Selecting good mutual fund schemes

Most of us while selecting a mutual fund scheme for investments look for recommendations from friends, browse through various tips given on different websites and take a decision based on the ratings given  by different agencies. We hardly try to evaluate a scheme based on its analytical parameters. Although there are different parameters to evaluate any mutual fund scheme to say Standard Deviation, Sharpe ratio, Sortino ratio etc, we shall discuss two main technical parameters which can give us fairly good idea about any equity based mutual fund scheme. 


It is a measure of a particular mutual fund scheme’s price (NAV) movements (upward and downward) in relation to it’s benchmark index. Beta of a fund is defined as the excess returns of the fund over the risk free rate as compared to the benchmark index . Let me explain this with the help of an example. Let us assume we get 7% interest from our Fixed Deposit. This is the risk free rate because we do not take any risk when investing in Fixed Deposit (Normally risk free rate is taken as current treasury bill rate). Let us further assume that we have invested in a fund whose benchmark index is Nifty 50 and the beta is 1.5. If Nifty 50 rises by 10%, how much return can we expect from our fund? We shall use this formula to find out expected returns.

Return of Fund = Risk free return + Beta x ( Return of Benchmark index – Risk free return)

In this example Return of fund = 7% + 1.5 x ( 10% – 7%) = 11.5%
What happens when this Nifty 50 benchmark index falls 10%
Return of Fund = 7% + 1.5 x (-10% – 7%) = -18.5%

We can see that, beta is a double edged sword. Higher the beta, higher is the potential returns in bull market, but we also risk higher losses when markets go down. A fund with beta of less than 1 is considered a low beta fund; funds whose beta is much more than 1 are high beta funds. It is important to understand that, a high beta fund is not necessarily a bad fund and vice versa. We should select funds with higher or lower beta based on our risk appetite. If we have an aggressive goal and high risk appetite, we can select high beta funds; on the other hand if we are less aggressive and want more stability in our portfolio we should select a low beta fund.


This is the single most important analytical parameter of  evaluating any mutual fund scheme. Alpha is the excess returns generated by the fund manager, compared to what he or she would have expected to get after factoring in the risk taken by him or her. Mathematically we can say

Return of Fund = Risk free return + Beta x ( Return of Benchmark index – Risk free return) + Alpha

If we compare two formulas ( Beta and Alpha), Alpha is the value addition by the fund manager for the same amount of risk taken. In the above example instead of fund giving -18.5% returns in case of 10% fall in Nifty 50 index, had it given -16.5% returns, the alpha would have been 2.

Top performing funds which have outperformed consistently over a longer period of time will have high Alpha. If a fund manager has generated high alpha, it is quite likely that he or she will generate high alpha in  future as well. High alpha speaks of the fund manager’s ability of pick up good stocks while constructing a portfolio. We should always look for those mutual fund schemes which are having high Alpha.

Debt Funds

As I have already explained in my earlier article, there are two main risks in debt funds namely, interest rate risk and credit risk. If we are able to select the right schemes based on these two risk factors, then debt funds can help us meet our specific investment needs. Accordingly, in our view, the two most important analytical measures for selecting debt mutual funds are modified duration and credit quality.

Modified Duration

Bond prices rise when interest rate falls and vice versa. Some bonds and debt funds (which invests in bonds) are more sensitive to interest rate changes compared to others – they rise faster when interest falls and fall faster when interest rate rises. The interest rate sensitivity of a bond or debt fund is known as the modified duration. Modified duration is simply the price sensitivity of a bond to changes in yields or interest rates. So if the modified duration of a bond is 10 years and interest rates go down by 1%, then the bond price will increase by 10%.

Some investors wonder, why is price sensitivity of a bond called Modified Duration? In the literal sense, duration should be related to the tenure (maturity) of the bond? Even from a technical standpoint, modified duration is closely related to the bond maturity profile of the debt fund. Risk and returns are directly related. If we want to get more returns by taking more risk, select a fund with high modified duration, but if we want stability then select a fund with moderate to low modified duration – modified duration of less than 2 years. Higher modified duration debt funds will give us significantly higher returns than traditional fixed income schemes like FDs, Government Small Savings Schemes etc. in favorable (declining) interest rate scenarios. Even moderate modified duration debt funds (modified duration of 1 – 2 years) can give better returns than traditional schemes in stable interest rate scenarios. Schemes whose modified duration are less than 1 year fall in the money market category – these are very low risk schemes and the returns are also lower.

