Smart Money - Investment Guide

Investments in Mutual Fund

Mutual Funds over the years have gained immensely in their popularity. Apart from the many advantages that investing in mutual funds provide like diversification, professional management, the ease of investment process has proved to be a major enabling factor. However, with the introduction of innovative products, the world of mutual funds nowadays has a lot to offer to its investors. With the introduction of diverse options, investors needs to choose a mutual fund that meets his risk acceptance and his risk capacity levels and has similar investment objectives as the investor.

Snapshot of Mutual Fund Schemes

Mutual Fund Type	Objective	Risk	Investment Portfolio	Who should invest	Investment horizon
Money Market	Liquidity + Moderate Income + Reservation of Capital	Negligible	Treasury Bills, Certificate of Deposits, Commercial Papers, Call Money	Those who park their funds in current accounts or short-term bank deposits	2 days - 3 weeks
Short-term Funds (Floating - short-term)	Liquidity + Moderate Income	Little Interest Rate	Call Money, Commercial Papers, Treasury Bills, CDs, Short-term Government securities.	Those with surplus short-term funds	3 weeks - 3 months
Bond Funds (Floating - Long-term)	Regular Income	Credit Risk & Interest Rate Risk	Predominantly Debentures, Government securities, Corporate Bonds	Salaried & conservative investors	More than 9 - 12 months
Gilt Funds	Security & Income	Interest Rate Risk	Government securities	Salaried & conservative investors	12 months & more
Equity Funds	Long-term Capital Appreciation	High Risk	Stocks	Aggressive investors with long term out look.	3 years plus
Index Funds	To generate returns that are commensurate with returns of respective indices	NAV varies with index performance	Portfolio indices like BSE, NIFTY etc	Aggressive investors.	3 years plus
Balanced Funds	Growth & Regular Income	Capital Market Risk and Interest Rate Risk	Balanced ratio of equity and debt funds to ensure igher returns at lower risk	Moderate & Aggressive	2 years plus

How to choose the right Mutual Fund scheme?

Mutual Fund investment decisions require consistent effort on the part of the investor. Before investing in Mutual Funds, the following steps must be given due weightage to decide on the right type of scheme:

1. Identifying the Investment Objective
2. Selecting the right Scheme Category
3. Selecting the right Mutual Fund
4. Evaluating the Portfolio

1) Identifying the Investment Objective

Your financial goals will vary, based on your age, lifestyle, financial independence, family commitments, level of income and expenses, among many other factors. Therefore, the first step is to assess you needs.

2) Selecting the scheme category

The next step is to select a scheme category that matches your investment objectives:

For Capital Appreciation go for equity sectoral funds, equity diversified funds or balanced funds.
For Regular Income and Stability you should opt for income funds/MIPs
For Short-Term Parking of Funds go for liquid funds, floating rate funds, short-term funds.
For Growth and Tax Savings go for Equity-Linked Savings Schemes.

Investment Objective	Investment horizon	Ideal Instruments
Short-term Investment	1- 6 months	Liquid/Short-term plans
Capital Appreciation	Over 3 years	Diversified Equity/ Balanced Funds
Regular Income	Flexible	Monthly Income Plans / Income Funds
Tax Saving	3 yrs lock-in	Equity-Linked Saving Schemes (ELSS)

3) Selecting the right Mutual fund

Once you have a clear strategy in mind, you now have to choose which Mutual fund and scheme you want to invest in. The offer document of the scheme tells you its objectives and provides supplementary details like the track record of other schemes managed by the same Fund Manager. Some important factors to evaluate before choosing a particular Mutual Fund are:

The track record of performance over that last few years in relation to the appropriate yardstick and similar funds in the same category.
How well the Mutual Fund is organized to provide efficient, prompt and personalized service.
The degree of transparency as reflected in frequency and quality of their communications.

4) Evaluation of portfolio

Evaluation of equity fund involve analysis of risk and return, volatility, expense ratio, fund manager’s style of investment, portfolio diversification, fund manager’s experience. Good equity fund should provide consistent returns over a period of time. Also expense ratio should be within the prescribed limits. These days fund house charge around 2.50% as management fees.

Evaluation of bond funds involve it's assets allocation analysis, return's consistency, it’s rating profile, maturity profile, and it’s performance over a period of time. The bond fund with ideal mix of corporate debt and gilt fund should be selected.