Equity Funds:
- Invest for the long term.Studies have shown that every increase in the holding period increases the probability of an asset class delivering the kind of returns it is capable of. If you invested for, say, 10 years, you give yourself a greater chance to earn the fantastic returns that equities promise than you would if you invested with the intent of exiting within a year.
- Keep an open mind. Don't expect your funds to deliver overnight. Don't wait forever, either. For instance, if you invest in an equity fund with the expectation of a 20 per cent return in a year's time and if you realise these gains in less than a year, say seven months, book profits.
- Stay true to your asset allocation. Says Sanjay Prakash, chief executive officer, HSBC Mutual Fund: "Don't get swayed by a rising market that might tempt you to allocate more to stocks. Always stick to your suitable asset allocation." When you pull out money from the safety of debt and move it to equities, you take on more risk than is desirable for you. In fact, a market rise calls for re-balancing your asset allocation, by booking some profits and reinvesting it in debt.
- Book profits periodically. The market is fickle—it can tank and erase your gains just as quickly. In a heated market, it helps if you can withdraw, partly or fully, before the crash comes. Two plans are available on all mutual funds: growth and dividend. In growth plans, the gains made by a scheme are reinvested in it, and the onus lies completely on you on when to withdraw. In dividend plans, however, schemes distribute their gains, partly or fully, to you, as dividends. Equity funds declare dividends in rising markets, thus automatically reducing your equity exposure. But on receiving these dividends, it's prudent not to plough it back into equities when the market is heated, but put it into debt.
Debt Funds:
The Strategies:
- Tailor your choices to your planned holding period. If your investment horizon exceeds a year, stick to the popular, plain-vanilla income funds and gilt funds. For investments of less than a year, you could consider short-term funds. Compared to income funds and gilt funds, the portfolio tenure—the average maturity of the debt papers a debt scheme has invested in—of short-term funds is shorter. As a result, it is less prone to interest rate risk (loss in capital value). And, compared to liquid funds, the popular option in the short-term space, they yield more.Says Nandkumar Surti, head, fixed income, JM Mutual Fund: "Short-term funds show substantially lower volatility, while returning 0.5-1 percentage point more than liquid funds."
- Use MIPs to max returns. A rash of MIPs have been launched in recent months. Although these funds were originally launched with an aim to provide you with some sort of a monthly income, these funds have evolved into vehicles that provide a kicker to your fixed-income returns by taking a small exposure to equities (up to 30 per cent of corpus). Given the bullish undertone in the stockmarket, MIPs are worthy options to max gains from debt, provided you don't seek a monthly income from your debt investment. Our vote: the dividend plan, as it ensures you cash in on profits in a rising market. Says Shah: "Given the state of the stockmarket and declining debt returns, MIPs should outperform all avenues of fixed income investments." Remember, though, that MIPs, by virtue of investing in equities, carry a higher risk than debt funds.