Credit Quality

Let us now come to credit risk. Higher the credit quality profile of a fund, lower is the risk of price (NAV) decline due to credit rating downgrade or default. The risk of an AA rated bond defaulting is much less than a BB rated bond. Therefore, if you want to reduce the credit risk of your investment select a debt fund which has a high proportion of AA or higher rated bonds in its portfolio. Let us understand how credit rating scale works. The table below describes the credit rating scale used by CRISIL to rate debt securities

We should select funds based on credit quality, as per our risk appetite. If we have low risk appetite, select funds which have 80% or more of their bond / NCD portfolio in AA or higher rated securities. However, we should note that, lower rated bonds give higher yields. Not all lower rated bonds get downgraded; only a few ones facing serious financial troubles are downgraded. If we want to capture an extra few percentages of yield we can invest in credit opportunities funds, which have a higher proportion in lower rated papers, but as always, we should be fully aware of the risks. It may not be advisable to take such risks for gaining few extra basis points of return. We must caution that, sometimes even a relatively highly rated debt paper (bond) can suddenly be downgraded. This will impact the returns of funds holding a high percentage of such papers in their portfolios. There has been a case like this in recent past where AAA rated IL&FS defaulted on its credit payments. 


It is our endeavor  to empower investors with knowledge to take the best financial decisions, as per their needs. Hopefully these articles help you increase your knowledge about  mutual funds, clarify doubts and focus on really important factors while doing investments in mutual funds. As always , in case of any doubt or need assistance, please feel free to reach us. We are always there for you.

Why should we continue with our SIPs in volatile or lower markets?

Legendary investor, Warren Buffett has often suggested that discipline is one of the most important attributes of successful investors. While investing behavior of most investors is influenced by greed and fear, successful investors do not allow greed and fear to override discipline. Discipline versus greed and fear distinguishes investors from speculators. Speculators make their investment decisions based on how they expect the market to trend in the near term. Investors on the other hand, make investment decisions based on their risk appetite and financial goals.

Shift in investor attitude

Historically, investment behavior or attitude of retail investors in India was largely speculative in nature. Investors increased their investments in equity in bull markets and exited out of equity in bear markets. However, over the past few years we saw a shift in investor attitude towards volatility.

As per AMFI data, in 2015, when we saw a sharp correction in the market, net inflows to equity mutual funds increased on year on year basis. The stock market has been fairly volatile this year too, though we have not yet seen a deep correction so far. Keeping with the trend seen in 2015, net inflows to equity mutual funds year to date in 2018, have increased on a year on year basis. This shows a shift in investor behavior from speculative to long term goal based investing. This is a testimony to increasing investor maturity and is very encouraging development for the investment ecosystem in our country.

Disciplined investing through SIP

One of the main contributing factors to this change in investor behavior is the rising popularity of Systematic Investment Plans (SIP) in our country. SIP takes speculation out of the equation in investing because in SIP, there is no price target for investing. You are investing at different price levels through SIP. Since stock markets are intrinsically volatile in nature, you will be investing both at high prices and low prices – this is known as Rupee Cost Averaging.

Every rupee invested by you will earn returns in the long term and the longer you remain invested, you can earn higher returns. Since you can start SIP with small amounts of monthly savings, you can start investing early. Remember, every SIP installment will help you earn good returns in the future and returns earned on each of your installments will in turn earn returns (profits themselves). Return on return or profit on profit is known as the power of compounding. The power of compounding in SIP is high because most of our SIP installments will  remain invested for a long time earning high returns for us.

The most important attribute of SIP is disciplined investing. We do not need to worry about market levels or having a large corpus to put in at the right level. By investing from our regular monthly savings through ECS/OTM(One time mandate) from our bank, SIPs puts our financial planning on auto pilot. Over a period of time, discipline becomes a good habit – our discretionary spending will be in control and as our income increases over time, we will be able to save and invest more for our financial goals.

SIPs in volatile and bear(low) markets

Warren Buffett famously said once that, “only when the tide goes out do you discover who is swimming naked”. What he is implying that, everything looks hunky dory in bull market and money can be made fairly easily. However it is in the bear market, which is inevitable, that tests how good an investor you are. Money made in 2 – 3 years of a bull market in speculative investments can be lost in a few months of a bear market – this is what Buffett means when he says, “you discover who is swimming naked”. Bear markets are unpredictable – you will not be able to guess when it will strike and how much will it fall.

