Selecting the right mutual fund scheme among a plethora of schemes available in the market is the most daunting task for mutual fund investors’ at all times. Selecting the right scheme based on your appetite is like finding a needle in a hay-stack. Every individual is different from the other when it comes to investment goal, risk tolerance, investment horizon, return expectations and entry-exit load, among other things. There is no ‘one size fits all’ strategy, thus investors’ portfolio should be in sync with their very own personal parameters.
Investment Goal
Know your investment goals. Do you want to preserve capital or to grow it? Is it to earn a certain income or to provide a certain cash flow at the end of a period? The answers to such questions will determine your investment goals in life. Your goals should be in line with your responsibilities in life. For example, a person looking to accumulate funds for retirement or a child's education may want to invest in a mutual fund whose objective focuses on long-term stock price appreciations instead of dividend payments. On the other hand, someone who's recently retired may wish to invest in a fund that provides additional income with little risk of loss to principal, such as a conservative stock fund that distributes dividends monthly or quarterly. Still another investor may want to use mutual funds to improve the return on his or her risk-free savings account at a bank. The investment should do at least as well as the overall stock market; therefore, a mutual fund that tracks the overall performance of a benchmark market index might be the most appropriate choice.
Asset Allocation
The groundwork of any portfolio construction is asset allocation. Studies show that over 90 per cent of returns generated by an investor depend on how the savings are allocated across different asset classes. Asset allocation also determines the broad risk level of a portfolio, which should be in accordance with the risk profile of the investor. Risk appetite of an investor depends on various factors like age, income level, etc. While making asset allocation decisions, investors should also keep the concept of diversification in mind. Diversification across asset classes and geographies is a wise idea.
Analyse the performance
A key attribute to mutual fund investing is analyzing the performance of a scheme. However, while evaluating a mutual fund scheme, attention should be given to the consistency of the performance. Investors should select schemes which have performed well over good and even bad markets. Only a long term perspective will help us understand how the fund has fared in unfavorable market scenarios.
Risk-adjusted returns
Returns should always be benchmarked against the risk undertaken by the scheme. A certain scheme could have superlative performance but would have undertaken huge risk to deliver those returns. A good mutual fund not only maximizes returns but also minimizes the risk.
Fund management team
Like an efficient sailor who can take his ship through turbulent weather and come out safe, a large part of a fund’s performance is dependent on the investment management team of the fund house. The ideal sailor whom you can trust with your money is the one who has weathered many a boom-bust market cycles and still have delivered consistent returns. Since the global investing window is now open for every investor, a globally experienced team would then add value to your global investments.
Load and fund expenses
Investors should also get a clear picture of all the funds expenses, including the applicable exit load and annual fund expenses as they also impact fund returns. Since Aug’09, investments in mutual funds no longer attract any entry fee. This now allows investors to decide how much to pay their advisor for his advice.
Typically, mutual funds costs comprise recurring annual expenses and transaction fees each time one buys or sells MF units. The expense ratio of a fund encompasses the myriad costs levied by the asset management company on a yearly basis. This is charged irrespective of fund performance. The basket of costs includes: management & advisory fee, selling and promotion fee, custodial fee, registrar fee, audit fee, etc… The expense ratio varies across different funds. However, SEBI has capped the charges at 2.5 per cent for equity funds and 2.25 per cent for debt funds. This cost gradually goes down as the corpus of the fund rises above a certain level. Equity funds charge2.5 per cent on the first Rs 100 crore of the average weekly net assets collected. This is then reduced to 2.25 per cent for the next Rs 300 crore, 2 per cent on the subsequent Rs 300 crore corpus; it finally comes down to 1.75 per cent for the balance assets. There are some expenses which are not accounted for in a fund’s return and are referred to as ‘loads’. These are deducted at source while buying or selling the units in the fund. SEBI has now abolished the front-end load. So funds can now only charge an ‘exit’ load.
Types of Funds
Mutual funds invest in different asset classes including equity, debt and alternate (gold, real estate, etc…). Investors seeking high return, who do not mind taking risk, should look at equity as an investment vehicle. Short-term investors, who may want to keep money liquid, need some sort of regular income or keep their capital protected, should look at mutual funds that invest in debt products. Investors seeking to diversify their portfolios and guard against inflation buy some gold or real estate through a fund. And then, there are those who want a fund to take care of multiple needs, should look at hybrid products.
Conclusion
In the current market uncertain times, more than ever, asset allocation will deliver better risk reward outcome than trying to time the market. Second, dynamic asset allocation may be preferred over static asset allocation. And lastly, discipline in investing will be more valuable than emotional or ad-hoc investment decisions. Above all, staying away from investing could turn out to be more harmful than investing; hence, invest, if you have a longer term view.
