• Professional expertise:
  Fund managers are professionals who track the market on an on-going basis. With their mix of professional qualification and market knowledge, they are better placed than the average investor to understand the markets.
• Diversification:
  Since a Mutual Fund scheme invests in number of stocks and/or debentures, the associated risks are greatly reduced.
• Relatively less expensive:
  When compared to direct investments in the capital market, Mutual Funds cost less. This is due to savings in brokerage costs, demat costs, depository costs etc.
  Liquidity:
  Investments in Mutual Funds are completely liquid and can be redeemed at their Net Assets Value-related price on any working day.
  Transparency:
  You will always have access to up-to-date information on the value of your investment in addition to the complete portfolio of investments, the proportion allocated to different assets and the fund manager’s investment strategy.
• Flexibility:
  Through features such as Systematic Investment Plans, Systematic Withdrawal Plans and Dividend Investment Plans, you can systematically invest or withdraw funds according to your needs and convenience.
• SEBI regulated market:
  All Mutual Funds are registered with SEBI and function within the provisions and regulations that protect the interests of investors. AMFI is the supervisory body of the Mutual Funds industry.

Snapshot of Mutual Fund Schemes

How to choose the right Mutual Fund scheme

Once you are comfortable with the basics, the next step is to understand your investment choices, and draw up your investment plan relevant to your requirements. Choosing your investment mix depends on factors such as your risk appetite, time horizon of your investment, your investment objectives, age, etc.

What should be kept in mind before investing in Mutual Funds?
Mutual Fund investment decisions require consistent effort on the part of the investor. Before investing in Mutual Funds, the following steps must be given due weightage to decide on the right type of scheme:

1. Identifying the Investment Objective
2. Selecting the right Scheme Category
3. Selecting the right Mutual Fund
4. Evaluating the Portfolio

A) Identifying the Investment Objective

Your financial goals will vary, based on your age, lifestyle, financial independence, family commitments, level of income and expenses, among many other factors. Therefore, the first step is to assess you needs. Begin by asking yourself these simple questions:

Why do I want to invest?
The probable answers could be:
» "I need a regular income"
» "I need to buy a house/finance a wedding"
» "I need to educate my children," or
» A combination of all the above

How much risk am I willing to take?
» The risk-taking capacity of individuals vary depending on various factors. Based on their risk bearing capacity, investors can be classified as:

• Very conservative
• Conservative
• Moderate
• Aggressive
• Very Aggressive

To ascertain your risk appetite, try out our Risk Thermometer.

What are my cash flow requirements?
For example, you may require:
» A regular Cash Flow
» A lumpsum after a fixed period of time for some specific need in the future
» Or, you may have no need for cash, but you may want to create fixed assets for the future

B) Selecting the scheme category

The next step is to select a scheme category that matches your investment objectives:

» For Capital Appreciation go for equity sectoral funds, equity diversified funds or balanced funds.
» For Regular Income and Stability you should opt for income funds/MIPs
» For Short-Term Parking of Funds go for liquid funds, floating rate funds, short-term funds.
» For Growth and Tax Savings go for Equity-Linked Savings Schemes.

C) Selecting the right Mutual fund

Once you have a clear strategy in mind, you now have to choose which Mutual fund and scheme you want to invest in. The offer document of the scheme tells you its objectives and provides supplementary details like the track record of other schemes managed by the same Fund Manager. Some important factors to evaluate before choosing a particular Mutual Fund are:

» The track record of performance over that last few years in relation to the appropriate yardstick and similar funds in the same category.
» How well the Mutual Fund is organized to provide efficient, prompt and personalized service.
» The degree of transparency as reflected in frequency and quality of their communications.

D) Evaluation of portfolio

Evaluation of equity fund involve analysis of risk and return, volatility, expense ratio, fund manager’s style of investment, portfolio diversification, fund manager’s experience. Good equity fund should provide consistent returns over a period of time. Also expense ratio should be within the prescribed limits. These days fund house charge around 2.50% as management fees.

Evaluation of bond funds involve it's assets allocation analysis, return's consistency, it’s rating profile, maturity profile, and it’s performance over a period of time. The bond fund with ideal mix of corporate debt and gilt fund should be selected.

