Why investing in an SIP is important

These are my current mutual fund investments:

Reliance Opportunity: Rs 100,000

Fidelity: Rs 25,000

Magnum Tax Gain: Rs 50,000

Kotak Contra: Rs 40,000

Birla GenNext: Rs 30,000

Magnum Emerging Business Growth: Rs 45,000

I have a few more investments too.

All these took place during the past six months.

What is your view on my portfolio? I don't want to lose my capital (initial investment) even if I do not make a profit on some of the funds.

Also, is there any safe mutual fund alternative to the savings bank account?

- Asheesh Kumar Srivastava

Your fund portfolio

A look at the funds you mention above reveals that all the funds are new, except Magnum Taxgain. Hence, none of them have a performance track record.

We believe it is always better to invest in funds that have proven their worth by performing well over a period of time, across bullish and bearish phases.

Therefore, we would recommend you select well-established funds for your future investments, instead of running after new funds. All of these only have promises to back their claims, not actual performance.

Read How to compare mutual funds when deciding which ones to invest in.

Investing regularly helps

We would also like to suggest you invest smaller amounts regularly instead of investing large sums of money at one go. You can choose to invest a fixed sum of money, monthly or quarterly, in various funds. This is referred to as a Systematic Investment Plan.

In Returns delivered by mutual funds, you will see that you get a much higher investing via an SIP than you would get from a one-time investment.

The hazard with lump sum investing in an equity fund is that if the stock market slumps immediately after you invest, a substantial part of your capital might get eroded. However, by investing regularly, the possibility of incurring a substantial loss is diminished. This is because over a period of time, the cost of your investments gets averaged. You end up buying some units at a high price and some at a lower price.

Please remember that mutual funds do not guarantee your capital. Hence, although they have the potential to give great returns, there is also the risk of loss. This risk, however, gets substantially reduced if one invests regularly over the long term.

Investing in various types of mutual funds

If this risk element bothers you, you should invest in relatively less volatile funds like balanced funds rather than pure equity funds. Unlike, equity funds that invest only in shares, balanced funds invest in debt (fixed return investments) and equity (shares). Hence, you get the benefit of equity but the debt portion adds stability.  

Safety of capital

Regarding your second query, we have already mentioned that no mutual fund will give you a guarantee of capital. A mutual fund investment cannot be compared with a bank deposit as far as safety of capital is concerned.

However, you can consider cash funds. They can provide you with comparable or even better returns than a savings bank account. The risk of loss in these funds is also minimal.

The dividend that you get from these funds is tax-free. The mutual fund pays a tax of 12.5% for distribution of dividend, which is ultimately passed on to the investor. Yet, it is substantially less than 30% you pay as tax on interest from bank deposits.

Please note that in case you sell your units in these funds within a year of buying them, any gain you make will be added to your income and will be taxable as per your tax slab. However, if you sell the units after a year, you pay a capital gains tax of 20% without indexation or 10% with indexation. Indexation is when inflation is taken into account when calculating your profits. Read All about capital gains to understand this in detail.

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Illustration: Dominic Xavier