First time investors in Mutual Funds act in the face of imperfect information and often get overwhelmed by uncertainties characterizing the investment situation. But there’s more to Mutual Fund investing than market timing.

First things first.

The first thing an aspiring unit holder must do is to establish what type of portfolio he wants to build. In other words, to decide the right asset allocation. Asset allocation is a method that determines how you invest your money in different investments with the proper mix of various asset classes. Remember, the type or class of security you own i.e. equity, debt or money market is much more important than the particular security itself.
The popular thumb rule for Asset Allocation says that whatever the investor’s age, he should keep that percentage of his portfolio in debt instruments. For example, if an investor is 25, he should have 25% of his investments in debt instruments and the rest in equity. However, in reality, different circumstances and financial position for each individual may require different allocation. Portfolio variable is another factor that one needs to understand to practice asset allocation. These are age, occupation, number of dependants in the family. Usually the younger you are, the more risky the investments you can hold for getting superior returns.

How to pick the right fund/s?

Next, focus on selecting the right fund/s. The key is to select the fund/s based on their investment philosophy and consistency in terms of returns. To ensure you are selecting the right type of funds that are appropriate for your needs, consider following:

Next, focus on selecting the right fund/s. The key is to select the fund/s based on their investment philosophy and consistency in terms of returns. To ensure you are selecting the right type of funds that are appropriate for your needs, consider following:

• Determine what your financial goals are.
• Are you investing for retirement? A child’s education? Or for current income?
• Consider your time frame. Do you need money in three months time or three years? The longer your time horizon, the more risk you may be able to take.
• Determine what your financial goals are.
• Are you investing for retirement? A child’s education? Or for current income?
• Consider your time frame. Do you need money in three months time or three years? The longer your time horizon, the more risk you may be able to take.
• How do you feel about risk? Are you in a position to tolerate the ups and downs of the stock market for the possibility of higher returns? It is necessary to know your own risk tolerance. It can be a guide for choosing the right schemes. Remember, regardless of the potential returns, if you are not comfortable with a particular asset class, you should consider other options.

Remember, all these factors will have a direct impact on the fund you choose and the return that you can expect to get. If you are a long-term investor with some appetite for risk and are looking for returns to beat inflation, equity funds are your best bet. MFs offer a variety of equity and equity-oriented schemes (See table ‘Fund Candy’). For a beginner, it makes sense to begin with a diversified fund and gradually have some exposure to sector and specialty funds.

Keeping track:

Filling up an application form and writing out a cheque is not the end of the story. It is equally important to keep an eye on how your investments are performing. While having a qualified and professional advisor helps both in terms of making the right decision as well as measuring performance, it makes sense to know how to do yourself with a little help from these sources:

Fact sheets and Newsletters:

MFs publish monthly fact sheets and quarterly newsletters that contain portfolio information, a report from the Fund Manager and performance statistics on the schemes managed by it.

Websites:

MF web sites provide performance statistics, daily NAVs, fund fact sheets, quarterly newsletters and press clippings etc. Besides, the Association of Mutual funds in India, AMFI, website, contains daily and historical NAVs, and other scheme.

Newspapers:

Newspapers have pages reporting the net asset values and the sales and redemption prices of MF schemes besides other analysis and reports.

Remember, it is very important for you to be well informed. To achieve this, you need to spend a little time to understand and analyze the information to enhance the chances of success. Even if you spend one percent of the time that you spend on earning money, it’ll be a good beginning. Above all, take help of a professional advisor to select the right fund as well as the right mix of one time investment, SIP and the STP.

Demystifying NAV myths

The NAV of a mutual fund has not been correctly understood by a large section of the investing community.
This is quite evident from the fact that Mutual Funds had been recently collecting huge corpus in their New Fund Offers or NFOs, whereas the collections in the existing schemes were negligible. In fact, investors sold their existing investments and invested in NFOs. This switch makes no sense, unless the new fund has something different and better to offer.

Misconception about NAV

This situation arises from the perception that a fund at INR 10 is cheaper than say INR 15 or INR 100. However, this perception is totally wrong and investors would be much better off once they appreciate this fact. Two funds with same portfolio are same, no matter what their NAV is. NAV is immaterial.
Why people carry this perception is because they assume that NAV of a MF is similar to the market price of an equity share. This, however, is not true.

Definition of NAV

Net Asset Value or NAV is the sum total of the market value of all the shares held in the portfolio including cash less the liabilities, divided by the total number of units outstanding. Thus, NAV of a mutual fund unit is nothing but the ‘book value’.

NAV vs. Price of an equity share

In case of companies, the price of its share is ‘as quoted on the stock exchange’, which apart from the fundamentals, is also dependent on the perception of the company’s future performance and the demand-supply scenario. And hence the market price is generally different from its book value.

