Moneylife Foundation workshop on mutual funds draws a packed, engaged audience
There are 240-odd equity mutual fund schemes with many different objectives. An ordinary investor would find it difficult to decide which scheme to buy and when, given the current market volatility. This was the subject of a seminar addressed by Debashis Basu, trustee Moneylife Foundation, that was hosted at the Moneylife Knowledge Centre today.
Various questions cropped up. The most common of course, "Where do I start?" And Mr Basu gave the audience of over 70 participants a detailed perspective on the investment scenario and how investors should choose the right schemes, beginning with the types of funds and the merits and demerits of investing in mutual funds, and into the intricacies of the different schemes.
Mr Basu analysed the benefits and the risks associated with each of these plans and investment strategies. This was the 82nd seminar conducted by Moneylife Foundation and the third on mutual funds
Talking about capital protection fund schemes, or monthly income plans that invest 80% in fixed income securities and 20% in equities, Mr Basu said capital protection was a misnomer as investing 80% in fixed income products does not offer capital protection if and when equity markets crash. It would be better if an individual put 80% in a bank fixed deposit and the remaining in a good equity mutual fund for the long term.
About picking the best equity scheme, he said it was ideal to weigh the performance of the fund over a five-year rolling period. (Moneylife magazine regularly puts out such analyses.) The performance of funds in bear markets is a true test of a fund.
There are usually just four-five fund houses that consistently register good performance. Investors should plan a portfolio that is diversified across all sectors. Therefore, sector funds are better avoided. Investors should also avoid NFOs (new fund offerings) and funds with fancy names, Mr Basu said.
Data shows that New Fund Offers (NFOs) come when the markets are in a bull phase; that's the time investors tend to jump in. This has been the case for recent NFOs for gold funds, as gold has been constantly on the rise. But this needn't be the right time to invest. In fact, NFOs do not even have a track record, which alone helps investors take an informed decision.
Investors should also avoid going by the star ratings, especially since funds often invest in stocks which are far from their objectives.
In response to a question raised by a member of the audience, on whether to choose a mutual fund or create one's own stock portfolio, Mr Basu said, mutual funds are a safer way for those who would like to invest in the capital market, unless one is ready to take on the hassle of choosing which stock, how much to invest and maintaining the portfolio which requires a certain amount of skill.
Mr Basu pointed out that SIPs (systematic investment plans) are a good option, but are flawed if they are not adjusted for rising incomes and rising inflation. Investors usually don't consider inflation and invest the same amount over the years. In fact, the value of money falls over the years, therefore, investors should incrementally increase their investment amount.
A safe and smart option for investors who don't have any experience about the markets and don't want to make any effort either, is investing money in index funds. Mr Basu hinted that Moneylife would soon launch a service that would distil its extensive research on mutual funds for the benefit of suscribing members.