The growing trend towards short term speculative trading in itself needs to be addressed. The question investors need to ask is whether they really benefit from frequent trades or from aggressive speculation in the current market scenario. The focus of investors - institutions and individuals alike - to a small sector of the economy for increased investments is also a cause of concern. Each stock and its market price has to be ultimately judged on fundamentals. The broadening of demand to scrips other than IT, pharma and FMCG, should see a rise, particularly for those enjoying stable growth, strong brands & distribution systems, and promising increased earning potential through cost cutting and restructuring.

Each individual should plan his/her portfolio of savings & investments tocater to his risk/reward capacity. These investments should include a measure of savings that would be kept liquid in the form of cash/investment accounts for meeting immediate requirements, and longer term investments which would include investments in fixed interest bearing securities, equities, gold and probably real estate. Equity markets have been fairly volatile over the last year, and we have witnessed continuing volatility in short-term interest rates.

The real estate market, reeling under the continuing slow down in the economy, has not picked up over the last two years. There doesn't seem to be much to indicate any hardening of demand and consequently prices in the short term.

Given the political uncertainty in the country, continuing market volatility and the rising fiscal and trade deficits while government spending has continued unabated, individuals may be hard pressed to plan a balanced portfolio. Mutual funds therefore have a positive role to play with professional research aiding theportfolio planning and management. A mutual fund is a way for many people from all walks of life to put their money together and have it managed by investment professionals. Mutual funds offer affordability with convenience of investing and the accompanied benefits of professional research and portfolio management. One of the advantages of investing in mutual funds is that an investor doesn't have to pay attention to short term market movements, which will be looked into by the fund manager. A financial advisor can then help the investor to combine different investments in mutual funds to reduce the overall volatility of his/her portfolio.

Although there are a host of schemes, there are three main types of mutual funds - balanced fund, income fund, and equity fund. Mutual funds reflect the value of securities they hold. An equity fund reflects the performance of the stocks in its portfolio. Fixed income funds generally reflect interest rate movements - when interest rates rise, the value of a bond fund willfall. When interest rates fall, bond funds normally rise in value. In times of strong economic growth and stability of markets, a financial advisor may recommend an increased part of these savings, dependent on the investors risk profile, to be invested in equities of companies with strong performances. Similarly, in times of low economic growth and uncertainties on the economic and political front, a financial advisor may recommend a greater degree of investment in fixed income mutual funds.

Income funds invest primarily in treasury bills, bonds and corporate debt. The main objective is to pay a steady level of income through an investment in low risk debt.

The most straight-forward income fund is a money market fund or a liquidity fund. A liquidity fund invests mainly in short term treasury bills, government bonds, PSU bonds, commercial paper and call money. A liquidity fund is normally used to park cash for emergency use, for an upcoming major expense or until an investment decision is made. The DundeeLiquidity Fund is such a fund with its investments largely in money market and rated debt investments. The scheme offers instant liquidity, and has been an excellent performer with a return since inception to date of 9.49 per cent annualized, while giving a very high degree of liquidity. With the RBI now permitting liquidity and money market funds to issue cheque books to unitholders, this will offer an excellent savings alternative to normal savings accounts.

Another type of income fund is a dedicated gilts fund, which invests only in government securities, and is thus a zero-risk fund i.e. where the principal and interest is sovereign and is therefore classified as Zero Risk. A dedicated gilts fund mainly invests in securities of long tenure offering a yield of about 12 per cent p.a., and has the assured support of the Reserve Bank of India (RBI) for liquidity. Recently the RBI has classified Gilts Funds as an approved investment by provident & pension funds. Banks, NBFCs and financial institutions mayalso invest in a gilt fund.

The soon to be launched Dundee Sovereign Trust is such a dedicated Gilts Fund, which would offer an ideal zero risk long term savings alternative to individuals in addition to investments by PFs, banks and NBFCs. Such a fund is ideal for investors wishing to invest their 'nest egg' i.e. savings for retirement, children's education and/or marriage, and housing plans - savings that they will not wish to risk for a possible greater return.

Investors having a higher risk-reward tolerance may invest a part of their savings in equity or balanced schemes. For investors with a lower higher risk-reward tolerance, liquidity and sovereign funds may suit their requirements.

The author is vice-president, Dundee Mutual Fund