Thursday, January 11, 2018
Tuesday, January 2, 2018
Many investors, especially those new to mutual funds, tend to invest their entire surplus in just one mutual fund scheme. This concentrates their investment risk with just one fund management team. Having funds of different market capitalisations and investing styles would provide adequate diversification across assets, sectors and stocks.
Moreover, investing in a single fund might not generate optimal returns as funds that deliver outstanding returns in the long term may deliver lower or negative returns in the short term, and vice versa.
Mutual funds are a great tool for diversification, many investors think that once they put their money into a mutual fund their work is over, but for a fact this is not the case, their work just starts as even in mutual funds sufficient diversification is required. For example You may invest in 4 different mutual funds, but it does no good if they all have similar holdings, that is a portfolio which is highly correlated with each other. In this case, you are not actually diversifying because if something affects the securities in one fund, it will also affect the other fund. In this case, you will be holding the same amount of risk which a single fund would have to your portfolio, which in proper diversification can be reduced.
If you want to truly diversify your portfolio, then you need to invest in mutual funds that are not correlated to each other in performance. You can do this by considering which asset holdings your current fund has and based on that try to spread your money so that no asset with similar features are repeated in your next fund.
You should always remember that the diversification towards any investment should be done in exactly the way it demands in a said particular situation. Doing too much of diversification will also not serve any great purpose because the stocks present in different-different schemes will be more or less similar. However, the performance of schemes varies as it depends on the call taken by respective fund managers holding their particular schemes.
Hence, it is advisable to take adviser’s help before taking any step of doing investments in mutual funds.
Thursday, December 21, 2017
Friday, December 8, 2017
One of the most important factors to consider while drawing a financial plan is fixing the time period, especially if you are a beginner. The thumb rule is, the earlier you start, the greater the chance of achieving your financial goals.
Everyone has some goals and responsibility in life, some want to buy a new car and some are planning to retire rich so that they can enjoy their post-retirement life. We all have many dreams, but are we really investing that much time and money on building the corpus to achieve these goals. It is time tested that if one starts investing early, the percentage of building the corpus for one’s desired future financial goals is higher as compared to those who start very late in their life.
Investing according to financial goals.
Identify and priorities goals:
The first step in goal based investing is identifying and prioritising goals by segregating them into needs and wants – needs are essentials and hence get precedence over wants, which are desires and aspirations. Once decided, align your needs/wants to the time horizon.
As a young investor one should know the holding duration of any MF categories (for e.g., liquid funds, debt funds, equity funds, hybrid funds, etc.) while investing their money in mutual funds against any financial goal.
Explore the systematic method of investing in mutual funds
Investors can also benefit from the systematic plans offered by the mutual funds. For instance, a systematic-investment plan (SIP) is used for wealth accumulation. A systematic-transfer plan (STP) helps in transferring wealth from one asset to another, in safeguarding the portfolio against volatility, and in adapting to the changing risk appetite with age and increase in responsibilities. Lastly, a systematic-withdrawal plan (SWP) is useful in deriving a regular income from the created wealth created.
Power of Compounding
Young investors have an advantage in investing since the longer you stay in the market, the less risky your investment becomes and the more corpus you can generate over a period of time. This happens because of the compounding effect and the rupee cost averaging benefit you get over a long term.
Once you are done with prioritizing your financial goals of life, quantify them, that how much amount you may need to achieve those goals and based on that choose mutual fund schemes. So give wings to your dreams and start investing in something each month to achieve your goals without any burden of heavy debt on your shoulder.
Tuesday, December 5, 2017
Thursday, November 23, 2017
When one wish to invest in mutual funds schemes; it is important to know as much as possible about the fund house, about the schemes, where your money will be invested etc. Most Asset Management Company (AMCs) usually publish monthly reports (also called factsheets) that contain critical information related to the portfolios, at times a roundup on debt and equity markets from the fund manager and performance details of the schemes managed by the AMC. However, in many cases, factsheets are not up to the mark leaving much scope for improvement and even standardisation.
Here are the 4 key points of evaluating mutual fund factsheet:
- Performance: The past performance is not the parameter to decide the future performance; however it gives you a rough idea about how that particular scheme may perform in the future. So the first is to illustrate if a scheme has been there for 3 or more years. Compare the funds return with its benchmark index and with the market return.
- Asset allocation: The factsheet can hint certain insight into the fund management approach. Consider the top 10 stocks in the fund’s portfolio to determine the diversification. Fund should follow not more than 5% asset allocation in single stock ensuring its top 10 stocks are well diversified along with sectorial diversification. The asset allocation table tells you how the fund’s net assets are diversified across stocks, current assets/cash. An equity fund’s allocation to cash should be noted. Being in cash could work in the fund manager’s favour if the market crashes, but a higher cash allocation works against the fund during a rising market.
- Expense ratio: Expense ratios are mandatory to be stated in the factsheet as they can significantly affect returns. It is the cost of running and managing a mutual fund scheme which is charged to the investor. A fund with a solid track record but a higher expense ratio (regulations cap this at 2.50% for equity and 2.25% for debt funds) may be better than one which charges less but gives poor returns.
- Fund manager: It is mandatory to know who takes decision of managing your money. Understand the expertise of your fund manager and find out their track record which helps you worry less about your investments. Over the long-term, it is better to have your money managed by a group of fund managers, rather than a single fund manager.
Tuesday, November 21, 2017
Demat account facility is available for investing in mutual funds but there are questions in the minds of investors as to when these should be used. The demat option to investing might complicate the matter further for investors as it would bring in a new route for investing that might work demat option can be used for holding mutual fund units.
If there is already a demat account that is being held and used for the purpose of buying stocks then the costs for the maintenance are difficult. This is the reason why attention should be paid to the issue of the conditions under which already being incurred. In such a situation the investor just has to look at the extent of the transaction costs that would be incurred and then make the decision. Thus if there is a demat account already present then it would ensure that a part of the costs would not be additional and hence it would be prudent to use this.
The investor having investment in stocks as well as units benefits the investor to be able to buy and sell the units from the single account with much less efforts. The investor should be able to buy the units and get them credited to their demat account because if the investor does not have access to this it is tougher to operate. Another benefit is that units can be freely transferred to the accounts of nominees or legal heirs, except in case of tax-saving funds, which have a three-year lock-in. However, transactions through brokers involve approximately demat fee of Rs 300-500 on annual basis and a brokerage every time you transact. The brokerage could be more than 0.05 per cent per transaction.
Knowledge of the manner in which the investor would be able to transact and buy and sell the units is important for them to complete the investment process. But if there is a need for consolidation of the holdings for easy management then the demat route is the way to go.