There are so many aspects that you need to consider before investing in mutual funds. New investors may start with a mutual fund advisor to help with their investments. Before investment you should also educate yourself about mutual funds and the basics of investments before doing it. Remember, it is extremely important to continue with your investments if you want to create wealth over a long period.
Nevertheless, if you are someone who wants to manage his money, you should put money through (SIPs) in balanced funds, which invests in a mix of equity, debt and arbitrage, and have fared better over other categories in last three years. Although it gives you the ease of investment, it takes out the flexibility that you can have by individually investing in debt and equity funds.
Balanced advantage funds that have started gaining popularity over the last three years are dynamically managed equity mutual funds that typically alter their equity allocation between 30% and 80%, depending on market valuations and usually considering the price-earnings ratio.
When valuations are high, they reduce their equity allocation; and when low, increase it.
Dynamic Asset Allocation (DAA) Funds
Another category of fund that a new investor can select is Dynamic Asset Allocation (DAA) funds. They invest in a way that minimizes risk based on market trends, and are targeted at first time and low-risk appetite investors. DAA doesn’t involve having a target investment mix of assets. Therefore, the fund manager has a high degree of flexibility while rebalancing. The success of DAA funds depends not just on market conditions but also on the manager’s decision-making ability.
As Dynamic Asset Allocation funds invest in more than one asset class, they are designed for risk-averse investors. Long term investors who understand the risk-return trade off and want a way to balance the Equity-Debt exposure in their portfolio might consider these investment options. As the fund manager himself will take care of the asset allocation during volatility, the investor need not worry about their investment.
We understand many would be interested to know the average performance of different categories of mutual funds. Here we give a list of top five best performing mutual fund schemes in the last three years. These are not recommendations and it just summarises their past performance.
SIP and its Many Cousins
The high decibel advertisement by industry body AMFI has made the word ‘SIP’ a house hold name. Besides, SIP has also couple of cousins. They are STP and SWP, which is again a way of investing and redeeming your investments.
Systematic Investment Plan (SIP):
An SIP is a regular investment in a fund of a fixed amount at a fixed frequency. In most of the cases the frequency is monthly but it can be any duration that you can chose including quarterly and daily. SIP has certain advantages. Firstly, it helps investor with rupee cost averaging. Since SIPs mean investing with a fixed sum regularly regardless of the NAV or market level, investors automatically buy more units when the markets are low. This results in a lower average price, which translates to higher returns in long run. Secondly, SIPs helps an investor in automating the process of investing regularly. It helps in coming out of any psychological and operational barrier of investment.
Systematic Withdrawal Plan (SWP):
SWPs are a regular redemption from a fund. There are a number of variations. Investors can either redeem a fixed amount, a fixed number of units or all returns above a certain base level. Among other things, they are a convenient way to take a regular income from a fund investment. This is more tax efficient way of getting regular income rather than opting for dividend option.
Systematic Transfer Plan (STP):
An STP is a regular transfer from one fund to another fund of same fund house. It is mostly used when you have a lump sum to invest in an equity fund and you want to invest gradually through an SIP rather than with a large sum all at once. In such cases, you could put the lump sum in a debt fund of an AMC and simply give instructions to transfer a fixed amount into a chosen equity fund every month. This is called STP.
- Direct plans are advantageous for those who have good understanding of mutual funds and the market as they can directly purchase them without any middleman.
- Direct plans are cheaper than regular plans.
- You may require help of an expert before investing.
- Regular plans are for those who don’t have adequate knowledge of mutual funds and the markets.
- They are a bit costlier than the direct plans as they include commissions paid to the middlemen.
- Mutual fund distributor may help you to some extent while buying mutual funds via regular route.