Trying to time the market is a futile endeavor. Let us understand why. Firstly, we can never be sure of the market trend direction unless there is a significant one way movement, by which time the price damage has already been done – if we panic and sell, we will be selling at considerably below the highs. After we sell (redeem), we will be waiting for the market bottom – bottom is even more difficult to predict because in a bear market multiple bottoms are made. So we will wait for a confirmation that a bottom has been made. What is this confirmation – basically we want to see solid evidence of a recovery. This means a longer wait. Recovery from bear market has historically been furious – we have seen a number of times that the market recovers a lot of ground from bottoms in just a few trading session. However, we cannot be sure, if this is sustainable, so we want to see more evidence. As the market bounces back, entry becomes increasingly difficult and investors have to wait longer. Finally, investors usually end up re-investing at much higher levels and there is big opportunity loss.

SIP in good equity mutual funds will ensure that we are never swimming naked no matter how strong the tide is. In fact, bear markets are greatly advantageous for disciplined investors in SIP because rupee cost averaging in a bear market will greatly reduce our overall average acquisition cost and in the long term, we can get excellent returns. Volatility is stressful for investors because no one wants to see their hard earned money going down in value. However, if we understand the fundamental principle of rupee cost averaging and futility of trying to time the market, then volatility is highly advantageous for SIP investors.

Opportunity loss of stopping your SIP in bear(low) market

SIP was introduced in India nearly 20 years back, but it is only recently that investors are starting to realize how SIP is advantageous in volatile and falling markets. In the past bear markets, we saw investors stopping their SIPs and redeeming their investments, waiting for the correction to end before restarting again. In the following example, we will see the quantum of opportunity loss suffered by such investors.

Two investors Sumit and Sunil started SIP in mid June 2007. Purely for the purpose of illustration, let us assume that their monthly SIP amount was Rs 5,000 and they both invested in the Nifty. Sumit has continued his monthly SIP till date. Let us see how much corpus he has accumulated.

  Source: National Stock Exchange;The above is only for illustration purpose

Sumit accumulated a corpus of around Rs 12.1 lakhs with a cumulative investment of around Rs 6.65 lakhs.

Sunil on the other hand, decided to stop his SIP and redeem, when the market fell nearly 25% in 2008 fearing that the market may fall further – his fear was justified because the Nifty fell more than 50% in 2008. He stopped his investment on June 1, 2008. He put the redemption proceeds in a 2 year FD at 9% interest rate (the 1 year FD was available at 8% interest rate, but Sunil did not want to lose the higher interest in case the market volatility persisted for a long time) and waited for the market to recover. The market started recovering from March 2009 onwards but the sentiments were so badly bruised that Sunil needed more time see gain confidence in the evidence of solid recovery. By Aug 2009, the market recovered Aug 2008 levels, but it still way below January 2008 highs. However, since the price had recovered to the level at which Sunil sold, he resumed his SIP and continued it till date. By June 2010, when his FD term expired, Sunil had gained more confidence in equity market, so he invested the maturity proceeds of the FD in lump sum in Nifty. Let us now see how much corpus Sunil accumulated.

Source: National Stock Exchange;The above is only for illustration purpose. 

Sunil accumulated a corpus of Rs 10.8 lakhs (Rs 1.4 lakhs less than Sumit) with a cumulative investment of around Rs 6.0 lakhs (Rs 50,000 less than Sumit), even though he put in much more effort than Sumit tracking market levels and shifting asset allocations.


Sunil is not the only example of investors who were worse off by stopping their SIPs in volatile markets. In fact, based on our experience, many investors fared much worse than Sunil because he was able to re-enter in 1-2 years, whereas many investors waited for 4 – 5 years till 2014 bull market rally began and prices were much higher. It is imperative to understand the difference between risk and volatility. Risk is the possibility of making a loss. We will make a loss, only if we sell; if we remain invested, chances of making a loss are very low, because the market will eventually recover and set new highs. Instead of worrying about volatility and trying to time the market, both of which are uncontrollable and unpredictable, we should remain focused on our financial goals and remain disciplined in investing through systematic investment plans.

Why Debt Mutual Funds are good for short term investments?

Debt mutual funds are ideal investment options for investors for short term investments. Their risks are much lower than equity or equity oriented funds, they have the potential to generate superior returns compared to traditional fixed income products and they enjoy a significant tax advantage over bank savings and Fixed Deposits.

What are debt funds?

