- Mutual funds are supposed to make life simple ! However, the story on the ground is somewhat different.
- The number of Asset Manageemnt Companies has already crossed 30 and the number of growing HDFC, Birl, Reliance, Franklin, Principal, Sundaram, LIC, Tata, SBI, UTI, ICICI Pru, Kotak, DSPML, etc. have been around for quite some time now. But the tribe is growing with new entrants lik HSBC, ABN Amro, Fidelity, Quantum, JM Morgan, AIG, etc. joining the party. While this competition is good as it allows better produts & services to be offered, it be comes difficult for an ordinary investor to decide where to go.
Then comes the bewildering mix of funds - short term debt funds, long term debt funds, short term floating rate runds, long term floating rate funds, gilt funds, index funds, tax-savung funds, diversified equity funds, growth funds, dividiend yield funds, mid-cap funds, sector0specific funds, close-ended/open-ended funds, etc. not to mention specialty funds like derivative funds, gold funds etc. Many funds have similar names which make it difficult to distinguish between them. Many funds have exotic names. Again, all this variety is good, but it leaves a lay-investor totally foxed. - That's no the end of the story. Having chosend an AMC and a particular funds, you are again caught in a quandary, when you sit down to fill-up the forms. SHould you opt for Growth or Dividend? If Dividend, then whether Payout or Reinvestment
Well, here is simple 4-point formular to help invest at least a large part of your corpus without many hassels.
Step 1: Analyze yourself
The most basic rule of any investing is that you must invest keeping in mind your financial profile.
Each one of us has a uniquie financial profile. Accordingly our investment pattern will also be unique. Hence, we must never invest based on where others are investing.
Therefore, as the 1st step you need to design your investment plan taking into account, your financial objective/needs; the time period you can remain invested; and how much risk you can take with your money
Step 2: Choose the type of fund
Having defined your investment needs, risk appetite and time horizon, decide how much money will go to which type of fund. As mentioned earlier, there are a wide variety of funds. But broadly speaking you can use the following simple strategy.
Short-term money: The money which you may need within 6 months should go to liquid or short-term floating rate funds.
Medium term money: The money which you need within 1-3 years should go to MIPs (which invest about 10-20% in equity) and Balanced Funds (which invest about 65%-70% in equity). Or you can buy a suitable mix of 100% equity funds and Fixed Maturity Plans/Debt Funds.
Long term money: The money which you don't need for at least 3-5 years should be put in large-cap/diversified/index-funds (about 50-60%), mid/small-caps (about 25%-35%) and sector finds (10-15%). You can skip sector funds if your risk appetite is not high.'
Step 3: Choose the specific funds
Top performers keep changing from year to year. It is impossible for anyone to predict which will be the tope performer next year. Having said that, there are funds, which have consistently delivered above average retturns. This is the set of funds, which should be your target.
Best Funds to buy
You have, in step 2, already shortlisted the 'type' of funds you should invest in. Now choose the top 5-7 funds amongst each particular type.
Just make sure that you are suitably diversified across fund houses too, by ensuring that you don't choose too many funds from the same AMC.
Step 4: Which option is better
The basic returns from the fund will be same irrespective of the option you choose. However, the post-tax returns can be different. To keep things simple, just remember three things
1. Whatever be the fund, just opt for Growth Option if your holding period is more than one year.
2. If you plan to invest for less than 1-year in an equity fund (though this is not recommedned), opt for Dividend Reinvestment.
3. If you plan to invest for less than 1-year in a debt fund, opt for Dividend reinvestment if you are in the higher tax brackets.
I am not talking about Divident Payout here because in most cases you dont depend on dividends to take care of your daily needs. Money coming in through the dividend is just a psychological comfort.
Follow this 4-step process and you will be able to suitabbly deploy your money in the 'right' funds and avoid getting into any ' woring' ones. Note that here 'right or wrong' doesn't necessarily mean that the funds are 'good or bad' but only whether they match your profile or not. This will help you to achieve your financial objective safely and surely.
Sajay Matai
