Your mutual fund scheme may advertise fancy returns that it would have generated in the past. But often, we don’t see investors earning the same. Is there a smarter way to invest to reduce this gap? To make a good financial plan for FY2017-18, let’s check out some smart ways of maximizing your mutual fund investments.
Product suitability
How do you make sense of close to 3,000 mutual fund schemes that are there in the Rs16.5 trillion Indian mutual funds industry? How do you pick the right mutual fund schemes?
Let’s say you want to buy one equity and one debt scheme. Does that mean you buy any of the 524 equity schemes out there and any debt fund out of the 675 such funds in the market?
It’s important that you buy the scheme that fits your requirements. For instance, if you are a first-time investor and wish to invest in debt funds, you could go for less risky debt funds like funds that follow accrual strategy instead of duration strategy, says Deepak Chhabria, chief executive officer and director, Axiom Financial Services Ltd.
“If fund managers fail to predict interest rate movements, debt funds can fall and even erode your capital,” Chhabria added.
Before the credit policy of 8 February 2017, many fund managers expected the Reserve Bank of India to cut interest rates. Many debt funds had, therefore, held high maturity papers in their portfolios. However, the central bank did not cut the rates; the yields shot up and many debt funds made big losses that day.
The pain was felt by short-term debt funds too, especially since some debt funds’ maturities were on the higher side.
Similarly, a first-time mutual fund investor wanting to invest in equities should avoid high-risk funds like mid- and small-cap funds and also sector funds.
“In case of excessive volatility, when such conservative funds fall less, or say, in line with their benchmark indices like how a well-managed and true to label large-cap funds would react; it’s easier for advisers to explain to investors. But a hard landing is tough to explain if we get greedy and put money in products that aren’t suitable to the investor,” said Chhabria.
Asset allocation is still important
We understand ‘Sensex’ and ‘Nifty’ but baulk when someone utters ‘interest rates’, ‘duration’ or ‘accrual’.
Recent accidents have only heightened the fears. Abrupt interest movements that have stumped fund managers’ prediction to a fall in credit ratings of underlying scrips have shown us that even debt funds can be volatile (read more about this here: http://bit.ly/2mrlxBr).
So, should you avoid debt funds completely now?
“No. (But) you need to be selective about the fund house where you want to invest,” said Anup Bhaiya, managing director and chief executive officer, Money Honey Financial Services Pvt. Ltd.
In a philosophical way, Bhaiya says that debt funds are riskier than equity funds because “debt funds are meant for the risk averse who wish to protect their capital. And if capital gets eroded, that’s a greater risk.”
If you come in the tax bracket, look at debt funds, he suggested. But if you don’t fall in the tax bracket and want capital safety, you may opt for traditional fixed income instruments such as the 8% government bonds and corporate deposits but make sure you choose AAA-rated bonds and reputed firms.
Ignore the blips
Every fund manager has a few bad days in the office. And no scheme figures among the top 10 year after year. While past performance is an important criterion to judge a scheme, it’s not the only thing you should look at. “There are many schemes that have gone down momentarily and have then bounced back. One bad patch, of 6 months to a year, doesn’t change anything,” said Amol Joshi, founder, PlanRupee Investment Services.
However, how is one to decipher whether a mutual fund scheme has really gone bad or that the blip in its performance is temporary?
“Stay in touch with your financial adviser and ask questions or stick to pedigreed fund houses that have proper risk management processes in place,” said Chhabria.
