolio is dominated by largecap companies and debt category has maximum exposure in govt securities of about 12% of the portfolio, most debt investments are in high credit score category of AA and above.
    The graph of 5 years return of a hypothetical investment of Rs. 10,000 in balanced funds of the top 5 mutual fund companies viz-a-viz Nifty

    Graph source – Moneycontrol.com


    Disclaimer – Mutual Fund investments are subject to market risks, read all scheme related documents carefully


    Fixed Income funds should be part of your portfolio

    Economic Times reported today, that fixed income schemes losing sheen, find here how quietly a category “credit opportunities fund” is replacing the other debt funds as a investment option and debt mutual fund schemes remains attractive. We will discuss the topic in this post.

    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

    How to select the best equity mutual funds for your portfoli

    10 parameters to select the best #equity #scheme.
    It’s a hair tearing task to shortlist mutual funds, taking expert advice, friends’ suggestions, father’s ideology and so on to figure out the best #equity #mutual funds in India. But, the more you discuss, the more complicated it gets. I have found my way of selecting the mutual funds with a little bit of help from the mutual funds fact sheets and the publicly available information.
    I have divided the topic in simple 10 segments, once we put our shortlisted equity mutual funds of
    our choice, we just simply need to check if its matching the parameters checklist and we are done.  While investing in equity funds, we must remember that the investment horizon should be long enough realise the benefit of equity investment, ideally above seven years. The ideal way of investing is through Systematic investment plan (SIP) to get cost average and benefit of compounding.
    Before I begin with the headings, I must explain what a good equity mutual Fund is. It is the fund which consistently beat the index and stays ahead of the curve. Equity mutual funds should be considered for long term (minimum 5 years), within equity mutual fund there are several categories as below, based on the core objective of the fund. According to Indian system any mutual fund maintains equity holding above 60% is treated as equity mutual Funds. Every class and subcategory of mutual funds has a defined objective, hence the returns.
    In this article we intend to only concentrate on the parameters for selecting a right equity fund.

    1. The Fund house and the AUM– I personally prefer funds from top 5-7 Asset Management Company. So, once I am sure of the category, I would choose a good pedigree. The volume and pedigree cannot predict a fund’s performance, but it definitely shows the investors trust and an established history and record of fund management.
    Asset under management is not true indication of future performance, largest AUM doesn’t ensure maximum return. However, a good equity mutual fund will have assets over multi hundred crore. Funds with lower assets may feel stress of volatile market movements or high redemption pressure. Also, bigger funds will likely have lesser expense burden.   
    2. Fund manager – A fund manager is the person responsible for complete management of the mutual fund. With his team of analysts and trading desk he ensures smooth functioning, investments, churning of portfolio based on opportunities and threats in the stock markets keeping up with the investment objective of the fund. His experience gives an indication of his working style, and a seasoned manager is assumed to see few stock market cycles.
    Ratios
    3. Standard deviation ratio – A mutual fund scheme is expected to give returned aligned to its bench mark index and its investment philosophy. The standard deviation ratio indicates the possible deviation between the historical mean return of the scheme. If a fund has historical mean return of 10% and standard deviation of 2%, it indicates the fund’s future return could be 10±2%
    4. Sharpe Ratio –Sharpe ratio is an indicator of fund’s performance compared to the risk taken by it. It captures the excess return the fund has earned. Higher sharpe ratio indicates better fund performance.
    5. Expense ratio – This particular ratio gives you an idea how much money is getting into the operational expense for managing the fund. This is indicated in percentage term in any fund fact sheet. Though #regulators have capped the ratio, a lower ratio indicates it is not eating much into the return on your investment. A average expense ratio could be at 1.5%
    6. Alpha: The simplest definition of an alpha would be the excess return of a fund compared to its benchmark index. If a fund has an alpha of 10%, it means it has outperformed its benchmark by 10% during a specified period.
    7. Beta: Quite like equity stock the Beta refers to fund’s volatility compared to that of a benchmark. For example if beta of a fund is 2, for every 10% upside or downside, the fund’s NAV would be 20% in the respective direction.
    8. Portfolio turnover ratio – This particular ratio specifically highlights the churning in the portfolio. Higher churning indicates higher cost. Until and unless the fund is giving exorbitant returns compared to its peers and benchmark, it could become a point of contention.   
    9. Fund rating – No harm in looking at it once, but it may or may not help with a true reflection and you can skip this parameter if your fund analysis doesn’t match with their rating. Ratings are assigned annually and every year the 5star rating changes and their criteria of analysing could differ from your long term objective.  
    10. Read the SID
    Go to the mutual fund website and check for fund fact sheet (For example, find Franklin India Blue Chip Scheme Information document)
    2. Check for analysis by few independent websites like – valueresearchonline, mutualfundsinddia etc.

    Do your own homework with the 10 points mentioned above or any other reference points. 

    Financial planning simplified

    #Personal finance is a very wide subject. Here I just want to simplify the basics, why we need to take care of our money, why the inflow and outflow of funds need to me managed.  
    Every person has their own perspective about life, income and expenses. However, we can start with the 5 constants of personal finance apart from the regular aspirations of education for your children, marriage and buying a home.
    1. You are going to grow old
    2. Prices will go up
    3. Value of money will decrease
    4. Financial markets will remain volatile
    5. There will be unplanned emergencies
    Now, what do we do? Start stacking up cash/ gold? Putting in Fixed Deposit? Buy stocks? Mutual funds? Insurance? What?
    We need to simply the relation between the goals and financial needs. We need to come in terms with the purpose of the investment so that we allocate funds and plan in a right manner.  

    How to go about it?
    Start as soon as you feel it is important; don’t wait for emergencies to teach you harsh lessons.
    Chalk out your financial goals based on the event and the expected timeline. For eg
    Own marriage/ buying property/ vacations/ children’s education and marrage/ second home/ retirement planning etc.


    Keep in mind


    1. Keep goals clear
    2. Time in hand
    3. Risk taking ability
    4. Avoid mixing asset classes
    Based on your age, current financial situation, priority and timeline you can plan your finance. 
    First, prepare an Emergency fund, ideally the most liquid investment like savings account/ Fixed deposit/liquid fund.
    Your financial liabilities and dependants should determine the life insurance cover. Chose term plan, stay away from endowment and ulips. See Post to know more.
    Health insurance is also a significant part of financial planning. A medical emergency can erode a significant portion of your wealth if not planned for emergencies.
    Few goals which are 5 – 10 years away and more, a significant kitty can be built with a monthly investing a small amount into equity mutual fund. See post on wealth creation

    Younger the age, risk taking capacity is more. Equity based mutual fund investment can yield maximum return in long term.  Thumb rule of equity investment is (100-age)% of total savings can be kept in equity. With increasing age/ nearing the goal gradually shift the investment into debts or fixed instruments like Fixed deposits.
    Retirement planning is one more aspect one need to start early. As, the value of money decreases with passing time, maintaining the same lifestyle as today will cost you much higher 20 years later. Hence, investing for retire is important. See post
    In other posts will go into details

    S I P (Systematic Investment Plan) – TREND AMONG THE FIRST TIME INVESTORS, making a strong case for Mutual Fund Industry


    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.

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