Yesterday, in Investing in mutual funds? 4 must-dos, we discussed how equity funds can help you achieve your long term objectives and make your money grow.
Do remember, however, that equity is a great investment option only if you have time on your side and are willing to take a certain amount of risk.
Alternately, here are some other avenues for you to consider.
Monthly Income Plans
MIPs are best for those who are essentially debt (fixed return instruments) fund investors but would not mind investing a portion of their investment in equities to improve their returns.
MIPs aim at improving your returns by investing a major part of their portfolio (total investments) in debt market instruments, with a small exposure to equities.
A typical MIP would have an exposure of 80%-85% to debt and money market instruments (explained in detail below) and an exposure of 10%-15% to equities.
While MIPs aim at giving a regular return, this is not guaranteed or assured. Volatility in the debt and equity market may result in inconsistent dividend payouts.
The main objective is to deliver a regular income, not capital appreciation (where the principal amount invested increases in value over time).
Here, you can opt for the dividend option or the growth option.
Those of you who require regular payouts should consider the dividend option. The growth option is best for investors who wish to build capital essentially through a debt portfolio but would not mind having small exposure to equity to improve returns over the longer term.
To understand the growth and dividend option in detail, read How to pick the best mutual fund scheme.
Floating Rate Funds
FRNs, like the name suggests, invest in instruments that offer a floating interest rate.
This interest rate changes as interest rates in the economy fluctuate. The benchmark is the MIBOR.
The Mumbai Inter Bank Offer Rate is often used as a benchmark for interest rates. It is the rate charged by banks when they lend to each other for very short-term purposes.
As the MIBOR changes, so does the interest rate of the floating instruments.
This option is great when interest rates in the economy are rising.
Money Market Mutual Funds
The money market refers to short-term debt instruments maturing in one year or less. Examples of money market instruments include Treasury Bills, Commercial Paper, and Certificate of Deposit.
Treasury Bills, commonly referred to as T-bills, are short-term government securities with maturities of no more than one year. They are considered risk-free because they are issued by the government.
CP is a debt instrument issued by companies to meet short-term financing needs.
A CD is an interest-bearing, short-term debt instrument issued by a bank.
Considering that money market instruments are some of the most secure instruments and are least impacted in volatile times, MMMFs are good investments for conservative investors for their short-term investment needs.
These funds are a good alternative to the traditional bank savings account. If you have some cash that you can spare for a few days or a few months, you could try this.
These funds provide high liquidity; some even offer facilities like redemption through ATMs and online transactions.
Gilt Funds
Gilt funds invest exclusively in Government Securities, commonly known as G-Secs.
As these securities are issued by the central and state governments, they are totally risk free.
For those who are completely risk averse, this is a good avenue.
Debt funds
Debt funds invest in bonds (fixed return investments issued by financial institutions), G-Secs, debentures (bonds issued by corporates) and money market instruments.
Within this category, you can opt for short-term debt funds or medium-term debt funds. The impact of volatility on the interest rates is much less in the short-term option as compared to a medium term income fund.
As is evident, mutual funds offer a lot in terms of variety. However, the key to success is to select the right combination of schemes.
For your mutual fund portfolio to perform consistently, you need to invest in schemes that have consistency both in terms of following their investment philosophy and in the returns they offer over a period. One's risk profile, time horizon as well as investment objective is equally important.
On a closing note, it may help to avail of the services of a professional and qualified advisor. Unfortunately, many people do not think it is important to find a good good advisor. As a result, they end up dealing with those who do not do justice to their hard earned money.
Remember, investing is more than just filling up application forms and writing out cheques. You need to select wisely and then monitor your funds. That's where a good advisor can make a difference.
The author is CEO, Wiseinvest Advisors Pvt. Ltd, a mutual fund advisory firm.