Debt mutual funds invest in debt and money market securities. Money market securities include commercial papers, certificate of deposits, treasury bills etc, while debt securities include Government and Corporate bonds. We should be aware of the fact that unlike bank FDs or Government Small Savings Schemes, debt mutual funds are subject to risks. There are two main risk associated with these funds:-

  1. Interest rate risk. It refers to change in price of the debt instrument with changes in interest rates(based on Repo rate as decided by RBI from time to time). As far as interest rate risk is concerned, it is directly related to the maturity profile of the underlying securities. Maturity is the time period at the end of which the issuer (borrower) will pay back the face value (principal amount) to the investor. So the debt instrument is price sensitive to its maturity duration due to changes in interest rate. If the duration of a debt instrument is 3 years, then for every 1% change in interest rate, the price will change by approx 3%. As a thumb rule, debt instruments have an inverse relationship with interest rates; if interest rate falls, price of the debt instrument rises and vice versa.
  2. Credit risk. If the issuers of the debt instruments (the borrower) do not meet their debt payment obligations(interest and principal amount), it amounts to credit risk. Credit ratings assigned to debt instruments by credit rating agencies are a measure of credit risk. It is important for us to note that if a debt instrument is held till maturity, then price change will have no effect on returns. That is why in the current debt market cycle, accrual based short term debt funds may be a good option.

What are the debt funds one should consider and why?

Liquid, Ultra short term debt funds employ accrual strategy to reduce interest rate risk by holding securities in their portfolios till maturity. They earn primarily coupon rate of the debt instruments. On the other side, income, Gilt and other dynamically managed debt funds perform based on interest rate cycles. Lets see different types of debt funds.

Liquid Funds: Liquid funds are money market mutual funds, where the residual maturity of portfolio securities do not exceed 91 days. Redemption requests are processed within 1 day and money credited to the investors’ bank account on the next business day. These funds do not have any exit load, which means that we can redeem our investments partially or fully at any time without paying penalty. Liquid funds are comparable to our savings bank account from liquidity perspective. In the last one 1 year, average liquid fund category return was 6.5%, much higher than savings bank interest rate.

Ultra short duration Funds: Earlier known as Liquid Plus Funds, they invest in very short term debt securities with a small portion in longer term debt securities. Most ultra short term funds do not invest in securities with a residual maturity of more than 1 year. Also referred to as Cash or Treasury Management Funds, Ultra Short Term Funds are preferred by investors who are willing to marginally increase their risk with an aim to earn commensurate returns. Investors who have short term surplus for a time period of approximately 1 to 9 months may consider these funds.

Short duration Funds: These funds invest predominantly in debt securities with a maturity of up to 3 years. These funds tend to have a average maturity that is longer than Liquid and Ultra Short Term Funds but shorter than pure Income Funds. These funds tend to perform when short term interest rates are high and could potentially benefit from capital gains as liquidity comes back to the market and interest rates go down. These funds are suitable for conservative investors who have low to moderate risk taking appetite and an investment horizon of 9 to 12 months.

Income Funds, Gilt Funds and other dynamically managed Debt Funds: These funds comprise of investments made in a basket of debt instruments of various maturities . These funds are suitable for investors who are willing to take a relatively higher risk and have longer investment horizon. These funds tend to work when entry and exit are timed properly; investors can consider entering these funds when interest rates have moved up significantly to benefit from higher accrual and when the outlook is that interest rates would decrease. As interest rates go down, investors can potentially benefit from capital gains as well.

Tax Advantage of Debt Mutual Funds:  If held over 3 years or longer, debt mutual funds enjoy a considerable tax advantage over bank FD. Long term capital gains in debt mutual funds are taxed at 20% with indexation benefits. Let us assume we invested Rs 1 Lakh for 3 years and 1 day in a short duration fund in FY 2014 – 15 and redeemed in FY 2017 – 18. Assuming annualized pre-tax return was 7% compounded for these three years, tax calculations would be as shown below:

Therefore,  effective tax rate on actual cash profit is only 8.1% as compare to much higher figures in case of bank FD( 30% tax on accrued interest if we are in 30% tax slab)


1. We discussed different types of debt funds; investments can be planned based on investment needs.
2. Debt mutual funds enjoy considerable tax advantage over traditional fixed income schemes, when invested over long tenors (3 years plus).

Investment Strategy : Debt Mutual Fund

This year RBI has been on a trajectory of tightening interest rates in an effort to control inflation. Repo rate has been raised three times. Repo rate hikes by the RBI raise bond yields, cause bond prices to fall and results in lower returns, especially for long term debt mutual funds. Surprisingly, RBI did not increase the repo rate in their October monetary policy meeting despite the US Federal Reserve hiking the Fed Funds rate in September. The 10 year Government Bond yield has moderated slightly from 8.2% to 7.8%. Long duration funds and Gilt Funds were the best performing debt mutual funds in the last 1 month; these two fund categories, on the other hand, were the worst performing debt fund categories in the last 1 year. In this article, we will discuss debt fund investment strategy in the current economic situation in India.