Source: http://www.indianexpress.com/news/pick-the-one-that-suits-your-needs/657759/0
Investment Goal
Know your investment goals. Do you want to preserve capital or to grow it? Is it to earn a certain income or to provide a certain cash flow at the end of a period? The answers to such questions will determine your investment goals in life. Your goals should be in line with your responsibilities in life. For example, a person looking to accumulate funds for retirement or a child's education may want to invest in a mutual fund whose objective focuses on long-term stock price appreciations instead of dividend payments. On the other hand, someone who's recently retired may wish to invest in a fund that provides additional income with little risk of loss to principal, such as a conservative stock fund that distributes dividends monthly or quarterly. Still another investor may want to use mutual funds to improve the return on his or her risk-free savings account at a bank. The investment should do at least as well as the overall stock market; therefore, a mutual fund that tracks the overall performance of a benchmark market index might be the most appropriate choice.
Asset Allocation
The groundwork of any portfolio construction is asset allocation. Studies show that over 90 per cent of returns generated by an investor depend on how the savings are allocated across different asset classes. Asset allocation also determines the broad risk level of a portfolio, which should be in accordance with the risk profile of the investor. Risk appetite of an investor depends on various factors like age, income level, etc. While making asset allocation decisions, investors should also keep the concept of diversification in mind. Diversification across asset classes and geographies is a wise idea.
Analyse the performance
A key attribute to mutual fund investing is analyzing the performance of a scheme. However, while evaluating a mutual fund scheme, attention should be given to the consistency of the performance. Investors should select schemes which have performed well over good and even bad markets. Only a long term perspective will help us understand how the fund has fared in unfavorable market scenarios.
Risk-adjusted returns
Returns should always be benchmarked against the risk undertaken by the scheme. A certain scheme could have superlative performance but would have undertaken huge risk to deliver those returns. A good mutual fund not only maximizes returns but also minimizes the risk.
Fund management team
Like an efficient sailor who can take his ship through turbulent weather and come out safe, a large part of a fund’s performance is dependent on the investment management team of the fund house. The ideal sailor whom you can trust with your money is the one who has weathered many a boom-bust market cycles and still have delivered consistent returns. Since the global investing window is now open for every investor, a globally experienced team would then add value to your global investments.
Load and fund expenses
Investors should also get a clear picture of all the funds expenses, including the applicable exit load and annual fund expenses as they also impact fund returns. Since Aug’09, investments in mutual funds no longer attract any entry fee. This now allows investors to decide how much to pay their advisor for his advice.
Typically, mutual funds costs comprise recurring annual expenses and transaction fees each time one buys or sells MF units. The expense ratio of a fund encompasses the myriad costs levied by the asset management company on a yearly basis. This is charged irrespective of fund performance. The basket of costs includes: management & advisory fee, selling and promotion fee, custodial fee, registrar fee, audit fee, etc… The expense ratio varies across different funds. However, SEBI has capped the charges at 2.5 per cent for equity funds and 2.25 per cent for debt funds. This cost gradually goes down as the corpus of the fund rises above a certain level. Equity funds charge2.5 per cent on the first Rs 100 crore of the average weekly net assets collected. This is then reduced to 2.25 per cent for the next Rs 300 crore, 2 per cent on the subsequent Rs 300 crore corpus; it finally comes down to 1.75 per cent for the balance assets. There are some expenses which are not accounted for in a fund’s return and are referred to as ‘loads’. These are deducted at source while buying or selling the units in the fund. SEBI has now abolished the front-end load. So funds can now only charge an ‘exit’ load.
Types of Funds
Mutual funds invest in different asset classes including equity, debt and alternate (gold, real estate, etc…). Investors seeking high return, who do not mind taking risk, should look at equity as an investment vehicle. Short-term investors, who may want to keep money liquid, need some sort of regular income or keep their capital protected, should look at mutual funds that invest in debt products. Investors seeking to diversify their portfolios and guard against inflation buy some gold or real estate through a fund. And then, there are those who want a fund to take care of multiple needs, should look at hybrid products.
Conclusion
In the current market uncertain times, more than ever, asset allocation will deliver better risk reward outcome than trying to time the market. Second, dynamic asset allocation may be preferred over static asset allocation. And lastly, discipline in investing will be more valuable than emotional or ad-hoc investment decisions. Above all, staying away from investing could turn out to be more harmful than investing; hence, invest, if you have a longer term view.
Source: http://www.indianexpress.com/news/pick-the-one-that-suits-your-needs/657759/0
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