Wealth Creation Through Mutual Funds

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Wealth Creation Through Mutual Funds
Himali Patel - 06 January 2020

Systematic Investment Plan (SIP) is a basket of stocks that helps you to tide over the market ups and downs, thereby bringing the much-needed discipline to investment, while reducing the overall cost of purchase through rupee cost average. Psychologically, investors find it practical and easy to invest a small amount every month rather than invest a lump sum amount at some point of time in the future. However, when it comes to investing in mutual funds, there are a plethora of funds available in the market. It is not easy for the investors, especially new ones, to understand which ones to select. Here, we try to answer some such common mutual fund queries that would help readers navigate while investing in such funds.

1. Direct Stock Investing Versus Mutual Fund Equity Investing, Which Route To Consider?

Investing in equity markets can be rewarding for investors who have adequate knowledge of the stock market and have the ability and appetite to take risks as they are willing to invest for the long term. However, most retail investors lack the knowledge and even the time to research and educate themselves about the nitty-gritty of the stock market. In such a scenario, it is best to leave your hard-earned money in the care of professional fund manager through mutual fund investing. A simple analogy would be that if someone is sick, they will consult a doctor (an expert). Similarly, for your hard-earned money, you should hand it to an expert (fund managers working in a good mutual fund)

(Vaibhav Shah, Head Products  and Marketing, MIRAE ASSET  Mutual Funds)

2. How Should I Select A Scheme Since I Am A Fairly New Investor In Mutual Fund? 

When you invest in a mutual fund, you are trusting the fund house to manage your money. This is why the pedigree of the fund house and fund manager is important and you should do a check on the fund house, history of existence, track record across schemes before selecting the scheme. Also select funds on the basis of their long-term performance track record and based on their risk adjusted performance. Choose funds that have not just performed well when the markets are doing well, but will remain steady even during a slump. And finally choose a scheme based on your risk profile, investment, time horizon and return expectations. This is where a good financial advisor will be able to guide you through the investment journey.

(Vaibhav Shah)


3. What Are The Things To Consider Before You Start Investing In Equity Mutual Funds?

There are two main things that one must consider before investing in equity mutual funds. First is the investment time horizon. Equity mutual funds can be most beneficial for investors who have an investment time horizon of at least 5 years. In the short-term, equity markets can be fairly volatile, which can impact the return potential of an equity portfolio. However, over the long term, market volatility gets smoothened as the intermittent market noise gets drowned out and the true fundamental value of the stocks emerges. Thus, an investor looking to leverage the benefits of equity mutual funds should consider staying invested for the long term (five years plus). The second point to consider is the risk. While equities are considered riskier relative to the debt asset class, one must ensure that they are comfortable with the risk quotient of the specific equity scheme. Within the equity asset class, there are multiple categories that relate to market capitalisation, sectors and themes. Some of these schemes will carry more risk than the others. Investors must be aware of these risks and ensure an alignment between their choice of equity mutual fund and their own risk profile.

(Chockalingam Narayanan, Head – Equities,  BNP Paribas Mutual Fund)

4. Are Debt Funds Really Safe Post IL&Fs Crisis?

Debt funds create return out of either interest rate calls or credit play. As per the traditional fundamental thought process, credits will perform only when the economic activity is such that the issuers are creating cash flows via good productivity and is self-fulfilling to fund the liabilities or capital commitments.

Currently, with the global economy chugging along slowly and questions being raised every fortnight over how would the global trade pan out. Now if you add to it, soft domestic growth and levered balance sheets and we find that companies are delaying their activities and thus are reducing cash flows. This is impacting other factors too.

Thus, for the risk-adjusted returns, we need to focus where the capital is moving, which, as per our assessment is towards the PSUs or PFIs as well as AAA corporates with decent track record. Hence, investors should focus on the underlying portfolio with these exposures for a capital-protected and risk-adjusted return.

(Mayank Prakash, Fund Manager, BNP Paribas Mutual Fund)

5. What Are The Different Types Of Sectoral Or Thematic Funds In The Indian Market?

 A mutual fund scheme that invests its assets in a particular sector or theme is known as sectoral fund. Sectors such as pharmaceutical, banking, technology, power, and themes like MNC, infrastructure, PSU are some categories available in the market today. As per Sebi guidelines, a sectoral or thematic fund has to invest at least 80 per cent of its assets in equity-related instruments in the selected sector. Such category tends to be more concentrated due to a particular theme or sector.

(Lakshmi Iyer, Chief Investment Officer (Debt) & Head Products, Kotak Mahindra Asset Management)

6. What is the difference between gold ETFs and physical gold?

Check the visual: Difference between gold ETF and physical gold

(Lakshmi Iyer)


7. Who should invest in REIT?

 Real Estate Investment Trust (REIT) funds hold significance to investors who are willing to invest in the real estate sector and possibly earn profits through their investment. The main purpose of REIT is channelising the funds that could be invested into operational functioning or ownership of real estate that could further generate income for the investors.

Advantages of Investing in REIT

1. Easier to invest in real estate using REIT

2. Lower risk as compared to direct investment in real estate

3. REITs are transparent as they disclose the capital portfolio annually and semi-annually

4. Bulk of the REIT income is paid as a dividend to the REIT investors

Thus, REIT gives an opportunity to retail, High Networth Individuals (HNIs) and institutional investors to hold shares by investing in it.

(Lakshmi Iyer)

8. What is STP and SWP and when to use this facility?

STP refers to Systematic Transfer Plan wherein an investor invests a lump sum amount in one scheme and regularly transfers or switches a pre-defined amount into another scheme. Systematic Withdrawal Plan (SWP) is a facility that allows an investor to withdraw money from an existing mutual fund at predetermined intervals. Generally, investors use these features when they are close to reaching their financial goals and would like to redeem gradually from their equity investments.

(Harshad Chetanwala - CFP CM - Head - Customer Delight, Quantum Mutual Fund)

9. How to review the mutual fund portfolio?

Ideally, mutual fund investments are linked to long-short term financial goals of investors. Investors need to review their investments every six months to one year. See if there is any fund performance that is showing a red flag consistently. In that case, investors would have to update their portfolios. However, it is very important to understand that negative performance is not always an indicator of poor performance. One needs to look at the state of the market at that time. It could be possible that other funds are also underperforming.

(Harshad Chetanwala)

10. What is expense ratio or Total Expense Ratio (TER)?

The Total Expense Ratio (TER) is the cost borne by mutual fund company to manage and operate investors’ money in a particular fund/scheme. A TER of a mutual fund scheme is a ratio that measures the per unit cost of managing a fund.

(Harshad Chetanwala)

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