Whether to invest via mutual funds
Now, with the implementation of the expense ratio the question arises whether it is advisable to invest in equity through mutual fund schemes If not, then what are the other options through which equity investment can be undertaken Many investors are self traders/investors in equity markets, but directly investing in equity markets require knowledge of the working of markets and also a great deal of time.
Benefit of investing in mutual funds
Small-time investors benefit from options like systematic investment plans with benefits like rupee cost averaging and long-term benefit in the form of the compounding effect. They also have the benefit of a well-diversified portfolio and no hassles of portfolio management and higher risk adjusted return.
Approach to investment
Basically there are two ways of investing in mutual funds lumpsum/one time investment and systematic investment plan (SIP). The SIP approach scores more than lumpsum as it reaps the benefit even when the market is heading south. During market falls, for those who have done a one time investment, the portfolio value will start coming down but for SIPs, the units will be bought at a lower price thus reducing the average investment price per unit; this concept is popularly known as cost averaging. Due to lower average cost of purchase the profitability also increases.
Choosing the funds
Choosing a mutual fund scheme these days has become a difficult task for the investor due to different investment options. There are about 35 mutual fund houses (total number of mutual funds is 44) with each offering at least 40 different schemes on an average. Thus, these lead us to over 1,400 different schemes to choose from. However, in order to make investment easy, one can consider the following approach.
Choose a fund which has a track record of more than three years and maintains consistency in returns. Choose from diversified equity funds and avoid thematic and sector-based funds as they attract high risk. Look at the performance of funds during period of downturn as this will help checking the sustainability of the funds.
Check historical returns and compare the same with the funds current returns and its index. Consistency in returns along with funds sustainability in downturns is an important criteria to assess. Diversify the portfolio across large cap, midcap, small cap, debt and gold funds. Debt and gold are inverse to equity markets and hence provide good upside when the market does not give good returns.
Investment in equity mutual fund should be done with a long-term horizon of two to three years as equity performs better on a longer time horizon. Exit load will be applicable on investments that are withdrawn within one year, thus one can also avoid the exit load cost if the investments are held over a longer period.
The author is CEO and founder of Right Horizons
Choose a fund which has a track record of more than three years and maintains consistency in returns
Choose from diversified equity funds and avoid thematic and sector-based funds as they attract high risk
Check historical returns and compare the same with the funds current returns and its index
Consistency in returns along with funds sustainability in downturns is an important criteria to assess
Diversify the portfolio across large cap, midcap, small cap, debt and gold funds
Investment in equity mutual fund should be done with a long-term horizon of two to three years