MFs: SIP, Don’t gulp

Jun 17 2014, 11:53 IST
Comments 0
The total number of equity mutual fund folios stood at 29.22 million as on May 31, 2014. The total number of equity mutual fund folios stood at 29.22 million as on May 31, 2014.
SummaryThe total number of equity mutual fund folios stood at 29.22 million as on May 31, 2014.

In May this year, assets under management (AUM) of the mutual fund industry rose to a record high of R10.11 lakh crore on the back of strong inflows into equity funds and a surge in the stock markets. This was also the third consecutive monthly increase in AUM of country’s 45 fund houses. Net inflows into equity mutual funds crossed the R2,000-crore-mark for the first time in three years. However, redemptions, too, increased in May as many investors booked profit because of the surge in the equity markets.

The industry’s AUM rose 7% to R10.11 lakh crore in May 2014 from Rs 9.45 lakh crore in the previous month, according to the monthly numbers released by the Association of Mutual Funds in India (Amfi).

While equity mutual funds added around 0.39 million folios in April 2014, they lost around 0.35 million folios in the next month. The total number of equity mutual fund folios stood at 29.22 million as on May 31, 2014. The equity mutual fund AUM shot up 13% to R2.17 lakh crore in May from R1.92 lakh crore in the previous month. In May, six equity schemes were launched. The benchmark Sensex has gained over 20% since the beginning of this year and foreign institutional investors have pumped around $9 billion into Indian equities.

The Nifty is currently trading at 14.7x on a 12-month forward earnings basis against a historical average of 14.2x. Historically, during the recovery phase, valuations tend to move ahead of fundamentals with renewed optimism and investor confidence. Analysts say this will have a spiralling effect and will eventually help recover demand and earnings, and provide valuation support for price stability.

However, retail investors should not time the market and, instead, invest through systematic investment plan (SIP) of mutual funds.

One can invest a fixed sum regularly in the mutual fund scheme as it will average out the cost of acquisition by purchasing more units when prices are low and lesser units when prices are high. This will better your returns over the long term by averaging out market volatility. When the markets are down, it is common for retail investors to opt out of SIPs. Instead, one should invest a fixed sum regularly and gain on the averaging opportunities during a market crash.

Tax savings an equity investment

Investments in equity linked savings scheme (ELSS) are eligible for deduction under Section 80C of the Income-Tax Act, 1961, where investments up to R1 lakh are eligible for deduction from the gross income.

ELSS funds have a lock-in period of three years, which is in fact, the lowest among other tax-saving instruments like Public Provident Fund, National Savings Certificate and five-year bank fixed deposits. ELSS primarily invests in equity market by buying stocks of listed companies.

While returns from ELSS are tax-free as long-term capital gains and dividends are totally tax-free as per the current tax structure, they will fluctuate depending on the performance of the equity market and the stock selection of the fund manager. These funds also offer SIPs, which are ideal for salaried investors. Analysts say before investing in ELSS, an investor must analyse the track record of the fund for a longer period instead of just looking at 2-3 months' performance. They must also see the dividend payout by the fund and whether it is adequately diversified across sectors. Moreover, ELSS funds provide growth, dividend payout and dividend reinvestment options. Analysts say the growth option is ideal for the salaried class because of compounding benefits. In the growth option, the investor will not get any income during the duration of the investment but only when the tenure ends. The investor will get a lump sum when the investment matures.

In the dividend option, the investor will get a steady flow of income throughout the duration of the investment. However, the income will depend on the market. In the reinvestment option, an investor gets locked in forever. For ELSS, the fund house will announce a dividend and, in the dividend reinvestment option, it gets reinvested and locked in for three more years. So, eventually, an investor will never be able to withdraw, even if it underperforms.

Analysts say unit-linked insurance plans (Ulips) and ELSS are similar as they both offer tax benefits and the corpus is invested in the equity markets. Also, unlike Ulips, ELSS does not offer a switching facility. As a result, an investor is not able to protect his capital in times of market fluctuations. In Ulips, you can switch from equity to debt instruments depending on market volatility. Analysts say one must have a firm investment policy in place that spells out which product to buy for each goal and hold it for long term. Moreover, one must do proper asset allocation and carry out a portfolio rebalancing exercise in line with the current market scenario.

Ads by Google
Reader´s Comments
| Post a Comment
Please Wait while comments are loading...