'January 18, 2008
Tips to invest in Mutual Funds
By V Ramesh
Investment, per se, is an art. Not everybody has this skill. At the same time, for those who do not possess this skill, still need to make investments. More you maximise the return by effectively utilising the money earned or saved by you, the better.
For those who do not possess the “investment” skill, there is a great route available – Mutual Fund (MF) schemes. This is a different animal. A simple one, with lots of variety and it comes in all shapes and sizes – to suit each of the investor’s requirements. In this article, without going to the basics of Mutual Funds, let me try and address some questions that investors had asked me at various points of time.
How long should I stay invested
A typical quandary for most of the investors. Not just in MF, in any other form of investment where flexibility is there. Let me stick to MFs. The longer you stay invested, the better. I would suggest a minimum tenure of 5 years, for you to have decent, steady return on your investment. Well, it also matters what type of scheme you chose and when you invest. Even in MF, the timing is important. Just to cite an example, if you would have invested in Technology fund in 1998, you would have got into a mess. But, if you would have invested somewhere around 2002/2003 in the same Technology fund, you would have been better off. Therefore, choice of right fund is of essence.
Should I invest in Growth or Dividend option
Some investors have this confusion as to which is best suited. Such confusion arises only to maximise the return and ensure that the option is correctly chosen so that it is tax efficient. If you plan to invest in an equity fund, in the current scenario, capital gains is not taxable if you stay invested beyond one year. In the normal course, mutual fund investment is for long term – I would say, for 3-5 years. Therefore, you should look at investing in Growth option.
If your investment is into a debt product, you should invest in dividend option. The dividend paid to the investor is tax free while the capital gain is taxable at 30% for short term and 20% for long term (plus surcharge and cess as applicable). In case of dividend paid, the scheme has to pay a dividend distribution tax of 12.5% (plus surcharge and cess as applicable). In simple words, Equity Schemes – Growth option and Debt Schemes – Dividend options. The caveat still remains that it shall depend on the individual tax structure and income levels.
NFO or the existing fund
The New Fund Offers (NFOs) are favourite for many investors. I cannot fathom why. Given a situation where there is an NFO with a same objective of an existing fund, it is better to get exposed to the existing fund. As they say, `known devil is better than unknown angel’. However, if there is a new theme that is being launched, it makes a lot of sense to invest in such a new theme. Having said that, in case there is a fund launched by a fund house which is not known for their equity investment and after some time another established fund house launches the same theme, it is advisable to take an exposure in the scheme of the established fund house instead of the existing one. Therefore, such decisions are situational and there is no set formula for the same. Still, it is all a game of asset allocation.
NAV of Rs 10 or Rs 175
Frankly, such a dilemma is unnecessary. NAV has no say on the returns that you receive. If the return of a fund is 40%, whether the NAV you have entered is 10 or 200 it will not matter. By that I mean that an investor A who has invested at an NAV of Rs 10 will get a return of Rs 4 per unit and the other investor B could get a return of Rs 80 per unit and the catch is that the number of units that the investor gets. Investor A will get 1000 units (on investment of Rs. 10,000) and Investor B will get only 50 units. Thus, the return would be Rs 4000 for both the investors.
Should I invest in ULIP or MF scheme
ULIP and MF schemes are of different set of investments. First, your objective should be clear. Do you want insurance cover or do you want to earn on your investment. My view is that you cannot mix the both. With the same outflow, it would be better to take a term policy (lower premium, higher cover) and have an SIP in a good mutual fund schemes for the period of the insurance (normally 15-18 years). You would probably make much better return in this combination than investing in ULIP.
How do I time the market
Even the well-known experts of the markets cannot accurately time the market. The philosophy goes “buy low sell high”. It is great as a philosophy, but in practice it is not possible to consistently do it. That is why, for those who are risk averse, there is this excellent facility called Systematic Investment Plan (SIP) and Systematic Transfer Plan (STP). And, rupee cost averaging will work very well for you. Currently, there are funds who offer weekly transfer plan under STP. I am waiting for the day when the Mutual Funds will offer Daily STP which will be amazing averaging.
The author is CEO, Prabhudas Lilladher Financial Services Pvt Ltd. The views expressed here are his own.
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