How to find the right MF for you

Having more money each year is what everyone aspires for, and one of the best ways to achieve this goal is through investing in mutual funds. Mutual funds are one of the best ways to invest one’s money, given the sheer num-ber of choices catering to every type of investor prefer-ence. The fact that one need not monitor the investments on a minute to minute basis (unlike if one’s investments were directly made into securities), and the ability to diver-sify one’s portfolio without high initial capital also are positive add-ons.

Many people are attracted to mutual funds, due to its high-er returns, but are concerned by the perceived risk factor. Mutual funds are actually a relatively better way to grow your money as compared to direct investments in Equities, with a variety of options - both equity as well as more con-servative debt options. Investing in mutual funds is an ex-cellent way to achieve one’s financial goals as the investor benefits from market rate of returns without having to spend too much time understanding the intricacies of the market.

Mutual funds offer benefits such as: Hassle free avenue for investing - the investor is not required to

have pre-knowledge on the various asset classes

Tax savings via ELSS funds

Tax free returns on equity investments held over a year

Opportunities to invest across different asset classes (debt, eq-uity, commodity, etc.)

Facility to invest in foreign markets

Specialized funds to cater to varied requirements, such as index funds, sectoral funds, arbitrage funds, fund of funds, and dis-tressed asset funds

Better liquidity than traditional investment avenues such as PPF, fixed deposits, and bonds

Ascertaining one’s financial situation such as income, expenses, investments and investment goals is the first step towards construct-ing a portfolio. Apart from financial situations and goals, points to consider are age, investment style, personality and risk tolerance. Once the current situation is taken into account, we also need to fix financial goals, and break this up into short, medium and long term.

The next step is to understand one’s risk profile and based on the risk profile, one can select the appropriate asset allocation (debt, equity, commodity, etc.). Are you a risk taker or risk averse person? If one loses sleep over the ups and downs in the stock market, it will be bet-ter to avoid any significant exposure to equity funds. However, if the investor is willing to take risks and has the ability to hold on to the investment for a reasonable period, equity funds are the best option to reach one’s financial goal. The risk profile then decides the asset allocation, and one can divide the capital between the various instruments. Here it is very important to understand the various instruments available in the market. There are the following types/categories of mutual funds - Equities, Bal-anced, Gold and Debt. Equities are one of the riskiest, while at the same time one of the most rewarding investment. There is further categorization to an Equity Fund based on capitalization – Large Cap/Mid Cap/Small Cap Fund. Based on one’s Financial Goals and Risk Appetite, one can select the suitable category of mutual fund for investments. Post deciding on the allocation for each category of fund, one need to finalise on the funds. Factors such as Past performance, portfolio size, how long the fund has been operational, and expense ratio are some of the key points that have to be studied while selecting/evaluating a fund. Fund houses with larger portfolio size (AUM) and the long plus consistent track record should be preferred over newer options, as these tend to be more stable in times of turbulent markets. The expense ratio is an aspect that will impact the returns, with different fund houses charg-ing differing ratios, even a 0.5% reduction in the expenses can result in a substantial increase in returns over a longer period.

Once the investor has decided on the asset type, fund house, and funds in particular, the next step is deciding the investment mode - either lump sum or SIP (Systematic Investment Plan). The SIP (Systematic Investment Plan) is a better way to invest, as this eliminates the need to time the markets. When investing via the SIP route, the investor benefits from both falling and rising markets since when the markets fall the number of units purchased will be higher which will help to enhance the Risk Adjusted Re-turns in the long run.

Key takeaway:

Make financial goals & determine your risk profile

Decide on asset allocation

Select the mutual fund based on criteria such as fund performance, expense ratio, asset size, etc.

Decide on the investment mode – SIP (Regular)

Mutual Funds: Growth or dividend option?

The question of investing in mutual funds is a no brainer, especial-ly for those of you who want to achieve your financial goals (i.e. Everyone!). However, even after selecting the right fund for you, assessing your risk appetite, and making the optimum asset alloca-tion, there remains the question of whether to go in for the growth option or the dividend option. This confusion is further compound-ed with the dividend re-investment option. The selection of the option is as important as the selection of the mutual fund itself. Let us take a look at these options in more detail.

Growth Option

Investments made under the growth option will not yield any short term income, in the sense that all money invested will continue to be invested until redeemed - i.e. this will give you capital appreci-ation and hence returns, but not regular (e.g. Monthly) income. For example, if you purchased 1,000 units of a mutual fund at Rs. 11 and sold it a year later at Rs. 15, this difference of Rs. 4,000 (i.e. Rs. 15 - 11 = Rs. 4 * 1,000 units = Rs. 4,000) is your capital gain and returns on investment. This type of investment is more suited for long term investing in equity mutual funds, as there are no tax-es on long term capital gains. Also, equity mutual funds are prone to short term risk, but in the long term they typically give good returns. This option benefits from the power of compounding since not only is the principal invested, but also the notional profit. It is a good option for those who do not need to depend on a monthly income from their investments for their living.

Also, since the fund does not pay out any dividends the NAV is much higher than that of the dividend option for the same fund - however it is to be noted that this difference is only due to the payment of dividends and not due to a sub-stantial variation in the fund performance.

