Personal Finance: Look Before You Leap

PERSONAL FINANCE
Look Before You Leap

There's more to mutuals than just the fund-managers. Here's a jackpot-manual on how to pick up your sort of scheme and strike gold.

By Shilpa Nayak

Let's be clear at the very outset. If you're an investment pro, who has surfed the markets with mutual funds of different hues, you can safely skip this article and focus on shuffling your portfolio. But if you're relatively uninitiated in the art of investment, and the mutual funds bazaar seems as confusing as trying to search for something on the Internet without a search engine, read on.

Fund Starters

Get your goal right: if you are in for fast returns, go for debt-schemes; for safe long-term returns, opt for growth schemes

Know the risk: pure equity schemes may strike gold, but the risk is too high; balanced funds carry less risk, while it's the least for debt schemes

Track your fund: monitor your fund-management team, trace their track records; and above all, know your fund inside out

Mutual funds, the pundits keep telling you, are the best investment options for individuals, who have neither the time nor the expertise to track the market and invest stock by stock or, if you like, bond by bond. Mutual funds let you leave all that to skilled fund managers, who usually know better. But that doesn't mean you can handover your money and just sit back. You still have to choose the funds you want to put your money into. And if you thought that's easy, think again. Because the 34 mutual fund companies registered in India offer a total of 383 schemes. Of them, 230 are open ended, 116 close ended, and 37 offer assured returns. Which one do you put your money into?

What's Your Goal?

Confused? Well, we suggest you start by asking yourself a simple question: what do you want from your investment? Do you want your money back in less than a year's time? Or are you looking at long-term returns to take care of, say, retirement? You should typically start with your financial goals. Says Dhirendra Kumar of Value Research: ''Your investment decision should start with a definition of your financial objectives.'' If you need the money back in less than a year's time, go in for a debt scheme. Long-term savings plans like retirement-planning call for investment in growth schemes.

Whatever your goal, there's a scheme that is suitable for it. Apart from the plain vanilla schemes, on offer are regular investment plans, monthly income plans, dividend re-investment plans, etc. Simply, list your financial goals and then find a scheme that best suits them. For instance, long-term investors looking for a lumpsum at the end of a tenure should go in for a growth option, while those who need regular returns could go in for the dividend plan, with an option to reinvest the dividend portion back in the scheme.

What's Your Risk Threshold?

Ask yourself whether you'd be willing to lose five bucks on every ten bucks you invest in anticipation of making fifty bucks. If the answer is yes, then you have the right risk profile for investing in pure equity funds. Sector-specific high-return funds come with huge risk tags attached so they aren't really meant for risk-averse people.

''One must understand that mutual fund products are riskier than bank deposits or national savings certificates,'' says A.P. Kurian, Chairman, Association of Mutual Funds in India (AMFI). If you aren't the risk taking type, stick to debt schemes that invest in safe government securities, bonds, and debentures. A medium risk-taker should go in for balanced schemes that offer a mix of equity and debt instruments.

Once you know your goals and your risk-profile, and the kind of fund that best suits it, run through this checklist before you zero in on the fund you want to put your money in:

Checking the antecedents: The track record of the Asset Management Company (AMC) and the fund managers is vital pointer to how the fund may perform in the future. Look for changes in the team managing the fund. You could invest in a fund by looking at its past performance, but the exit of its fund manager may mess up its future performance.

Finding a good match: Read everything about the investment philosophy of the fund in the brochures it provides. Ensure that the fundamental investing principles of the fund manager fits in with yours. If safety is the first thing on your mind, avoid funds that have an aggressive approach.

Looking for consistency: Avoid funds with a volatile and unpredictable track record. Don't go for it just because it had a great performance in the latest rally. While the performance of some schemes, like say the pure equity schemes, will be linked to the market, you should be worried if a scheme consistently underperforms in a falling market.

The add-ons: Funds today offer a gamut of investor-friendly services like newsletters, website updates, 24-hour redemption centres, cheque writing facilities, and ATM cards. While these can be attractive, what really matters is how quickly you can buy or sell the units, and how soon you receive the unit certificates and dividend warrants.

Transparency: Check if the fund declares all that an investor needs to know about his investment, particularly the details about its portfolio allocations, NAVs, and regular circulars on performance. Also check if the fund has a website that contains all the required information that is updated regularly.

Now, are you ready for some action? Take the plunge.

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