History of RBI interest rate actions

The chart below shows the history of RBI repo rate actions over the last 5 years. You can see in the chart below that repo rate peaked in January 2014 and since then RBI had been bringing down interest rate till August 2017. From August 2017 to June 2018, RBI maintained status quo on interest rates and then in the next two monetary policy meetings hiked the repo rate twice, each time by 25 bps. Surprisingly in the October meeting, RBI held repo rate at 6.5%, when the market was expecting a rate hike to arrest INR (Indian Rupee) depreciation.

Source: RBI

Let us now see what RBI rate actions did to the benchmark 10 year G-Sec (Government of India bond) yield in the last 5 years. You can see that the 10 year G-Sec yield was declining from April 2014 to July 2017. This was a great phase for long term debt mutual funds investors; many investors got double digit returns. Since August 2017, bond yields have been rising and this has caused long term debt fund returns to be disappointing for investors.


Returns of different debt fund categories in the last one year

The chart below shows the returns of different debt fund categories in the last one year. You can see that shorter duration funds clearly outperformed longer duration funds. This shows that the shorter end of the yield curve presents better investment opportunities in the current interest rate environment. Please note that we are showing category average returns; individual debt mutual fund schemes may have outperformed or under performed the category returns.

Source: Advisorkhoj
What should your fixed income strategy be?

When outlook on bond yields is uncertain, with rising short term yields the best strategy in the near to medium term is accrual. In an accrual strategy, you hold short duration or very short duration bonds or money market instruments till maturity. In this strategy, you will earn the interest (coupon) paid by the bond and bond price changes will not affect your returns because by holding the bond to maturity, you will get the face value (price changes in the interim will be irrelevant).

The chart below shows the India yield curve and its shifts in the last 6 months. You can see that the yield curve has shifted upwards more towards the short end compared to the longer end in the last 6 months. From a risk return perspective therefore, it makes more sense to invest in shorter end of the curve because you will get better returns relative to risk taken by investing in the longer end of the curve.

As such, in our view, for investors with shorter investment tenors (less than 3 years), it is better to invest in shorter duration funds compared to longer duration funds. You can invest in liquid funds, ultra short duration funds, money market funds, low duration funds, short duration funds etc, depending on your risk appetite. To get higher yields you can also invest in corporate bond funds or credit risk funds, but you should be clear about the risk factors before investing.
source: Advisorkhoj

Should You Take Financial Products/Advice from Banks?

I am sure we all must have received  calls from our banking relationship managers trying to convince us to buy so and so financial product..may be its a mutual fund scheme or insurance investment product. When we go to our banks, they will try and push us to buy one of their financial product, whether we require it or not.

Do they really care what is best suited for us without understanding our investment objectives and risk profile? No. They have to just  meet their targets by selling(or mis-selling) a financial product as part of their non banking revenue generation.When I say mis-selling, I mean

1. Concealing material, important and relevant information about the product
2. Whether the product is suitable to the customer or not
3. Not explaining the risk associated with that product and
4. Making misleading and false statement

This kind of mis-selling by our banks is difficult to quantify because most of these things happen through verbal communication and we end up buying their financial products which are neither suitable for us nor help us meeting our financial goals.

Many Asset Management Companies (AMC) which are running different mutual fund schemes are from the same fund houses which own these banks. Most of the banks will try and sell their own financial products, irrespective of the fact whether it’s beneficial to us or not.  Please take a look at the table below which shows that these banks get maximum commission by selling their own mutual fund schemes.(courtsey: OutlookAsia)

So should we go ahead with buying financial products as offered by our banks or should we take a deliberate decision where to invest our hard earned money? Before deciding which financial product would be good for us, let’s spend some time in deciding our future goals, do our risk assessment and then start investing in the most suitable financial product which has the potential to meet our financial goals.
If we  find it difficult to  handle this, no  harm  in  taking  financial  advice  as we  take it  in other matters (legal, medical etc). Avoid taking advise from Banks on your personal financial matters. They may not be true to you…
Disclaimer : No offence meant for Indian banks.

Key to Mutual Fund Investing

You may have heard it many times when you are in the world of mutual fund investments – “Don’t time the market, steer clear of greed and envy, and be prepared to wait “.