Dividend Option

Unlike the growth option, investors opting for the dividend option will get a payout in the form of dividend. This option is ideal for short term investments, especially in debt. Debt mutual funds with dividend options are a good option for senior citizens who require a steady income flow and not only capital appreciation. This option will give the investor the benefit of moderate capital appreciation along with dividend returns over the period of holding. It is important to note that due to the pay-outs, the power of compounding is not as efficient as com-pared to that of the growth option. Also, investors who do not depend on the dividend income, will face the risk of re-

investment, i.e. re-investing the money earned via dividend in an asset class which offers good return. It is important to keep in mind that dividends are not guar-anteed, and also that sometimes no dividend is declared throughout the year.

Apr-29th 2014 | Source : Money control.com

Divide d re-i vest e t opio

This option tries to make the best of both worlds, in the form of declaring dividends to investors, but not issuing the dividends in the form of cash but re-investing the dividends into the same mutual fund for additional units. One faces the risk of having to pay an entry load each time a dividend is

reinvested, and also if there is any lock in (as in the case of an ELSS), the new units will be subject to a further 3 year lock in. The growth option is a better bet than the dividend reinvestment option.

Taxaio

Taxation on growth funds is simple, as only capital gains are calcu-lated, and for equity funds there is no tax on long term capital gains, while for short term capital gains it is 15%. In the case of debt funds in the growth option, short term capital gains is taxed at 30% whereas Long term capital gains is taxed at 10% without in-dexation or 20% with indexation. However, in the case of dividend options, the dividend is tax free in the hands of the investor, but the fund will have to pay dividend distribution tax before it gives the

Key takeaway:

Make financial goals & determine your risk profile

Decide on asset allocation

Select the mutual fund based on criteria such as fund performance, expense ratio, asset size, etc.

Decide on the investment mode – SIP (Regular)

How to manage Mutual Fund Portfolio?

A mutual fund is an investment avenue for small and large investors alike. The investors’ money is pooled, profes-sionally managed & invested by professional fund manag-ers. This benefits investors as they can get the advantages of scale as well as returns from a professionally managed portfolio at a fraction of the cost. Through this diversifica-tion, one’s portfolio risk is reduced; thus enhancing the Risk Adjusted Returns. In short, mutual funds helps to gen-erate wealth through capital appreciation in the long term (depending on one’s investment horizon and goals) through a diversified portfolio at a low cost and lower risk

One can invest in both equity and debt funds at a low cost and without the need for daily monitoring. Ideally, one should look at investing 70% in equity funds and 20% in debt funds, and 10% in gold funds (either via ETF or gold funds) – the mentioned allocation is suitable for a person who has risk appetite of moderate – high and is willing to stay invested for a long term. The best way to invest in a mutual fund is first to understand one’s risk profile and based on the risk profile, one should select the appropriate asset allocation (Debt, Equity, Gold, etc.).

If one loses sleep over the ups and downs in the stock market, it will be better to avoid any significant exposure to equity funds. Howev-er, if the investor is willing to take risks and has the ability to hold on to the investment for a reasonable period, equity funds are the best option to reach one’s financial goal. Also within the equity holdings, funds can be fur-ther diversified to Large/Mid & Small/Balanced funds. However managing one's di-versified portfolio needs adequate disciplined approach of investment and maintenance. Here are the few methods that can be fol-lowed in-order to manage one's mutual fund portfolio. Diversify the holdings In practice, not all funds invested in different portfolios such as bonds, debt instruments, stocks, etc. incur similar profit all the time; as some funds can give substantial returns and others might not.

Diversify the holdings In practice, not all funds invested in different portfolios such as bonds, debt instru-ments, stocks, etc. incur similar profit all the time; as some funds can give substantial returns and others might not. So it is essential for an individual to look into the mutual fund category before investing, the type of fund i.e. Large/Mid&Small/Balanced/Gold/Debt etc, returns generated in the past and also the associated risk.. You can choose some of these funds based on your portfolio mix keeping in mind your risk appetite and financial plans. A high performing fund for a particular year may not perform well in the future years or vice versa, and basing investment decisions on this will not bode well for the long term. For example, if one invests money across several funds equally, and if one fund (Fund A) does badly, while the others give mod-erate returns and Fund B yields very high returns; then the losses made in Fund A will be offset by the gain in Fund B – hence it would be advisable to diversify/invest in multiple funds in order to reduce the risk. Risk Profile Before investing one should know whether you are a risk taker or averse to risk. Risk tolerance is measured by how much market risk (fluctuations/volatility) you can handle at a given period of time, and the higher your risk tolerance you can have a higher allocation towards equity oriented avenues as compared to debt, bonds etc, whereas if the risk tolerance level is low then your portfolio should have a lower allocation towards equity in relation to debt instruments.

Time Horizon This is a very important factor to consider, since this is based on one's financial goals – the shorter the time frame for the goal is (e.g. higher education) it is better to invest in debt instruments, and for longer time frame goals it is better to invest in equities (via mutual funds)

If one is willing to invest for the long term, then equity mutual funds are the right investment decision. As holding the investments for a longer term period will benefit the investors, due to the power of compound-ing, as well as zero long term capital gains tax for equity instruments. Tracking Performance A very crucial step towards managing your mutual fund portfolio is to revisit your portfolio from time to time, and make check/measure the performance If the performance is inline with the market condition and expected returns, then one can continue holding the same portfolio mix. However if the portfolio has not been successful in delivering the expected returns then one can consider small modification in the same. However it is advisa-ble to stay invested in an equity oriented avenue for a longer time before making any switch .

Key takeaway:

Assess your risk tolerance, financial goals, and investment horizon

Check your portfolio at least once a quarter to make any adjustments

Diversify your holdings

Invest via Systematic Investment Plan (SIP) route