There is no concept as market value for the MF unit. Therefore, when we buy MF units at NAV, we are buying at book value. And since we are buying at book value, we are paying the right price of the assets whether it is INR 10 or INR100. There is no such thing as a higher or lower price. 

NAV & its impact on the returns

We feel that a MF with lower NAV will give better returns. This again is due to the wrong perception about NAV. An example will make it clear that returns are independent of the NAV.

Say you have INR 10,000 to invest. You have two options, wherein the funds are same as far as the portfolio is concerned. But say one Fund X has an NAV of INR 10 and another Fund Y has NAV of INR 50. You will get 1000 units of Fund X or 200 units of Fund Y. After one year, both funds would have grown equally as their portfolio is same, say by 25%. Then NAV after one year would be INR 12.50 for Fund X and INR 62.50 for Fund Y. The value of your investment would be 1000*12.50 = INR 12,500 for Fund X and 200*62.5 = INR 12,500 for Fund Y. Thus your returns would be same irrespective of the NAV.
It is quality of fund, which would make a difference to your returns. In fact for equity shares also broadly this logic would apply. An IT company share at say INR 1000 may give a better return than say a jute company share at INR 50, since IT sector would show a much higher growth rate than jute industry (of course INR 1000 may ‘fundamentally’ be over or under priced, which will not be the case with MF NAV).

New Fund Offer: Things to note before you invest

Most of us like to try out new things whether it’s dining at restaurants, buying mobile phones and cars to name a few. Some go to the extent of changing mobile phones every 1 year and a car every 3 years. Well this is a matter of personal preference and lifestyle and might give you some kind of emotional happiness which is good in some sense.

But when it comes to most new funds, there is hardly anything different, unique or really NEW about it. It's just that the name gets more exotic, dressing gets much better or a new marketing ploy such as Invest in India's Growth potential as if other options available are not investing in India's growth potential.

To put it simply most of the new fund offers are Old Wine in a New Bottle. They are packaged very smartly with fancy marketing ideas to entice the client to buy. There was a deluge of New Fund Offers in 2005 and early part of 2006.

SEBI on its part took a series of steps. Firstly, SEBI objected to the use of the word IPO and instead had every fund house use NFO (New Fund Offer), to confuse with Stock IPO, to curb rampant mis-selling of new funds.

Secondly, SEBI had Mutual Funds launching open-ended New Funds charge the initial issue expenses within the entry load itself whereas close ended funds could still charge 6% initial issue expense.

This is precisely one of the reasons why most of the mutual funds have been launching closed ended New Fund Offers so they could pay a higher brokerage of around 5 to 6% to distributors.

Thirdly, SEBI has taken note of this deluge of similar funds being launched and made it mandatory for the trustees of Mutual Funds to personally certify that their new schemes are different from the old ones. Despite this some of the fund houses have been launching me too schemes.

Some fund houses such as DSP Merrill Lynch have not launched any new offering in the last 12-15 months, except for the Super SIP (which was a genuine attempt to offer something new that was relevant), whereas others such as Tata Mutual Fund and SBI Mutual Fund have been strong contenders for the Top Slot in the New Fund Euphoria.

So the question boils down to “How does then one decide if the New Fund Offer of the so many being launched every other month is suitable for me”. 
Before answering this question, first 3 Common Mistakes all investor should be aware of:

(a) Too less or Too many aren’t good enough

I have seen many investors having anywhere between 16-85 funds or some who have just one or two. Having too many in the name of diversification is no good and in fact defeats the very purpose of diversification.
After all the one of the reasons you opt for a mutual fund is to diversify your investments but having all large cap funds in your portfolio is unlikely to do any good.
At best based on the size of your portfolio, spread your investments across in 4-6 different funds spread across different Mutual Funds, fund managers, investing styles, expense ratios, portfolio turnover, market capitalization and whether its an all equity, balanced, or tax planning fund. Give Sectoral funds a complete miss unless you are very bullish on the sector and understand the risks well.

(b) INR 10 NAV is not cheaper than INR 100 NAV


What you should be concerned about is the% fall or% rise. An INR 1 fall in a NAV 10 fund is the equivalent of Rs.10 fall in a NAV 100 fund. In fact INR 100 means proven competence and a long track record of capital appreciation.

(c) Don’t fall for fancy terms

Don’t fall for fancy and general terms such as Investing in India‘s growth potential, Options and Derivatives to diversify your portfolio. See if there are any existing funds with longer track records with similar investment objectives & strategies.
If there are, opt for the tried and tested ones rather than going from newer exotic ones.

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Contributed by Financial Partners International, Jakarta:
Jasleen Bansal
jasleen.bansal@financial-partners.biz

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