Why invest in MFs? | Investing in Mutual Funds

Why invest in MFs?
Mutual funds are ideal investment avenues for retail investors because a single unit of mutual fund provides a bouquet of diverse shares, debt and money market instruments. For a small investor with the limited resources he has at his disposal, this would be a dream. More importantly, the investors does not have to pour through financial results and analyse the ratios to decide which shares to buy and which debt or money market instruments to invest in. The professionally qualified and experienced fund manager does it for him. Also, after investing, the investor does not have to monitor the share prices and decide which share to sell and when and which one to buy in its place — the fund manager does it for him. “With minimal fund management fees and no entry load now, an investor gets access to well -researched, well managed equity portfolios at hardly a cost unlike direct equity where he would do his own research, brokerage costs etc.,” says Angirish. Explaining the crucial role of fund managers, Joshi says “Mutual fund is one of the best investment tools for one who is unable to track the market and manage his stock investments efficiently. Fund managers of mutual fund schemes are expected to invest in the quality stocks with longer horizon and manage it through the highs and lows of markets to generate reasonable returns while managing various risk attached to it.

MFs have a diversified portfolio of investments spanning across cross section of industries and sectors and, therefore, investing in mutual funds automatically provides the necessary diversification to your investments. Diversification reduces the risk because the stocks in the portfolio of the mutual fund may very rarely decline simultaneously or in the same proportion. “You can invest in asset classes like equities, debt, gold, etc. Apart from diversification in various asset class, it also provides large variety of schemes within asset classes, for e.g. in equity category it has schemes across market caps (large, mid and small cap), themes (e.g. infrastructure), sectors (e.g. banking, power), investment philosophies (value or growth), etc.,” says Joshi.

Investing in Mutual Funds
Now, the question is: how should you decide which scheme is suitable for you? This will primarily depend on the objective of your investment. If you are young and have a specific objective in mind such as buying a house, children’s education, etc. and are looking at getting a lump sum amount after a specific period, the growth schemes are ideal for you as they provide capital appreciation over the long term. However, if you are a retired person looking for regular income, the income schemes are right for you. However, if you are looking for both regular income as well as capital appreciation over the long term, the balanced schemes would be the right choice. If you are looking at investing in mutual fund from the limited purpose of tax planning, you should go for the tax saving schemes, while if you are bullish on a particular sector, you should invest in a sector-specific scheme.

One should also take into consideration one’s risk appetite before investing in mutual funds. “Choice of mutual fund scheme completely depends on your risk profile. For a high risk investor, he can choose an aggressive high beta equity or a specific sector fund. For someone who wishes to invest in equity but with lesser risk, he can choose diversified/large cap or index funds. For someone, who does not prefer risks at all, should look for debt schemes,”
More importantly, the choice should be in line with one’s financials goals. “The starting point for a new investor should be to identife his financial goals, both short-term and long-term ones, as well as his risk profile. A good financial planner will be able to help him with this and will also draw up an asset allocation that is in keeping with the goals and the risk profile. Having these building blocks will itself narrow down the universe of funds that would meet an investor’s risk profile and goals.”

It is also important to check out the performance track record of the fund house. “Retail investors should look at the investment objective of the fund and see whether it fits into their asset allocation. They should look at the historical portfolios and check how the fund is managed and how portfolio looks like. They should look at the background of the fund manager and his previous track record, including some basic checks on the investment team of the fund house. Lastly, they should look at historical track record of the fund. Typically, they should invest in funds which have atleast over 2 years of consistent track record.

“The decision to invest in an equity MF by a retail investor should ideally be driven by aspects like investment objective (tax planning, capital protection, wealth creation etc.), expected returns, risk appetite and investment horizon (short term v/s long term) which are bound to vary. These will be key factors in determining the timing for investment in equity MFs,” sums up Ravi Trivedy, Executive Director — Financial Services, KPMG Advisory Services.