There are 240 schemes with different flavours, combinations and sectors. An ordinary investor would find it difficult to decide which scheme to buy and when, given the current market volatility. Debashis Basu, Trustee, Moneylife Foundation, told the audience on how to analyse each sector and pick the right scheme for specific needs

The high volatility in the market and the huge drop in the indices recently have left many investors confused. Investors are wondering if they should exit the market, or if they should look at the situation as a buying opportunity. Newbie investors are pondering if this is the right time to start investing in the market—or should they wait?

All these questions were answered at the 75th seminar conducted by Moneylife Foundation. The Foundation’s trustee, Debashis Basu, enlightened investors today on how to be safe and smart in selecting the right mutual fund scheme.

Financial products are not designed for easy use, pointed out Mr Basu. Investors need to constantly have to evaluate these financial products. In the seminar, Mr Basu gave the participants a detailed perspective on mutual funds and how investors should choose the right mutual fund schemes.

The participants were explained about the different types of schemes available, like equity funds, ELSS (equity linked saving schemes), bond funds, liquid funds and SIPs (systematic investment plans). Mr Basu explained the benefits and the risks associated with each of these plans and investment strategies.

Mutual funds allow investors to diversify over shares and bonds of different kinds. Investors in a mutual fund have a professional fund manager who would make investment decisions on their behalf. However, some fund managers are no better than amateurs and this can be evaluated through their fund’s performance. The money of an investor is left at the mercy of the manager.

As every investment comes with a cost, mutual funds come with a cost as well. Presently there is no entry load—but soon, investors may have to shell out as much as Rs150 if they invest more than Rs10,000 in mutual funds. Apart from this, there are fund management charges that are deducted in the form of units. Even if investors plan to exit, they would have to pay an exit load.

Mutual funds, however, are a safer way for those who would like to invest in the capital market compared to putting all their investments only in one stock. One can start with an investment as low as Rs500. Open-ended funds are highly liquid and can be converted into cash easily. Investors can avail of tax benefits as well through investing in ELSS.

SIPs (systematic investment plans) are a good option, but are flawed if they are not adjusted for the growth option. Investors usually don’t consider inflation and invest the same amount over years. In fact, the value of money falls over the years, therefore, investors should incrementally increase their investment amount.

Mr Basu introduced the idea of value averaging, a better option compared to SIP. It is a strategy through which investors should buy more when the NAV (net asset value) is less and vice-versa, thus increasing returns.

On how to choose the best equity scheme, ideally, returns over a five-year rolling period should be considered to analyse the performance of a fund. Moneylife regularly puts out such analyses. There are usually just four-five fund houses that consistently register good performance. A portfolio which is diversified across all sectors should be chosen; therefore, sector funds should be avoided. Investors should avoid NFOs (new fund offerings) and funds with fancy names.

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 making money from the market through index funds.