With over 1,000 mutual fund schemes overwhelming the market, it takes some skills to select the right one.
AT LAST count, there were over a thousand mutual fund schemes offered by the 39 asset management companies in the country. Mutual funds have been taking advantage of the bull run to launch new fund offerings (NFOs) which have been sold aggressively by distributors. If you have been a mutual fund investor for some time, chances are that you will be overwhelmed with a flood of statements and mailers updating you about the various schemes that you have invested in. Probably a thought might have crossed your mind on whether you should be owning so many schemes.
DEFINE YOURSELF
In consultation with a financial planner, do an asset allocation for yourself. Based on parameters such as your age and risk-taking capacity, he will be able to understand whether you are an aggressive, conservative or moderate investor. If you don't have a financial planner, relax. You can address this issue by answering one question. How much money can you afford to lose if the markets were to turn volatile? If you can digest a 50% mark-to-market loss on your portfolio, you can claim to be an aggressive investor. If you can take a 25-30% hit on your portfolio at best, you are a moderate investor and if you get worried over a 5-10% loss, you are a conservative investor. Once you are sure about your standing, look at your equity fund portfolio.
HOW MANY FUNDS?
A look at the table will enumerate how financial planners would construct equity portfolios, depending upon the risk appetite of the investors, other things remaining equal. Seven-eight funds are more than enough to take care of an investor's equity investments. Of course, there is a need to put things in place and no arbitrary investments would work.
THE WHEAT FROM THE CHAFF
Once you have decided how many schemes you want to keep, you next need to identify those that need to be weeded out. The purpose of investing in mutual funds is to get a diversified equity portfolio. Let the fund managers take a call on which sectors to invest. So, if you really do not have sectoral expertise, it makes sense to do away with sectoral funds. It makes sense to run a large-cap oriented fund portfolio. But if you are a savvy investor, it probably makes more sense to go for a theme such as infrastructure over a sector fund, as the themes are move diversified.
TRACK RECORD
Opt for a fund with a good track record. Of late, new fund offers from multiple fund houses have been hitting the market. Most of these offer similar themes. Getting rid of them is not a bad choice if they are not contributing to the process of achieving your financial goals. Better stick to schemes that have a longer track record and a more diversified investment mandate.
NARROWING CHOICES
Stick to fund houses that are known for their investment process rather than star fund managers. Keep schemes with a good track record and ones which come from fund houses with stable fund management teams. Do not succumb to the temptation of investing in mid-cap funds. To generate wealth in the long run, it makes sense to stick to schemes that invest in large-cap companies.
WATCH THE TAX AXE?
If invested for more than a year, long-term capital gains tax is nil against short-term capital gains tax of 15.45%. Ergo, it makes sense to stay invested in equity mutual funds for at least a year. However, there's a point to note: if you are invested in a wrong scheme, it makes sense to get out by paying higher taxes and an exit load, as most funds have an exit load if you exit before putting in at least 12 months.
