Invest in consistent mutual funds to beat market volatility

The current bull run is marred with ample volatility due to global liquidity, scams, inflation, interest rates, fears of war, increased FII pullouts and economic worries around the globe. Some aggressive investors turn market volatility in their favor by churning quick profits.

However, such wild price movements could lead to heavy losses in an investor's portfolio. Are mutual funds affected by market volatility? Since the underlying investments of mutual funds include picks from stock markets, the volatility of the markets transcends up to these funds. Irrespective of the strategies employed by fund managers, mutual funds cannot remain totally immune to market fluctuations.

The extent of volatility is determined by the extent of fund's exposure to equity.

Market volatility can be beaten by owning actively managed mutual funds or non-index mutual funds. The fund manager identifies stocks that are susceptible to negative market swings and adopts strategy to minimize the impact of a fall. A more volatile fund is associated with larger risk, especially when you require money over a short term.

This is when a fund's volatility becomes critical.

It is true that past performance cannot accurately predict future returns. However, this data provides an insight into the fund's volatility. The standard deviation of a mutual fund is a measure of variation of returns across a period of time.

A fund's beta is another common measure of volatility. Here, beta compares a fund's performance to a benchmark, typically an index. The beta coefficient refers to the return that a stock or portfolio of stocks is expected to achieve in relation to the returns provided by the stock market as a whole. The closer a mutual fund's beta is to one, the less volatile it is. If the beta value is greater than one, it is more volatile.

To beat volatility, invest in mutual funds that have exhibited consistent growth over the years.

Here are a few investment options for the risk averse:

Balanced fund

Young investors who seek decent returns for moderate risk can explore balanced funds. These invest partly in equity and partly in debt instruments. While equity investments lend growth prospects to the portfolio, debt investments provide the much needed stability and capital preservation. Most balanced funds have equity to debt investments in the ratio of 65:35.

Debt mutual fund

For those investors who are close to their retirement years, assured of liquidity, capital preservation and regular flow of income are prime concerns. They usually aren't concerned in making quick profits by taking considerable risks. Debt mutual funds are not only less risky but also provide higher posttax returns than the traditional debt products.

Invested in fixed income instruments, debt mutual funds pass on interest income earned to investors in the form of dividend. These dividends are subjected to Dividend Distribution Tax and the same is withheld by the fund house before disbursement.

Systematic investment plan (SIP)

Investment discipline or systematic investing is key to building a long term robust portfolio. Instead of investing a lump sum, the investor can choose to invest in a particular mutual fund scheme on a periodic basis. He not only benefits from the power of compounding but also from Rupee Cost Averaging. This is the ideal investment vehicle for long term investors. Some fund houses offer SIP investments as low as Rs. 250 per installment, making it very attractive.

Fund houses are now providing more investment frequency options for investors - daily, weekly, monthly and others. A daily SIP takes advantage of intra-month swings in prices of stocks, which comprise that scheme's portfolio.

Monthly income plan (MIP)

Yet another option for investors with low risk appetite is MIPs. Funds in this category invest a small portion of around 15 percent to 25 percent of the portfolio in equity and the rest is pumped into debt and money market instruments. Investors must know that unlike what the name suggests, monthly income is not assured but is dependent on market performance.

Investors can get higher returns owing to the fund's equity exposure, compared to fixed deposits and pure debt funds. Medium or risk averse investors can invest in new hybrid products that have exposure to both equity and debt markets.

These hybrid funds have equity exposures varying from 15 percent to 50 percent and an investor can choose such schemes which are in line with their risk appetite. These plans offer a balance of sensible risk with growth potential.

Source: http://economictimes.indiatimes.com/features/financial-times/Invest-in-consistent-mutual-funds-to-beat-market-volatility/articleshow/7042076.cms?curpg=2

PAN to be mandatory for mutual fund investments

All mutual fund investors, new as well as existing, will need to mandatorily furnish their PAN (Permanent Account Number) details from next year irrespective of the size of their investment.

The move is part of the revised Know-Your-Customer (KYC) compliance norms to be adopted by fund houses from next year in order to comply with money laundering prevention rules.

Currently, individual investors need to quote PAN only for investments of Rs 50,000 or more, although non-individual investors are required to quote their PAN for all amounts.

All the fund houses have been asked by industry body Amfi to comply with new KYC norms, which would include collecting details like PAN, address proof and photograph of all their new and existing investors, with effect from January 1, 2011.

The Amfi (Association of Mutual Funds in India) decision follows a direction from market regulator SEBI earlier this year to tighten the KYC norms to check fraudulent practices and money laundering activities.

Earlier in 2007, SEBI had made it mandatory to furnish PAN - which is allotted by the Income Tax Department - for all stock market transactions as part of efforts to check fraudulent practices.

The fresh move will lead to MF investors going through some additional paper work, but it is expected to also benefit them as the entire KYC documentation would be centralised across all the fund houses with the help of PAN details.

Subsequent to this, existing investors would not need to go through any paper work for fresh KYC compliance at the time of their new investments.

With Amfi asking all the fund houses to implement new and standardised KYC norms with effect from next month, the fund houses have started the process of collecting the required documents from their investors.

In a circular issued to all the fund houses and distributors, Amfi has said that the industry has signed up CDSL Ventures Ltd (CVL) to undertake the centralised record keeping of all KYC documents.

On completing the one-time process of common standard of KYC with CVL, the investors will be able to transact across multiple mutual funds without having to repeatedly submit their documents with each mutual fund, Amfi said.

The KYC norms were first implemented in the mutual fund industry in February 2008 for all investors putting in Rs 50,000 or more in mutual fund schemes.

Subsequently, the rules were revised with effect from October 1, 2010 and all the investors other than resident individuals were asked to furnish PAN irrespective of the amount. However, resident individuals were allowed to invest up to Rs 50,000 without quoting their PAN details.

There are 44 fund houses in the country, who collectively manage over Rs 7 lakh crore of assets in more than four crore investor accounts.

Source: http://www.thehindubusinessline.com/blnus/05051720.htm