Are you stuck with your investment move and not getting an appropriate idea for the right mutual fund? You should look for the governing ideas that hold potential of instilling confidence in you of becoming an investor.
Everybody knows that mutual fund investments are subject to market risk and as an investor; we are advised to go through scheme information documents in order to acquaint with the details of knowing the fund returns, asset allocation, expense ratio, apportionment of sectoral asset classes etc. But not everybody can decide the best picks for themselves.
Still, there are so many financial advisors who advise as per their perception and wisdom of being associated with the stock market since long. It’s understandable that it takes a heavy heart to employ your money in mutual funds and waiting the tenure of the fund to get over for fetching returns. Being a finance professional, I will suggest to stay affirmed with your financial objectives when going for selection of mutual funds. Moreover, the governing principle lies in the time period of staying invested in mutual funds, your age and risk-taking appetite that deploys the capacity of your fund in providing you effective returns. Let’s take a quick overview in determining the type of mutual funds that can stand better for your objectives, keeping in view your investment horizons discussed as follows:
Liquid/Ultra Short Term Plans
If your investment horizon ranges from 1 or a few days then you can look for investing in Liquid/Ultra Short Term plans. This is an investment where you just park your “surplus liquidity”–it’s a superior alternative to a “bank saving account” where you can earn higher yield. You should note that these funds don’t carry any interest rate risk but they possess credit risks. Your objective for getting invested in Liquid Plans should be only on earning accrual interest.
Short Term Plans
If your investment horizon falls between 3 to 12 months, then Short Term Plans should be your prime objective of investment. Short terms plans invest in identical instruments as of liquid funds but bear a slightly high maturity period. This fund occupies its presence between a bank savings account and a fixed deposit. No matter, these funds possess credit risks along with some amount of interest risk but your objective for choosing this plan should be of earning accrual interest along with some capital gains.
Fixed Maturity Plan
Block your money for a fixed period of time at the prevailing interest rate for that period of time describes Fixed Maturity Plan(FMP). This plan does not carry any interest rate risk. However, it carries a very high “opportunity loss risk” in the sense that if you block your money in the long term FMP just before the start of an interest rate hike cycle then you will lose the opportunity of earning higher returns. Therefore, investment in an FMP should suitably be done at the peak of the short-term policy hike interest rate cycle.
If you have a medium to long-term investment horizon (3-5 years), then Income/Gilt Funds can be an ideal bet for you. Income funds invest mainly in longer duration corporate papers with some Government of India Securities (G-Secs) while Gilt Funds invest only in Government securities. Interest rates and bond prices have negative correlation i.e. when interest rates go down then bond prices go up and vice versa. Hence, timing holds crucial importance in this fund. As an investor, your objective should focus on earning accrual interest on Income/Gilt Funds along with capital gains.
Balanced funds strike a proportion of its investment in both equities and debt and hence stabilise your needs for asset allocation. It is the most imbalanced fund among other funds as it considers the credit of protecting and shielding your funds from all the major monsters eyeing to eat your investments. Such investment market robbers are termed as inflation, interest rates, income tax, market volatility and asset allocation. Your objective as an investor should be to earn attractive returns during equity bull markets and balancing its portfolio during equity bear markets.
Equity funds provide you growth capital subject to your stay in equity funds for a longer period of time. As the name suggests, these funds invest in equity shares and also provides higher returns as compared to fixed income securities. Timing carries a paramount importance in stock markets and as an investor, it depends on your courage of buying equity shares at the time of cyclical bottoms and sell during structural top. Equity funds are categorised into different type of schemes such as large-cap, mid-cap, small-cap, sector funds, theme funds etc. Many new funds and schemes get their launch-pad during times of exuberance. Banking Funds will be launched when banking stocks are at the peak of their performance, infrastructure funds when infrastructure stocks are going up or IT funds when the technology is ushering through its boom phase and so forth. These sector funds employ smart tactics in collecting money from the gullible investors. As an investor, you should remember that there is hardly any reason for anybody to believe that they can pick winning stocks or time the markets. However, the best remedy for an equity investor is to invest into low-cost passively-managed index funds because as the years go by they would beat atleast 75 per cent of the actively managed funds and over the longer term in most possibilities beat almost all the funds.
Gold Funds and ETFs are now broadly accessible for all the Indian mutual funds investor. They offer the convenience and safety of holding gold in electronic forms such as demat account instead of holding in physical forms. They provide tax advantages which are not subject to “wealth tax” and become long term in 1-year in contrast to 3-years for physical gold. The investor has to remember that investment made in Gold ETF stands equivalent to good or bad as that of the price of the yellow metal itself because the funds holds Gold as per units denominated and hence your perception on gold also carries some paramount importance. No doubt, it’s a speculative commodity as these funds are based on the future price of gold with no real industrial consumption where the value is based on the value of US Dollar, real interest rates in the US which in turn depends upon the nominal interest rates and inflation of US markets and then translating it into the value of Indian rupee against the US Dollar.
Nowadays there are many international funds on offer like the feeder funds i.e. the Indian fund playing the role of a ‘postman’ accumulating funds from Indian investors and investing it further in International funds. There are exchange traded funds on foreign markets which are broadly available in India. It’s difficult to anticipate Indian market movements like that of facing stiffness of predictability in foreign markets. Besides getting actual returns from International funds, currency also plays a predominant role—–the crux being, weaker the Indian rupee against the US Dollar, higher the return to the Indian investor.