For both new and existing investors, there are quite a few things to keep a note of before investing in equity mutual funds.
With the stock markets touching new all-time highs and a stable government at the Centre, more and more investors are keen on investing in the equity markets. Although markets at their peak carry high valuations and stocks don’t come cheap, for long-term investors, any time is a good time to derive the potential of equities in their favour.
For both new and existing investors, there are quite a few things to keep a note of while investing in equity mutual funds (MF). Let us explore the important ones.
1. Link investments to your goal
Do not start investing without a goal in sight. Identify, estimate the inflation-adjusted value for each of them and then start SIP towards them. “Have a goal in mind and then work backwards to arrive at the required monthly investment. A SIP that results in a small corpus is useless if it doesn’t help you achieve your financial goals. Hence decide what you are investing for before you start your SIP, says Sanjiv Singhal, Founder and COO, Scripbox. For unmarried, starting with as little as possible and building a corpus for marriage needs or even otherwise helps in creating a habit to save. “By investing regularly you not only form a healthy habit but also keep away from the cardinal mistake of trying to time the market,” says Singhal.
2. Why SIP
For a salaried individual, income sources are mostly fixed and hence diverting a portion towards goals is easier than others. Retail investors including salaried may opt for Systematic Investment Plans (SIP) to save by giving a mandate to the banks to deduct a fixed amount each month towards MF investments rather than trying to time the market by investing a lump sum. Staggering one’s investment through SIP helps one to stay disciplined, avoid temptations to book profits or delay investments based on market conditions.
3. Which SIPs
SIP is merely a mode of investment, the selection of the right MF scheme is equally important. Opt for consistently performing MF schemes that have generated benchmark-beating returns over the long term. Do not merely look at the fund’s especially sectoral fund’s short-term performance to decide.
Choose 2-3 schemes forming the core of the MF portfolio. Add mid-cap and small-cap depending on your risk profile and goal horizon. Avoid thematic or sector funds unless you can track them especially in terms of government policies impacting them.
Understand the scheme’s objective, have a close look at least at the scheme’s ‘Fact Sheet’ to see the portfolio structure – in terms of market cap, allocation to top 5 industries and top 5 stocks, as returns are largely going to flow from these factors. This approach will also help you diversify your MF portfolio.
4. Active funds or passive funds
As an investor, one has two choices – either to invest in active funds or passive funds. While the former aims at beating the benchmark index, the latter look to mirror the index returns. “If one were to look at the top 25 equity mutual funds by size, at an aggregate, these funds have delivered 2 per cent per annum return more than the Nifty over the past decade. This is after the management fees of these funds. This can partly be explained by the fact that mutual funds in India are relatively small, compared with the overall market and one can expect professional fund managers to do better than retail investors,” says Singhal.
However, two decisions by SEBI about 12 months back has redefined the MF space. Post re-categorization and implementation of TRI for benchmarking of equity funds, index funds are expected to outperform even the category of actively managed large-cap funds over the long time frame. This is what Singhal had to say, “2018 seems to have been a landmark year where active funds failed to beat Nifty. Only time will tell if this is a one-off occurrence. Over the next decade, index funds will gain prominence, but given the track record, active funds are likely to deliver returns better than the index for some time to come.” It will not be a wrong call to add index funds in one’s portfolio before picking 2-3 active funds.
5. Regular plans or Direct plans
Once decided whether to go with active, passive or a mix of both, the investor needs to decide if routing investments in MF is better through Regular Plans or Direct Plans. To invest in Regular Plans, one needs to get assistance from independent financial advisors while the latter is more of DIY kind of approach.
Choosing between the two is an ongoing debate with no clear set of parameters to help decide which is a better approach. Singhal offers a helping hand in taking a pick – “If you have a good grasp of the arithmetic of investing such as understanding of inflation, compounding and the ability to plan for financial goals and can understand various objectives of investment, for long term goals such as retirement, for short term goals, portfolio construction principles including diversification, and characteristics of different asset classes and the products within them such as equity mutual funds (across market caps), and different kinds of debt funds,, etc. with the ability to select the right option within the category, then direct plans could be for you.
But if you are not savvy, or new to investing and need advice and guidance, or just don’t have the time, experts can help you get started. Online platforms have democratised access to the best practices of investing and wealth creation so that you don’t have to spend time on selecting funds, monitoring performance, making changes, and consolidating your portfolio.”
Finally, give time to your investments and do not panic if you see your portfolio gets into the red in a few weeks or months time. Be ready to wait at least seven years before you see a sizeable gain in your portfolio as equities have the potential to generate returns over the long term. However, keep reviewing the performance of active funds at least every two years to weed out the laggards.