Mutual Fund – Pervade Investing

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Hello guys..

Trust you are doing great

Currently markets are witnessing the blood bath amid the corona crisis. Markets bounce back from lows and investors are desperately seeking for the bottom. By my experience and reading, no one can ever find the bottom.

Yes, Technical analysis tells us some data till some extent but still doesn’t give exact results. Then what for an investor like me who doesn’t know technical analysis. Also It’s dumbness to find the bottom and invest assuming that bottom is made. In this case there are more chances to lose your money.

So in this case there are two ways to invest your hard earned money.

  1. Invest directly in Equity
  2. Invest through the Mutual fund. [lump sum or SIP (Systematic Investment Plans)

Invest Directly In Equity :

This requires knowledge of Investing, you need an experience or you can hire any registered advisor for your portfolio making.

It’s highly risky for newcomers to start direct equity investing. They will obviously borrow tips from others,media or many whatsapp groups which is dangerous for your hard earned money.

Invest through Mutual Funds :

For new investors it is the best way to invest in the markets.

There are two ways to invest in Mutual fund :

  1. By Lump Sum Amount
  2. By Systematic Investment Plan (SIP)

There are more advantages of SIP over Lump Sum Investing.

Advantages of SIP over Lumpsum

  1. You get used to regular savings
  2. There are chances that you will run out of lump sum money. SIP requires a small amount every month which is manageable and less chances of running out of money.
  3. You will get benefit of fall during the markets and you can average down your NAV which leads to higher returns if the fund does well.
  4. Generally we spend first and then save but in SIP Mode you can invest first and then spend which is the best habit for long term wealth creation.
  5. You don’t need to time markets as you can benefit from rise and fall both.

How to choose Mutual fund

For wealth creation doing SIP in Any Mutual fund can be dangerous. There are plenty of measures for selecting mutual funds. There are more than 2200 mutual fund schemes in India under AMFI. There are many schemes which haven’t made money for investors in the last 10 years. So Which scheme to choose is becoming difficult for a new investor. We will go through how to choose a mutual fund, but before that we have to understand the different types of fund schemes available in markets.

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Fund schemes mainly divide in two categories.

  1. Open ended schemes
  2. Close ended schemes

Open-ended scheme :

These funds are most popular among the retail investors. Although it could be a high risk for short terms. If you are in your 20s, and in the initial stage of earning then equity growth funds are best suitable for the long term. There are higher chances that it can give you better returns and capital appreciation over other schemes in long term. there are sectoral funds, index funds etc.

Another category in equity funds is ELSS (Tax saving equity linked saving scheme). It is also a good choice in which you can save tax and can invest. In this fund your capital will be locked for 3 years. There are many ELSS schemes which have given a good capital appreciation over a long period of time.

In this fund your capital will be allocated in Government securities, debentures and bonds etc. The returns are low compared to equity funds.

In this fund, capital invested in both categories Government securities and Equity. These funds are comparatively low risk than equity funds. Also if you want regular income then balance funds are a good option.

Close ended funds :

Investors can invest in this fund only during NFO (New fund offer) period. This fund has a fixed maturity period.

Fixed Maturity Plans (FMPs) – These schemes generally consist of debt instruments which mature with the maturity of the scheme. FMPs are normally passively managed, i.e. there is no active trading of debt instruments in the portfolio.

Capital Protection : The primary objective of this scheme is to protect the principal amount while trying to deliver reasonable returns. These Fund invests in high-quality fixed income securities with marginal exposure to equities and mature with the maturity period of the scheme.

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We have gone through the various types of mutual funds, Now Let’s look into the most important part “Selection of the fund”

  • Goals : When you invest in a mutual fund, you have to clear with your goals. If you are absent with your goals then you might stop or exit from the investment, hence it should be your first priority to define your goals and go ahead accordingly. Goals can be long term or short term. Clear goals generally tend to the good returns and Capital Appreciation.
  • Risk : As warren buffet says “Risk comes from not knowing what you are doing”. So before choosing the mutual fund you must know the risk. Every fund has one of the three risk measures High,Medium and Low risk. for e.g. – Equity Mutual funds have all three category funds and Debt Funds are generally low risk funds.
    Also Risk varies with the time frame of your holding. E.g. If you have 3 years of horizon then it is riskier than a 10 year horizon.
    • Liquidity of your money also defines the risk. If you have enough liquidity and not needed in the near future you can invest in an equity fund, but if you need it in the near future then a liquid fund is the good option.
  • Performance : Fund Performance is important for the comparison of the same type of funds. Otherwise it is less important. Many retail investors always see past performance and invest accordingly. We have to understand that it’s not necessary that past performers can be the next performer. We will discuss this later on in this blog.
  • Portfolio: It is absolutely okay if you don’t check your portfolio. It is always measurable by Risk and Past performance. If you want to check the portfolio then you can check whether majority stocks are Large,small or Mid cap.
  • Fund Manager: It is one of the important aspects for selecting the mutual fund. As we discussed early in the Performance point that performance also depends on the Fund Manager. If we compare a fund by performance then it is required to compare that is this the same fund manager that handled the fund in the past ? High Past Performance of a fund under the new fund manager is like New fund. That’s why it is one of the important parameters.
  • Expense Ratio : Again it is one of the most important points to be considered. Expense ratio is the commission being charged by the Fund. Investors must go with a lesser expense ratio. If you look at the ratio, it seems less but when you calculate, it will create a huge impact on your portfolio in terms of returns. Index funds generally have a less expense ratio among all.
  • Exit load : Exit load is a charge levied by the fund when investors redeem units before the set limit of a mutual fund. Being an investor you should go with the minimum charge or no charge of exit load.
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So these are the various points to consider for selecting the Mutual funds which i am using.

Being an Investor remember that you’re not chasing the returns of other funds or seeking higher returns. You have to be clear with the goal and invest accordingly. Seeking higher returns leads to the loss of capital. It should always be in line with your goals.

Currently markets corrected significantly from the all time high. Indices are corrected nearly 25%. During this time it is advisable to increase your SIP amount or buy additional units so that you can average down your NAV.

Thanks and Happy Investing………….

Note: The above is not a research report but information as available on public domain and it should not be treated as a research report

Registration status with SEBI: I am not registered with SEBI under the (Research Analyst or Advisor) regulations 2014 and as per clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations”

Disclosure:Readers should consult their financial advisory before any investments.



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Adish Vakharia
Adish believes in identifying future opportunities, studying well about the sectors, and developing a circle of competence.
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