Open any newspaper or a magazine and you will not miss a story or two about the domestic equity market being propelled to new highs, personal fortunes of successful businessmen growing by leaps and bounds on the back of rising share prices, foreign investors pouring money into the Indian equity show with gusto to notch up double digit returns, etc.
Big investors, it seems, are always clued-in about the market movements and are able to ride out the ups and downs with relative ease. These investors are able to reap superior returns on account of access to research and advisory.
However, the small investors are not so lucky when it comes to direct investment in the equity market. They depend on tips from the so-called informed investors or brokers in the market or go by house views flashed on business channels. Gullible retail investors are easily taken in by market euphoria -- they invest when the market is close to peaking and are caught on the wrong foot when the market tanks.
In order to avoid getting mauled by the market yo-yo and earn good returns for their hard earned money over the long run, small investors will do well to park their money with mutual funds. Fund managers, with their wealth of experience in investing across asset classes, at fund houses help you make the most of market opportunities.
Volatility has now become a way of life in the Indian markets. A thousand points upside or downside is not uncommon. In this backdrop, Union finance minister P Chidambaram's caution to retail investors about volatility in the market and indirect suggestion that they should participate in the market through the mutual fund (MF) route assumes significance. MFs, hence, have become an attractive alternative to the retail investors.
A globally proven investment, MFs offer an investor the avenue to minimise risk through portfolio diversification while maximising returns thanks to the expertise of the fund managers.
All investments whether in shares, debentures or deposits involve risk. While risk cannot be eliminated, skillful management can minimise risks. Generally, the longer the term, the lesser the risk.
So, what are the benefits of using the MF route?
First, benefit comes in the form of the fund manager. His/her expertise gained through experience helps an investor to diversify risk. What's more investors in MFs enjoy the advantage of convenient administrative cost, minimal paperwork and lower transaction cost.
MFs also offer other merits such as the ability to liquidate (sell units and get cash) an exposure fast if one feels that a fund is underperforming her/his expectations. It also makes high value stocks affordable to the small investor i.e. a small investor who would think twice before taking an exposure in a high value stock such as L&T say, is now able to do so using the MF route. This makes an MF a cut above the rest.
Last but not the least, MFs provide transparency in the form of frequently published Net asset values (NAVs) and flexibility through features like regular investment plans, regular withdrawal plans and dividend reinvestment plans.
The retail investor in India is spoilt for choice when it comes to mutual funds. There are 34 MFs and over 300 schemes with cumulative assets under management (AUM) of nearly Rs 4.7 lakh crores. India MF industry is regulated and regularly monitored by the market regulator The Securities and Exchange Board of India, Sebi.
Steps to invest in MFs
~ Step one: Identify your investment needs
Your financial goals will vary, based on your age, lifestyle, financial independence, family commitments and level of income and expenses among many other factors.
Therefore, the first step is to assess your needs. You can begin by defining your investment objectives and needs which could be regular income, buying a home or financing a wedding or on education of your children or a combination of all these needs, the quantum of risk you are willing to take and your cash flow requirements.
~ Step two: Choose the right mutual fund
The important thing is to choose the right MF scheme which suits your requirements. The offer document of the scheme tells you its objectives and provides supplementary details like the track record of other schemes managed by the same fund manager. Some factors to evaluate before choosing a particular MF are the track record of the performance of the fund over the last few years in relation to the appropriate yardstick and similar funds in the same category.
Other factors could be the portfolio allocation, the dividend yield and the degree of transparency as reflected in the frequency and quality of their communications.
~ Step three: Select the ideal mix of schemes
Investing in just one MF scheme may not meet all your investment needs. You may consider investing in a combination of schemes to achieve your specific goals.
~ Step four: Invest regularly
The best approach is to invest a fixed amount at specific intervals, say every month. By investing a fixed sum every month, you buy fewer units when the price is higher and more units when the price is low, thus bringing down your average cost per unit. This is called rupee cost averaging and is a disciplined investment strategy followed by investors all over the world. You can also avail the systematic investment plan (SIP) facility offered by many open-ended funds.
~ Step five: Start early
It is desirable to start investing early and stick to a regular investment plan. If you start now, you will make more than if you wait and invest later. The power of compounding lets you earn income on income and your money multiplies at a compounded rate of return.
You may reap the rewards in the years to come. MFs are suitable for every kind of investor -- whether starting a career or retiring, conservative or risk taking, growth oriented or income seeking.
To sum up, mutual fund is the way to go for the retail investors. This route to investment is less cumbersome and more rewarding in the long run.
The author is CEO of Birla Sun Life AMC. The views expressed here are personal.
Image: Mukul Gupta, CEO, Birla Sun Life AMC
Photograph: Rob Elliott/AFP/Getty Images
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