Balanced funds ideal for the risk-averse in a volatile market

Written by Ashish Kapur | Updated: Feb 28 2012, 06:17am hrs
I had discontinued my SIP in mid-2011 when the market was falling. Now that the market has started moving up, I want to start a fresh SIP. What time-period should I opt for

Amandeep Singh

No one can really time the market. While investing, do not worry about the short-term direction of the market. This is especially true for the SIP route. We advise you to start your SIPs again and remain invested for a long time.

Should I invest in ELSS this year, given the fact that there will be no tax incentive on them when DTC comes into effect

Madhu Sinha

DTC is likely to come into effect only from FY13, according to which ELSS investments after April 1, 2012, will be exempt from tax deductions. This does not apply to already existing ELSS funds and investments made before the above-mentioned date. So, it would be wise to avail of this advantage while it is still available.

How does a dynamic bond fund work Is it a good time to invest in such a fund as interest rates are likely to fall now

Paritosh Sen

A dynamic bond fund enjoys the flexibility to change the duration of the bond as and when needed. Interest rates and bond prices are inversely related. When the interest rate is rising, bond prices fall and the fund manager can decrease the duration of the bond and vice-versa. The other flexibility is to move into cash and sit on the sidelines when the interest rate is rising sharply over different horizons. They dynamically move from a fully invested situation to a fully cash position and various stages in between, depending on the fund managers reading of the situation. Dynamic bond funds take advantage of rate cuts or hikes by altering their portfolios. Thus, regardless of the interest rate scenario, investing in a well-managed dynamic bond fund makes sense.

What are index funds Is it a good idea to invest in index or balanced funds

B Bhanumurthy

Index-based mutual funds hold the securities in the same proportion as their respective benchmark indices and have the objective of tracking the returns of the index. The concept, though interesting, does carry the normal market risk. Any fall in the indices will result in negative returns, though, being a passively managed fund, it is generally less volatile than the actively managed equity funds.

On the other hand, balanced funds or hybrid funds invest in a combination of equity and debt instruments. Any change in the interest rate scenario is captured by the debt portfolio and the equity part of the portfolio tracks the market movement. This provides both income and capital appreciation while avoiding excessive risk. The diversified portfolios of these funds manage the downside in equity markets without too much loss. Thus, is you are a risk-averse investor, we suggest you to go for balanced funds, which limit the downside risk to some extent.

The writer is CEO, Investshoppe.com; Send your queries at fepersonalfinance@expressindia.com