Systematic Investment Plan (SIP):

A Systematic Investment Plan (SIP) is a simple method of investing, used across the world as a means to accumulate wealth. It works the same way as a recurring deposit account. SIP involves investing a fixed sum of money in a specific investment scheme, on a regular basis, for a pre-determined number of period.

SIP is a disciplined approach to investing, and:
» Helps you to invest disposable funds each month.
» Gives you the benefits of rupee-cost averaging
» Relieves you of trying to time the market
» Helps you to reach your financial goals

Here is how you start:
» Fill up a single SIP form, and a single application form.
» Draw post-dated cheques (minimum 5 cheques).
» Per cheque minimum SIP amount, can be as low as Rs 500/-

How is SIP useful?
» Your periodic investments can be as small as you want, provided your overall investment is at least Rs. 5,000/-.
» The day/ date option ensures that you get to pick the time of month/ quarter that best suits you, given your cash flow patterns.
» Minimum papaerwork
» If you invest through SIP, you do not have to pay an entry load in most schemes
» If you exit in less than the specified period (usually, 6 months for debt schemes, 1 year for equity schemes), you pay exit load as applicable.

Benifits of SIP

SIP in Tax Saving schemes (ELSS)
People having time horizon of more than 3-4 years may choose Tax Saving schemes (ELSS) over a purely diversified or focused equity fund scheme.

It provides:
» Relief from one lump sum investment at the year-end (e.g., Rs. 1,000 every month, rather than Rs. 12,000 lump sum)
»Tax relief

Accumulating Insurance Premium through SIP.

Open two SIPs of 6 month each and repeat the same after 6 months.
It provides:
» Ready premium at the end of six months every one year.
» Relief from one lump sum investment at one go (e.g., Rs. 1,000 every month, rather than Rs. 12,000 lump sum at the time of premium payment date).

Word of Caution on SIP
An SIP may not always provide better results in terms of returns, especially in successively rising markets (The Rising markets example above has some months when NAV falls). But it usually works out in favour of investors as markets tend to fluctuate by nature fluctuate and do not always show a continuous rise over long periods. And of course, SIP does offer a superior and easier way of investing in Mutual Funds.

How to calculate the growth of your Mutual Fund investments?

ILLUSTRATION
Mr. Gupta purchased Mutual Fund units worth Rs. 10,000 at an NAV of Rs. 10 per unit on February 1, 2004. The Entry Load on the Mutual Fund was 2%. On September 15, 2004, he sold all the units at an NAV of Rs 20. The exit load was 0.5%.

His growth/ returns is calculated as under:

1. Calculation of Applicable NAV and No. of units purchased:
(a) Amount of Investment = Rs. 10,000
(b) Market NAV = Rs. 10
(c) Entry Load = 2% = Rs. 0.20
(d) Applicable NAV (Purchase Price) = (b) + (c) = Rs. 10.20
(e) Actual Units purchased = (a) / (d) = 980.392 units

2. Calculation of NAV at the time of Sale
(a) NAV at the time of Sale = Rs 20
(b) Exit Load = 0.5% or Rs.0.10
(c) Applicable NAV = (a) – (b) = Rs. 19.90

3. Returns/Growth on Mutual Funds
(a) Applicable NAV at the time of Redemption = Rs. 19.90
(b) Applicable NAV at the time of Purchase = Rs. 10.20
(c) Growth/ Returns on Investment = {(a) – (b)/(b) * 100} = 95.30 %

Some don’ts for Mutual Funds

Do not speculate: Always evaluate risk-taking capacity.
Do not chase returns: Because what goes up must come down.
Do not put all eggs in one basket: Diversification reduces the risk.
Do not stop working on Mutual Funds: Continuous evaluation of funds is a must.
Do not time the market: Every time is good for investments.

Always remember

1. Mutual Funds are subject to market risks and there is no assurance that the fund objective will be achieved.
2. NAVs fluctuate depending on forces affecting the Capital market.
3. Past performance may or may not be sustained in the future.
4. Returns are neither guaranteed nor assured.