The mere availability of a lot of investing options doesn’t necessarily mean all of them are ideal for a retail investor. While most Indians prefer safe havens like fixed deposits, inflation reduces their real returns. As a result, investors must realign their portfolios to changing times.
Mutual funds could be one option if you want to be part of the growth story. They pool savings from a large number of investors and are one of the more innovative ways of investing.
Here are five important steps to investing in mutual funds:
a) Invest as per your objective: Investment objectives vary across age groups, levels of income, number of dependents, availability of time, corpus, habits, etc. Various objectives require different corpus and, thus, it is imperative to plan out investments considering your objectives, requirement of funds and age. If a larger corpus is required, especially for retirement or a house purchase, a larger allocation is needed towards equity and vice-versa.
b) Diversify: This helps cushion against the fluctuation in return concentrated in one investment bucket. An investor could diversify into assets such as equity, debt, gold and real estate. Investors need to allocate the investible surplus depending upon his/her risk profile and age. A person nearing retirement need not over-expose to equity whereas a relatively young person may allocate a higher proportion to equity mutual funds.
c) Invest through SIP/STP: You need not time the market — no one knows when to enter and exit it. Investing a lump sum upfront is risky as any subsequent fall may remove the gains, if any, or might reduce the value of initial investment. A disciplined approach through a Systematic Investment Plan (SIP) and a Systematic Transfer Plan (STP) would help average out the cost of acquisition, as when the market falls, more units can be accumulated and, when the market is on an uptrend, it lifts the overall investment amount.
Investors may put in a lump sum in a fund house’s liquid fund scheme and ask for a fixed periodic transfer into equity mutual funds, which is called STP. This will serve two purposes. One, it will get higher returns than from saving deposits and, secondly, it will serve the purpose of SIP investment.
d) Choose 4-5 schemes with good track record: Low-priced NAV of a mutual fund scheme does not mean it is cheap and vice-versa. Investors should overcome the psychology of investing into low-price NAV and must select the schemes with a good track record. Weighing comparison of returns, expense ratios, sectoral exposure of funds, Sharpe Ratio, other return ratios, fund manager and scheme information are important.
A low-price NAV scheme will invest in Nifty stocks similar to what the high-price NAV schemes would invest in. While investing, it would be prudent to choose a maximum of 4-5 schemes, whereby one can easily track and compare the returns since its variability between various schemes is very minimal, especially in debt, index and passive funds. Investors may opt for online facilities to invest or redeem, as it saves time and is very convenient to operate.
e) Regular follow-ups: Investing is not a one-time affair; investors need to be regular and disciplined. One must ensure availability of funds in the bank account to execute SIPs. Investing in equity MFs is a long-term affair, which is exposed to short-term market events. It may test investors’ patience; hence, a long-term investor need not worry about short-lived fluctuations in returns.
It’s equally important to monitor the progress of your investment to assess whether returns are lagging. MF investments do not require daily monitoring, but reviewing them once a quarter is fruitful.
Alpesh Porwal
The writer is senior vice-president & head, Retail, SBICAP Securities