January 24, 2008

`MFs are the best tool to mitigate your risk’

The domestic securities market has been volatile in the recent past. An average volatility of 1000 points either side at the bourses has become an order of the day. Due to this, the Net Asset Value (NAV) of the Mutual Fund (MF) schemes too have been impacted as they are directly linked with the equity market.

The volatile financial market has compelled the retail investors to chalk out their investment strategy properly. And, they have been sending several questions to this website on MF industry and the financial market.

To answer these queries,  Mukul K Gupta, CEO, Birla Sun Life Mutual Fund took some time from his busy schedule to address the issues and concerns raised by the investors. Excerpt:

I want to invest in Mutual Fund. Please give me a brief knowledge about this.

A MF is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in the capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them. Thus, a MF is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.

Currently, in which scheme I should invest? My budget is Rs 4,000 per month.

With a budget of Rs 4,000 per month, you can invest wisely and the best way to do so is investing through Systematic Investment Plans (SIPs). You can have couple of SIPs with allocations to mid-cap funds and the flexi-cap funds. If you are looking for tax planning, than allocations can also be made to ELSS schemes.

In which aspect a Unit Linked Insurance Plan (ULIP) could be recognised as better than Equity linked Savings scheme (ELSS) (close ended) MF scheme.

Investments in ULIPs and ELSS has to be viewed differently, though the products look comparable. In terms of returns, ELSS would always outperform the ULIPs due to low fund administrative and other charges. Secondly, ULIPs also charges one for the life cover associated with it.

The general opinion is that investing in SIP on a long-term basis is better. Could I set a time frame for SIP for say 20 years on compounding basis?

Best results from SIPs are visible only in the long-term, though the definition of long-term may vary from people to people. I believe one should look at allocating funds towards SIP for minimum 5 years.

What is the minimum amount to start investing in SIP?

To begin with SIP, Rs  1,500 is a very good idea. SIPs are the best way to invest for a long-term wealth creation.

I am 28 yrs and earning Rs 45,000 /- month . What should be my monthly investment in MFs through SIP and what are the good MF's in which I can invest ?

Your SIP allocation should be atleast Rs 5,000 per month. You can look at
Mid-cap and Flexi-cap funds to start off your investments and later move to the thematic funds. If you are looking at tax planning also than make some allocations to ELSS too.

I want to invest Rs 15,000 per month in MFs. Please inform which are the best performing in terms of providing returns and tax saving also.

Returns from MFs are directly linked to the equity markets so it would be very difficult to put a number to percentage (%) of return. In the long run, markets have given returns in the range of 15% to 18%. For tax saving, one need to invest in special category of MFs termed as ELSS. These schemes have a lock in of three years.

Is investing in an Infrastructure Fund is profitable in the longer run?

Investing in equity markets with a long term view is always good And investing in companies participating in India's infrastructure boom is even better. India still has a long way to go in infrastructure development
and as current order books of the infrastructure companies suggest that they are in for huge rise in scale of operations.

What is an Initial Public Offer (IPO). How it is differ from equity share?

New Fund Offer (NFO) or investments in MFs are quite different than equity shares. Basically, MF is a pool of money invested by several investors through a professionally managed fund house in equities. MFs are the best tool to
mitigate your risks associated with investments in equity market and at the same time enjoy the upside of equities.

Both author and website have taken a proper care while providing the above information. However, the investors are advised to consult a financial advisor for their investment decisions. Either author or website will not be responsible for their investment decisions. Read Disclaimer