Investing smartly in mutual funds may sound harder than it really is. We have made the job easier with the following Ten Commandments of Mutual Fund Investing. These commandments have been followed by many legendary investors like Benjamin Graham and Warren Buffet, who have used these to create great investment success. You can do so, too!

1. Be patient for the long term

The stock market is a device for transferring money from the impatient to the patient.” Warren Buffet once said.

You need to give time when you’re confident about your mutual fund investment choices. Investing in some mutual fund schemes, especially equity mutual fund schemes, can take time to generate decent growth. Of course, there will be times when you may end up seeing your equity mutual funds giving negative returns or even failing to deliver expected returns, but these are the times when you need to be patient and wait for the market to turn in your favor. Remember, equity mutual funds take time to appreciate in value. You should have minimum 5 years of investment horizon for equity mutual funds. The investment horizon could be even more if you are investing in mid and small cap funds or thematic/ sectoral funds.

2. Do not ignore the fact that equity markets are volatile

Nobody can predict how the equity market is going to behave. Since the stock markets has always been a volatile one, your equity mutual fund investments may go up or come down based on market movements. This may cause fear in your heart, but you need to maintain calm believing in the fact that equities as an asset class is the best performing one compared to any other asset classes.

3. There is no ‘Best Time’ to invest

There’s a popular Chinese proverb that say – The best time to plant a tree was 25 years ago. The second best time is now.

There isn’t any perfect time to invest and as an investor you shouldn’t wait for a perfect time to start it. You first need to know what your long and short term goals are and start investing accordingly. Once you are focused on achieving your goals and ready to start investing according to it anytime is the ‘best time’ to invest. Continuing with your investments without waiting for the ‘best time’ is the key to long term success in investing.

In the last 10 years there have been very bad times and good times in the market and had you continued your investments you would have made superior returns compared to any other asset classes.

4. Never waste time guessing market tops and bottoms

It may be your dream to buy at the bottom and sell at the top of the market. However, as all dreams go, this dream is also near-impossible to achieve. As an investor, if you can follow a more realistic and achievable approach by selecting good performing mutual fund schemes for your investments, your job is done. A recipe for happy investing is to stay invested over the stock market cycles and eliminate unnecessary punting. This strategy ensures that you make wealth in the long run.

There is a proverb, time in the market is more important than timing the market. You can make more use of your time by studying mutual fund investment strategies and finding new ways to invest instead of trying to time the equity markets.

5. Have a look at various mutual funds

You need to put in a lot of efforts if you are trying to pick the right mutual fund schemes even though you’re not trying to time the market. This process becomes even harder if you are someone who is not good with knowing various schemes. This is when you need to look at the various categories of mutual fund schemes and the solutions offered by them.

Various categories of mutual funds help you choose schemes based on your investment objectives and risk profile. While, there are debt mutual funds which help you get better than fixed income returns, there are various kinds of equity mutual funds which can help you save taxes or achieve your long term investment goals. Again in equity mutual funds, there are large cap or hybrid equity funds which are suitable for moderate risk profile investors, mid cap or multi-cap funds for moderately high risk takers and small cap, thematic or sectoral funds for very high risk takers.

6. Invest systematically

There is an ideal way to invest in mutual funds and that is via Systematic Investment Plan or SIP as they are popularly known. You can invest a fixed amount in mutual fund schemes of your choice, on predetermined dates every month. This not only helps you to become a disciplined investor and reduce some of the stress associated with timing the market, it also helps you save for your long term goals brick-by-brick.

7. Avoid investing on basis of high and low prices

There are instances of investors selling their mutual fund holdings when the market goes down fearing that their investments value will correct further. There are also instances, when investors buy mutual funds aggressively fearing that they have missed the good run up and so they should immediately accumulate units at the current market prices.

As an investor if you invest based on low and high prices (known as NAV) of mutual funds then you may often miss out on the opportunity to generate even more gains. It is important to stay invested in a mutual fund scheme as long as it is meeting your investment objectives.

8. Focus on investment goals

In the world of investing, you will always see fluctuations in stock prices, which may be exciting for some investors and terrifying for others. However, you should ensure that your investment decisions don’t rely on these ups and downs but rather on your investment goals. It is advisable to stick with your investment goals following various investment strategies while understanding that there will be fluctuations in the market movements.

Sticking to your investments and aligning them with your various goals could be passive investing and boring but that is the only way to create long term wealth.

