How A Young Investor Can Build A MF Portfolio?

If you have just started a career and wish to kick start some savings, then mutual funds can be a great way to do it systematically.

But then, if you are new to equity markets, then investing in equity mutual funds and experiencing any short-term volatility can spook you out of mutual funds, which otherwise make for great long-term products.

Hence, for an investor with little or no knowledge about equities, the following steps may make life easier:

– Consider making a start with debt-oriented products (such as MIPs), which offer 10-25% exposure to equities. This will provide a good entry point to equity investing.

– It is a misconceived notion that MIPs are only for those who look for monthly income. MIPs can be held with a growth option. Their simple aim is to generate debt-plus income, with the additional equities they hold. This may be a better option than going for a recurring deposit.

– Hold some surplus in liquid/ultra short-term funds to build an emergency fund, or if you would like to set  aside some amount for your own spending – ranging from buying a mobile, to going on a vacation, or for expenses incurred to apply for B-school a year or two later.

Consider parking your incentives and bonuses in this kind of contingency fund. You can always shift this money to other investment avenues later. It is likely that it will be spent if it remains in your savings account.

• In about a year’s time, you can gradually add balanced funds which will offer 75% exposure to equities (and the rest in debt) and then a year from then, start off with diversified equity funds with a large-cap exposure.  Again, use only the SIP route.
• At this point, you can start considering tax-saving mutual funds as well, for your Section 80C benefits. Until then, use other tax options such as PPF, EPF and some basic term insurance and medical insurance for your tax benefits.
• By the time you are over 3 years into your career, you may start having specific goals such as saving to buy a property, upgrading your lifestyle with consumer durable products, saving for your own marriage, or investing for your retirement or for your family’s needs – such as child’s education.

At this juncture, you can have a well allocated portfolio of equity and debt funds. This may have liquid/ultra short-term funds for short-term requirements and a combination of equity and income funds for long-term goals.

Please note that you may even begin this whole process with a good asset allocation strategy, if you already have fixed goals in mind, have an idea on how to go about it, or have the right guidance. Otherwise, the above will be a more phased approach.

The biggest advantage with mutual funds is that it allows you to ride different asset classes (equity, debt, gold) using the same vehicle. Hence, it becomes easy for you to have an asset-balanced approach once you start investing towards specific goals.

Happy investing!

High NAV vs. Low NAV – The Tale of Two Numbers

The Net Asset Value or the NAV is the price at which a single unit of a particular mutual fund is traded. It is calculated by dividing the total net value of the assets held by the fund, to the number of outstanding units.

How NAV differs from stock price?

While the NAV might seem to be similar to stock price, the two differ a lot. Since the NAV is based on a bunch of underlying assets, its value is declared only once (at the end of a day), once the trading in those underlying assets is completed. In comparison, a stock price (although fluctuating) is available throughout trading hours. Moreover, unlike a stock price, the NAV does not give you an idea about the performance of mutual fund scheme.

Highs & lows of NAV

If you are planning to invest your money in a mutual fund, do not let the high and low NAV values influence your decision about short-listing a fund. As discussed, unlike shares, the absolute value of a mutual fund NAV does not say much about the performance of the fund.
Low NAV - When a fund house launches a new fund (New Fund Offer – NFO), the units of the fund are available for a standard NAV of Rs. 10 – this shouldn’t be a deterrent. Further, as the formula above states, a fund could have a lower NAV because its net assets are low or the no. of outstanding units is high (due to a temporary transition like NAV split, etc). Also, a fund’s NAV decreases proportionately, whenever it pays out dividends..

High NAV - Similarly, a high NAV could be because of a good performance over the years. But then, with mut, the pastual funds, performance is never a guarantee for future performance.

Low NAV means More Units and More Dividends  is a myth

Investors should refrain from being attracted to low NAV funds just because you realize that your money can fetch you more units and that this might be beneficial when the fund declares a dividend. Here, the investor will not really benefit because a dividend is nothing but their own money being paid out. In fact, after the dividend is paid out, the NAV is adjusted accordingly!

How Many Funds Do You Need For Adequate Diversification?

Well, there is no magic number that can answer the question. More than the quantity, quality of diversification would matter. There is no point in having five funds, all with the same / similar investment approach. This is not going to give you the real diversification that you are looking for. So diversification would need to be done across:

Asset classes: It is prudent to spread your money among various assets like equity, debt and gold. This ensures that you participate in the out performance of these assets which usually happens at different points in time.

Market capitalizations: Putting all your money in many schemes, all operating in the same market cap too is not optimal. You would need a blend of large, medium and small cap funds to build a good portfolio due to the varied risk and return characteristics that each of them exhibit.

Investment styles and strategy: There are many investment styles like growth investing, value investing, dividend yield strategy, special situations strategy etc. A good portfolio will have a blend of these styles.

Geographies: You would also do well to spread your money in more than one country. This is to safeguard against geo-political events and currency risks. Every country has its own strengths and weaknesses and geographical diversification ensures that you get the opportunity to participate in the other growing economies, also thereby reducing country-specific risk.

Sectors and Themes: If your risk appetite permits, one should also allocate a small amount of the total portfolio (may be 5 or 10%) to sectors and themes which would do well in the time to come. However, this should not form part of the core allocation of your portfolio.

In a nut shell: Diversification is a must for mutual fund schemes too. The focus should be on the quality rather than the quantity of diversification. Constituents of the portfolio must complement each other in minimizing risk and generating returns.

SHOULD YOU INVEST IN MARKET LINKED TAX SAVING PRODUCTS?

If you are comfortable exposing yourself to market fluctuations, consider investing in market linked investment products that save tax. Otherwise, consider traditional tax saving investment options.

Following are some of reasons that why you select market linked tax saving products:

1. Greater returns:One great advantage of market-linked investment products is the returns they offer. Unlike traditional investments that offer a static interest rate of 8%-9% , ELSS, MFs and ULPPs offer returns as high 25%. Debt funds protect your money when equity markets are not performing well, while equity funds ensure you get higher returns than debt instruments when markets are up. As a result, you benefit immensely.
2. Tax benefits:Similar to FDs and PPFs, ELSS and pension funds offer tax savings. Investments up to Rs 1.5 lakh are eligible for tax deduction under Section 80C of the Income Tax Act. In the case of ELSS, dividends earned during the investment period are tax free. Further sale of ELSS units are not subject to tax as they are considered long-term capital gains.
3. Investment frequency:These products give you the liberty of investing in lump sum or at periodic intervals. This feature trumps FDs which require lump sum deposits. A systematic investment takes advantage of market volatilities yielding positive returns.
4. Lock-in period:ELSS has the shortest lock-in period of 3 years while for ULPPs, it is 5 years. When you compare these numbers with the lock-in periods of a tax-saving FD or a PPF, you get a clear winner.
5. Fund managers:You don’t need to be an expert on stock market and portfolio management for investing in mutual funds or ELSS. The financial institution in whose scheme you have invested has professional fund managers to handle your portfolio and ensure you receive maximum gains. Therefore, you gain from a hassle-free, well-diversified package of many individual investments, which you would otherwise find complicated to manage on your own.

Before making any investments, the readers are advised to seek independent professional advice, verify the contents in order to arrive at an informed investment decision. Mutual Fund investments are subject to market risks, read all scheme related documents carefully.