If you have enough saving in your FD, PPF, PF, NSC or other debt instruments, it makes sense to give your portfolio an equity exposure. As a rule, if broking or investing is not your day job, avoid buying stocks. Managed Funds have outperformed with huge margins, however, you need to evaluate your Fund Manager. Having chosen a Mutual Fund, do not try and time the market. In fact, just ignore it. Allow traders to get their thrills from the fluctuations of the market - your focus is not thrills or to expound on your two-day gains at the evening cock-tail but long term wealth creation. The best way to do that is to lock your income by getting into Systematic Investment Plans (SIP) of Mutual Funds. Patience is your friend while thrill is your enemy; remember winning is a habit. The idea behind SIP is first invest regularly and not in lump sum. Because of the regular investing you end up buying units at an average cost.
In financial jargon, following are the kinds of funds based on market capitalization:
- Small Cap: High Risk & High Returns
- Mid Cap: Moderate Risk & Moderate Return (Mid and Small-cap funds rise faster when the markets rise and fall faster when the markets fall)
- Large Cap: Low Risk & Low Return (Not extremely volatile and are secure with their return performance and considered safe to invest)
- Multi Cap: As a category, Multi Cap Funds are expected to weather all kinds of market conditions and come up winners. This factor makes the Fund Manager’s task difficult and achieving growth a challenge. Having many Multi Cap Fund does not bring in diversification as it just duplicates the idea that this category adopts.
Categories based on investment style:
- Exchange Traded Fund or An Index Fund: Funds that mimic indices such as Sensex or Nifty.
- Equity Linked Savings Scheme (ELSS): There are some Mutual Fund schemes specially created for offering tax savings, and these are called Equity Linked Savings Scheme, or ELSS. The investments that you make in ELSS are eligible for deduction under Sec 80C. However, with the new DTC Code, which is expected to come into effect in April 2012, some of the Financial Products that got you tax deductions this year would not qualify for tax benefits under the DTC schemes. So, for tax saving reconsider your investment in ELSS having lock-in period of three years because investments from the third year (April 2012) will not qualify for tax benefits.
Some due diligence is needed before giving your money to any arbitrary Fund Manager. You can choose a Mutual Fund depending on how much risk you are ready to take. You should invest with a financial goal or plan in mind. This will help you track the performance of your investments and measure its performance against its peers and set benchmark for you to make any change in your holding to these funds.
- Determine your risk apetite
- Invest with a goal by selecting a combination of funds that will help you achieve your goal.
- Choose a Mutual Fund that gives above 20% return. Check past 3-5 years annual returns.
- Ensure credentials of the Portfolio Manager is strong. Check whether the Portfolio Manager holds good education, has long experience (say 15 years) in the industry, and has a proven track record.
- Invest in a Fund that has atleast 500 Crore of net assets and has established reputation. Never invest in a Fund that has only ~ 10-50 crore of Net Assets. Such Fund may return great but it is very risky.
- Choose a 4-star to 5-star rated Mutual Fund. Refer to List of Financial Sites for ratings of various Mutual Funds.
- Track the performance of your investment at least twice a year and make any necessary course correction.
- Invest in 4-5 Funds instead of too many Funds. More Funds reduces your chance of superior performance, are difficult to manage and not the best way to diversify.
- Decide after collecting information from many sources. You can also get an idea by talking to various Bank’s Financial Agents/Bank Managers. Be cautious while collecting information and not be trapped with one agent. Sometimes, an agent will try and force a ULIP (Unit Linked Insurance Plan) down your throat and then get you to sell it and buy for another three years. The moment he says so, you know that he is not acting in your interest. Dump him, even if he is your favorite uncle ji down the road.
- Invest in SIP that begins in April and ends in March rather than invest towards the end of the year. While the burden of saving for tax investment gets reduced, it can help to manage to generate a decent return on investment. Be cautious Mutual Funds lure investors by declaring dividents between January and March.
- Plan your portfolio to have 70-80% investment in large-cap to bring stability. The balance should be invested in Mid, Small and Multi Cap Funds which are relatively risky and also offer the necessary boost for the overall higher portfolio returns.
- Set a target for exit – (A) If I get 25% returns and it is good enough for me; then I should exit. (B) When I will get 25% return I will just recover my initial amount and keep the remaining invested to grow. In this way I will never lose any principal and allow my remaining money to grow as well.
- HDFC Top 200 (inception date of this fund is 1996, so we have a huge sample size to monitor performance) and HDFC Prudence have good ratings, strong net assets, established Fund Managers, good returns and proven track record.
- Six ELSS Picks: Crowded with over 30 ELSSs, most of them with dangling dividend carrot, the ELSS market may get confusing. The only filter is consistence performance. All the following show consistent returns.
|Conservative||HDFC Tax Saver Growth (Origin Date 1996)|
|Fidelity Tax Advantage Growth (Launched in March 2006)|
|Franklin India Taxshield Growth (25% mid cap and 75% large cap)|
|More riskier but higher return||Religare Tax growth (56% investments in mid and small cap)|
|Sundaram BP Taxsaver Growth|
|Birla Sunlife Tax Relief 96 Div (A mix of large and midcap stocks)|
Did you know Dividend Reinvestment in ELSS locks your money forever? Do not invest into Dividend reinvestment plan, your money is locked forever. The dividend gets reinvested into the fund. Any such reinvestment is considered a fresh investment and gets locked in for three more years. Subsequent dividends declared on this reinvested amount get reinvested again for yet another three years. This way, you get into a vicious cycle of perpetual investment.
The way out: Most Fund Houses allow you to switch from a Dividend Reinvestment Option to Dividend Option or Growth Option. However, your fund may impose a lock-in from the time you switch your units to the Growth Option. Use the Dividend Option or Growth Option and check for the lock-in time.
Now, we are left with Growth and Divident Option. I am still exploring the difference between the two, and which is better or how they affect individual goals. I will revisit this topic later.
Thanks to Hindustan Times and many other sites I collected the above information and gathered into nice enriching article. Comment, questions, praises, please drop me on comment.