9. Envy could be the enemy of investing

Never make your investment decisions out of envy. You should know that your investment objectives and goals are most likely different from other investors and emulating the strategies of other investors in the hope of making a quick gain will land you nowhere.

You should always take time to think hard before making any investment decisions which should be based only on your needs and not what others are suggesting or currently ‘trending’ in the market.

Chances are that your colleague or neighbor had made a killing in one of their investments but that does not mean you should also attempt that! You should not focus much on return but on outcome of your investments. As long as your investments are meeting your objectives/goals, you should be happy without envying others.

10. Think of an emergency funding first

Generally, the basic principle of mutual fund investing is to invest something today for a better tomorrow. However, you need to be cautious since investing too much for the long term can hurt you in the short term particularly when you need funds in an emergency. Example – when you need liquidity to pay a hospital bill and find that all your money is locked up in funds with long term investment objectives.

To achieve short and long term investing success, you should first keep aside a percentage of your savings for contingencies. You should always invest for long term only after setting aside for contingencies. Also remember that equity investments also suffer periodic declines in value and your emergency fund can also help accumulate further investments when the going is not so good!


You should start investing with these principles, which can go a long way toward building a successful and healthy mutual fund portfolio. Your long term goals, changes in taxation policy and your monthly investable surplus should be kept in mind when planning your investments. Always remember that an investment strategy which is based on these sound principles can grow more rapidly than you think.
source: Advisorkhoj

Why Should We Go For Goal Based Investments ?

 With stock market in correction mode for almost two months now, we are witnessing gains in our equity based portfolios getting eroded substantially, more so in mid and small cap. Nifty benchmark index has fallen 13% from its recent high and Mid & Small cap index has lost 26% and 39% respectively from their 52 week high.

Although it does create apprehensions and some sort of panic in the mind towards future outlook of our investments, it should not worry us especially if we are into Goal Based Investments. So what is this concept of Goal Based Investments?

When we begin our journey towards savings and investments, there has to be some future purpose of these investments, some events like Children’s Education, their Marriages, Retirement Planning etc which we want to finance in future by sacrificing our today’s spending. Let’s call them future goals which we want to achieve through our investments over the available time horizon. Investment without a goal is like boarding a train without knowing the destination.

Hence Goal Based Investments allow us to invest towards achieving the desired goals in the available time horizon by choosing the correct asset allocation(equity, debt, mix of both) with optimum risk through a Systematic  Investment Plan.

A few of the behavioral and financial reasons for choosing goal based investments are :

1. Optimum Savings. Once the goals are decided well in advance, we know how much money needs to be saved regularly, nothing more nothing less.

2. Start Saving Early to get More. Sooner we start saving towards a goal, lesser savings would be required due to power of compounding. e.g If a child’s education requires 50 lac after 20 years, we need to save only Rs 5,500 pm if we start today as against an amount of Rs 10,600 pm if we start after 5 years  and Rs 22,500 pm if we start after 10 years (Assuming 12% return P.A.).

3. Tangible Outcome. We are more likely to save and invest towards achieving a definite goal rather than saving without a purpose.

4. Avoids Debt and Better Management of Assets and liabilities. By mapping tomorrow’s liabilities with assets of today, we avoid getting into debt trap. It also helps us in better budgeting thereby meaning how much we can afford to spend today as against how much we want to spend.

5. Optimum Returns. Goal based investment gives us the opportunity to match our time horizon with asset allocation by taking optimum risk. If there is a mismatch in allocation, we may save too much or too little, missing out on returns with conservative allocation or missing out on goals with too much of risk.

Goal based investments provide us with an opportunity to work towards achieving our future goals rather than chasing returns and give us  peace of mind during such turbulent and volatile market conditions.

Derisking Liquid Debt Fund

Liquid Funds have been around for a long time. The first Liquid Fund, as per Value Research, was launched in 1997. Today, almost all mutual funds have a Liquid Fund. 

Liquid Funds have also come a long way in terms of the market risks that it can take. I have heard of instances of longer tenor bonds being part of Liquid Fund portfolio in the early 2000 till SEBI in its steadfast investor protection introduced maturity restrictions in Liquid Fund portfolios. 

Post the 2008 global financial crisis and with the RBI having to offer a Liquidity Window for Mutual Funds to meet redemption, SEBI tightened the norms further by eventually mandating that Liquid Funds can only invest in instruments which are 91 days or less in maturity. This took away any ambiguity on the extent of market risks that investors would bear in a liquid fund. 

Liquid Funds now almost came at par with short term fixed deposits in terms of its return profile. This greatly benefited marketing and positioning of Liquid Funds over bank deposits.

