Have you ever considered investing in mutual funds? How many of you decided on your first mutual fund investment based on hearsay? How many of you read about the various mutual fund categories before putting your money in one of them? Most importantly, how many investors take the pain of learning about mutual fund categories to ensure that their investments are in sync with their financial goals?
To start with, mutual fund investing may not be a cakewalk for many considering how many investors misconstrue these investments as equivalent to parking money in the stock market. Since not many people are aware of how mutual funds can help achieve financial independence, they must look for something that allows their investments to perform in sync with the market.
This is possible only with passive investing, which involves putting money in index funds. Since these funds are passively managed, investors benefit from zero or less interference from the fund manager. You can opt for any of the index funds following the Nifty50 or Nifty100 or Sensex index or more.
However, Viral Bhatt, Founder, Money Mantra has a different opinion on the same. Bhatt said, “Debt funds are suitable to invest your surplus money and earn some interest on it. Debt funds usually offer higher interest rates than bank deposits and hence, they can be of great help to fulfil short-term goals. Also, you can keep a stash of money in debt funds to create an emergency fund to deal with any incident.”
Investing in only one kind of fund may not be enough. Since the volatility of stock markets can be a cause of concern for many investors, it serves them best to put money in balanced advantage funds that invest in both equities and debt, thus, allowing them to benefit from the best of both kinds of investments.
Dev Ashish, Founder, Stable Investor said, “Balanced advantage funds are designed to change their exposure to equities and debt based on the fund manager’s view (and chosen investment strategy). Generally, these attempts to reduce your potential losses during volatile markets by balancing your allocation to debt and equity. If in the fund manager’s view, the equity market is becoming risky, they may choose to reduce the fund’s equity exposure. So, this strategy acts as a hedge against losses. And when the markets fall, the funds may buy equities and profit when the markets move up. So, while there is a case for these funds in almost all investors’ portfolios, it might be particularly suited for new investors who may benefit from the fund’s risk management-based asset allocation to smoothen their return experience."
"A balanced advantage fund must not be used to have a one-fund portfolio as it is not a solution to all the investment problems. Just investing in BAF will not solve your overall asset allocation needs. However, all such funds are not the same. Some are counter-cyclical which buy low and sell high, while others are pro-cyclical which try to ride a rising wave and work on buying high sell higher philosophy,” he added.
Now that investors have gained some confidence by investing in balanced funds, it would do a lot of good to look at another category of funds that invest in equities but are still less subject to volatility owing to investments in top blue chip stocks. Instead of assessing blue chip stocks and deciding in which to invest, investors may opt to put their money in large-cap funds that help to earn from the price movement of stocks of some of the top companies in the world.
Suresh Sadagopan, MD & Principal Officer, Ladder7 Wealth Planners said, “Large-cap funds invest in the blue chip companies of the stock universe. These companies are generally market leaders, have good brands and have staying power. Hence investing in such large-cap funds (that invest in blue chips) is safer as compared to any other category.”
The current volatility and sudden shifts in market conditions prompt many investors to park their earnings in debt funds that invest primarily in fixed-income securities such as bonds, securities and treasury bills. These funds invest in fixed-income instruments such as fixed maturity plans (FMPs), gilt funds, liquid funds, short-term plans, long-term bonds, and monthly income plans. Because the investments have a fixed interest rate and maturity date, they can be an excellent choice for passive investors seeking consistent income (interest and capital appreciation) while assuming little risk.
Rohit Shah, Founder & CEO, GYR Financial Planners Private Limited opined, “First-time investors who want to get familiar with the world of mutual funds. Conservative investors are predominantly in fixed deposits and are in a high tax bracket. All investors having an asset-allocated portfolio would have a defensive portion. A good part of this may be considered via debt funds.”
Apart from growing wealth, the focus must also be on saving taxes. This is when equity-linked savings schemes (ELSS) serve best as investments in these funds qualify for deductions under the Income Tax Act, 1961. With the exception of the newly introduced passive ELSS funds, most of these funds invest in equities and thus provide high returns in line with the growing market.
Rahul Agarwal, Proprietor, Advent Financial explains, “ELSS Funds are essentially equity funds but with a mandatory lock-in period of three yrs. However, unlike other open-ended equity funds, where the investor’s objective is primarily capital appreciation, in the case of ELSS, there is an additional objective of tax saving on the invested amount. And I think this should be the starting point of evaluation for ELSS Funds. If the investor plans to use these investments as part of his/her overall equity portfolio along with the added benefit of tax savings, then ELSS funds should be evaluated in a similar manner as equity funds."
“If the objective is tax saving alone and ELSS is used as the ‘best tax saving option’ with the lowest lock-in period among the other tax saving alternatives, then one needs to understand the risk-reward profile of ELSS which is a 100 per cent equity scheme vs say a five-year fixed deposit which is 100 per cent debt. Individuals often fall into the trap of such mental accounting. The simplest approach is to decide on the overall asset allocation based on one’s goals and objectives, time horizon and risk profile and then choose funds/ securities within the different asset classes. It is here that the tax benefit comes into play. Other things being equal, an ELSS fund will deliver better tax-adjusted returns than an equity fund without any tax benefits,” Agarwal added.
With so many categories of mutual funds being introduced by asset management firms, investors are frequently perplexed as to which fund to select and invest in. Though there are a lot many factors influencing one’s choice of mutual funds, a lot depends on one’s financial goals and how one views the state of one’s finances in the long run.