Tips to invest in Mutual Funds

 

 

VP Singh

Uttarakhand Bureau Head

Investing requires discipline, even if you regularly put money in mutual funds. Since mutual funds are run by professionals, these are considered good for those who do not have the time and knowledge to invest in shares and bonds. However, building a good mutual fund portfolio requires planning.

Though the ideal portfolio depends upon the person’s risk-taking ability and age, investors must keep some broad points in mind while deciding which funds they should invest in.

A mutual fund portfolio should ideally be divided into two parts – core, for stability and predictability; and satellite, for investments that have a lot of potential but are risky.

This not only reduces volatility but also lowers the tax burden. “The premise of the core and satellite portfolio strategy is to minimise transaction costs and tax liability (short- and long-term capital gains) and manage volatility while looking for opportunities to outperform the market,” says Shilpi Johri, Certified Financial Planner, and Head, Arthashastra Consulting.

IN THE CORE

The core, as the name suggests, is at the backbone and must comprise 70-90 per cent of the portfolio. Its aim is giving stability and decent returns.

Globally, index funds or passively-managed funds are the first choice for the core. An index fund replicates a benchmark index both in portfolio composition and returns. The fund manager does not have any say in stock selection, which eliminates the risk of wrong judgement. The fund management costs, too, are low. Because they invest in multiple stocks, index funds are well-diversified.

“Considering that in India actively-managed funds have outperformed passive funds, which is contrary to global trends, the core should ideally be built around a combination of index and large-cap funds that have a good track record and stable fund management teams,” says Vishal Dhawan, founder and chief financial planner, Plan Ahead Wealth Advisors.

Equity-oriented hybrid funds can also be a part of the core. These funds have over 65 per cent exposure to equities and 15-35 per cent to bonds. Since the allocation to equities is higher, the returns are in line with those from equity funds. Plus, exposure to debt gives downside protection.

Gold ETFs and gold fund-offunds can also be a part of the core. But they should be limited to 5-10 per cent of the overall portfolio.

A part of the core portfolio can be used to meet short-term goals if you add debt funds, which offer downside protection.

“Ideally, the core portfolio should have a combination of accrual-based funds which follow the hold-to-maturity strategy. These could range from FMPs (fixed maturity plans) of different maturities to short- and medium-term funds with hold-to-maturity strategy,” says Vishal Dhawan