Selecting a fund merely on past year’s performance a mistake

Updated: February 3, 2015 2:44:22 PM

Are gilt funds as safe as bank fixed deposits (FDs)...

Are gilt funds as safe as bank fixed deposits (FDs)? Is there a guarantee that I will get the principal back even if the fund house goes bankrupt?

Investors often compare gilt funds to FDs since the former invest in securities issued by the government of India, or G-Secs. G-Secs do not carry credit risk, but their values/prices are subject to interest rate risk, i.e., they are impacted by fluctuations in interest rates. If interest rates go down, the prices of debt instruments, including GSecs, go up and vice versa. The key difference between bank FDs and gilt funds is that FDs give positive and fixed returns during the entire tenure, but returns from gilt funds can vary, and even be negative over the short to medium term.

As for your concern over the fund house going bankrupt, let’s understand the structure of a mutual fund (Mf). An AMC manages the investments and the underlying instruments (including government securities) are held by the custodian. Now, if the fund house goes bankrupt, it doesn’t affect the unit holder’s money since the custodian is independent of the AMC. So, the structure of an MF ensures that the investor is fully protected from something like bankruptcy — in such a situation, the gilt fund is liquidated and money is returned to unitholders.

I have been advised to buy gold ETFs as the metal’s price has fallen. How is buying a gold ETF different from purchasing gold jewelry or coins?

Gold ETFs are a better alternative than physical gold. First, information on gold ETF prices is available in a transparent manner on the stock exchange they are listed on, which allows ease of transaction. Further, they have better liquidity than gold coins or bars, which banks don’t buy back. You can get a standard price for gold ETFs irrespective of your geographical location. However, in case of jewellery, different jewellers usually quote different rates. Third, you don’t need to worry about the authenticity of the underlying metal in gold ETF as all the physical gold is regularly audited and physically verified, and each gold bar is accompanied by the necessary documents that evidence its origin, authenticity and purity. Last, since gold ETFs are in the demat form, there is no worry of theft, and you also save on storage costs like locker charges.

There are so many MF schemes in the market that it’s confusing. How should I select a scheme before investing in it for 5-7 years?

With the number of schemes on offer, it is easy to get confused. A young investor might be able to take on greater risk and opt for an equity-based MF whereas a retired investor usually opts for a debt-based MF for regular income.

Investors often make the mistake of selecting a fund based on its past year’s performance. This method is flawed. Before selecting a scheme, you should examine its risk-return ratios over the long term, portfolio-based parameters, the fund house’s stewardship and the fund manager’s quality.

In a balanced fund, can I choose to increase or decrease the equity exposure every six months depending on the movements of the stock market?

Typically, as an investor, you do not have any say in fund management activity. Balanced funds maintain an asset allocation mix between equity and debt. The percentage allocation towards the two asset classes is the fund manager’s prerogative. However, as an investor, if you have a view on these asset classes, you can choose to allocate your corpus towards equity and debt MFs in a mix that suits you. In a scenario where you feel equity as an asset class is going to outperform debt, you can choose to increase your allocation to equity funds and vice versa.

By Sameer Hassija

The writer is senior investment analyst, Morningstar Investment Adviser Send your queries at

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