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Investors must remember that mutual funds are investment vehicles, not an asset class

 

 

Investors and even some of the financial advisers often talk of a mutual fund as an investment product, as if that is an asset class in itself. They hardly realize the fact that mutual fund schemes are actually tools to invest in several other asset classes. So on a standalone basis, a mutual fund scheme is never an asset class.

For example, shares are an asset class. So are bonds, gold, real estate, commodities, etc. Now if you want to invest in shares, you can directly invest in the market through a broker and after opening a demat account. An almost similar process is followed if you want to invest in bonds and commodities. And different approaches are taken when one wants to invest in gold or property.

While investing in stocks, rather than investing directly through a broker, you can also invest through the mutual fund route by buying units of equity mutual funds. Similarly, to invest in bonds and other debt instruments, you can buy units of debt funds, and for gold you can buy into gold funds or gold exchange traded funds (ETFs). Even if you want the liquidity that cash offers, you can avail of the same by investing in liquid funds or ultra short-term funds. Although not yet available in India, but in most of the developed countries you can also invest in real estate and commodities through the mutual fund route.

So you can see that a mutual fund scheme can work as a bridge to investing in various asset classes. This is because such a scheme is more like a pass-through vehicle for your investment in an asset class, but that scheme itself is not an independent asset. This characteristic also brings in flexibility for investor to diversify even with a small amount of money. Mutual funds offer simplicity, affordability, risk diversification along with professional management.

In short, according to Mehta, for cash you can use liquid and/or ultra short-term funds which are very close to bank deposits. For investing in debt, you can use medium- and long-term debt funds, income funds or fixed maturity plans. They give you a steady income and tax efficiency too.

For investing in gold, you can go through a gold fund of funds or take the ETF route. And for investing in stocks, depending upon your risk-taking ability, you can invest in diversified equity funds, or large, mid or a small-cap fund and also in sectoral funds or index ETFs.

Financial planners and advisers also say that other than just being an investment vehicle, mutual funds also offer a variety and choice to investors. As an investor, one can choose to invest his/ her money in funds from over thousands of funds managed by about 40 fund houses. When an investor chooses to go with equities, he/she can opt for a growth fund or a value fund or even a fund which combines both. For those who prefer dividends, he/she can select income funds. The opportunities are limitless.

One can also use mutual fund schemes for asset allocation. For example, allocation funds include equity funds and debt funds simultaneously by investing in equity and fixed income instruments in different proportions. And since Indian investors have a fascination for gold, fund houses have smartly tapped into this long-standing fascination by introducing funds that can simultaneously invest in equity, fixed income and gold (via the ETF route), the financial planner added. Although here the fund manager decides in what proportion the allocations would be made to various assets while remaining within the broad contours of the scheme, in effect, such funds are a one-stop shop for asset allocation.

The last but not the least is the tax efficiency that mutual funds offer. If one invests in debt instruments directly, he/ she may not enjoy all the tax benefits that can (indirectly) come to him/her if he/she takes the mutual fund route. In equity funds, however, the scope for tax advantage is limited compared to direct investing.

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