Articles

If your New Year resolution is to start investing the surplus that lies idle in your bank each month, or to force yourself to put aside money for the uncertain future, then it is time for you to consider mutual funds. Mutual fund schemes come in a wide range that cater to different types of investment needs. If you have access to an adviser, it’s simpler to start as she can guide you. If you don’t, then it may look like a daunting task for you to sift through the many schemes available and decide which one to pick. Here’s a suggestion: start with the basic selection and as your experience builds, move to the more nuanced products.

Fixed income

Mutual fund investing isn’t only about starting a systematic investment plan (SIP) in an equity fund. Fixed income funds like ultra-short term and short-term income funds present a good switch opportunity when you want to think about products other than fixed deposits. According to Kerala-based mutual fund distributor, Shiney Sebastian, “Many people we interact with are primarily fixed deposit investors and for them to jump straight into equity may not always make sense. Money that needs to be kept aside for around 3 years can be invested in ultra-short term or short-term funds, which offer a fair amount of safety and better returns.”

An ultra-short term fund is a simple scheme that invests money in short-term debt instruments issued by companies, banking institutions and government securities. The objective of these funds is to deliver regular income through interest earned on these securities. You can also opt for the dividend option, which pays out the accumulated profit periodically, or remain invested in the growth option where the profits earned get accumulated till you have to redeem.

Typically, the maturity of securities in such funds is around 6-12 months—a low maturity helps to keep in check the interest rate-driven volatility in daily value, making this type of fund relatively less risky.

According to Prakash Lohana, a Vadodara-based certified financial planner, “With less than 1-year maturity of securities and a good portfolio, these funds fit well in the overall fixed income allocation of a client.”

If you want to save some money for the near future, and you want to earn something extra on it but are not sure about the exact time of your requirement, an ultra-short term fund or a low-maturity (1 to one-and-a-half years) short-term income fund is the fund to pick. However, coming into mutual funds does mean that you should be ready to face some volatility in returns in the very short term.

The equity dose

Once you have addressed a safe surplus for near-term needs, you have to think about saving for the future. The objective of investing in equity is to grow your wealth and earn above-inflation returns in the long run. This means, you need to be invested for at least 5-10 years. For those who don’t want too much risk, starting with a balanced fund can help. Traditionally, balanced funds have 65-75% in equity and the rest in debt—the latter is intended to provide stability in returns. Keep in mind that here the asset allocation is predetermined, which may or may not suit your profile.

If you are willing to commit to long-term investments and ride out the near-term volatility, it may help to start with simple products like a large-cap equity or a multi-cap fund. Suresh Sadagopan, a Mumbai-based financial planner, said, “The choice of fund depends a lot on the conversation with the client. For someone who has a long-term horizon and the risk appetite for equity, multi-cap funds are a good start.” Such funds give the investor the adequate diversification needed for the first experience. Only once you are familiar with equity investing should you diversify further into mid- and small-cap funds, or others.

D. Muthukrishnan, a Chennai-based financial planner, “Clients come to advisers to seek the benefit of equity investing, as most often they have fixed income allocation in place. SIPs in diversified equity funds are a good way to start, rather than going for small- or mid-cap funds or thematic funds.” This is for long-term investors. Those who are looking to park funds only for around 3 years should consider monthly income plans, which have around 80% in debt and rest in equity, he added.

Planners and advisers were unanimous that ideally one should start with an asset allocation and relevant conversation around what you are looking to achieve with your investments, the ability to manage volatility in market-linked investments and the expected investment horizon. Choosing products without having the above in place may not be the most efficient start.