SEBI recently also introduced standardized fund categories by using maturity bands to demarcate Debt Fund categories. Liquid Funds, in the new definition, are funds which have investment in Debt and Money Market Securities with maturity of up to 91 days only. This continues the earlier practice of ensuring that Liquid Funds carry low interest rates risks, but this still does not account for the credit risks (risk of default of interest and principal) that a Liquid Fund can take. 

The investment objective of a Liquid Fund is to keep our investment safe and liquid and try and achieve better returns than bank deposits. This is how a Liquid Fund is positioned and marketed to investors. Liquid Funds offer T+1 liquidity, as also instantaneous redemption upto Rs. 50,000. 

Thus, Liquid Fund portfolios should have very high liquidity, minimum volatility and near zero chance of capital loss. Liquid Funds should thus prioritize safety and liquidity over returns. But most Liquid Funds of today are prioritizing returns over safety and liquidity. The recent cases of defaults reported in Liquid Funds are a fall out of this aspect of chasing returns over safety. 

As per data from AceMF, today, an average Liquid Fund holds around 60% of its assets in instruments issued by Private Sector. A good share of that is invested in private corporate which are not AAA rated. About a third of the assets are invested in instruments issued by NBFCs (Non Banking Financial Corporations). The Liquidity and the Credit quality of these instruments may not be commensurate to the liquidity and safety objectives of a Liquid Fund, thus compromising on the very objective of liquid fund. 

Retail Investors invest their short term cash surplus in Liquid Funds to earn more than bank deposits. Financial Planners advise Equity investors to park their lump sum money into Liquid Funds so as to be able to switch/transfer their allocations to the equity fund at regular intervals. Equity Mutual Funds, PMS Managers park their cash holdings in Liquid Funds waiting for an opportune time to buy Equities. Most of them may not be aware and/or not prepared to see a capital loss in their liquid fund investments. 

So, before investments in the liquid fund, it is very essential to scrutinise the investment portfolio of that liquid fund scheme and see how much credit risk forms part of the portfolio. We prefer Liquid Funds which do not take credit risks. For safety and liquidity, look for those liquid funds which invest only in Government Securities, Treasury Bills and AAA rated instruments  issued by Public Sector Undertakings (PSUs).

Source : Quantum Mutual Fund

Why Should We Invest In Equity?

Over last year or year and half, every body is talking about investments in mutual fund, “Mutual Fund Sahi Hai”, we all must have seen this Ad. But this ad does not amplify whether we should invest in equity or  debt   mutual fund or combination of these two (Hybrid). Before we proceed further, it would be prudent to understand the basic difference between debt and equity.

When we invest in debt instrument, we lend our money to the borrower for a fixed interval of time and the borrower gives interest on that money as per prevailing market rate (cost of borrowing money) during the period of investment. This interest may be fixed or variable as per the mutually agreed terms of reference ( e.g Government securities offer fixed rate of interest whereas Provident Fund gets variable rate of interest). Thereby meaning, our principal amount  is not growing, and we are getting only the interest on it as per prevailing market rate.

When we invest our money in equity (buying a stock directly or through mutual fund), we are actually buying stakes in the business of that company. If the company grows, our money grows with it. A lot of companies have created wealth for their investors in the past. But on flip side if the business does not do well, we loose out on our investments. That’s why selecting the right business and diversification are the main key factors. We as investor may not be able to do justice while investing directly through the stock market and in that context , investments through mutual fund will be a better option.

Despite risk associated with investments in equity, this asset class has been outperforming over all other asset classes over a longer period of time.

A comparison chart prepared by HDFC Mutual Fund showing  how an amount  of  Rs 10,000 invested on 31st Mar 1995 (once) in different investment avenues would have performed on 31st July 17 is enclosed. Over a period of 22 years, Tax Saver Mutual fund (One of the scheme of HDFC MF which invests in equity) has given annualised return of 24.73% as against 8.84% in PPF. Even  Nifty 500 bench mark index has given 12.19% annualised return. Undoubtedly, investments in equity through mutual fund will create a lot of wealth for you over a longer period of time.

Approach to Debt Mutual Funds

NAV of Equity Mutual Funds nosedived during last few weeks as stock markets are in correction mode, more so in mid and small cap mutual funds. This sharp correction in stock markets, although not unusual, has rattled a lot of investors. Not only the equity market which saw correction, but the concerns surrounding  one of the big infrastructure firm on credit risk,even the debt Mutual funds came under lot of pressure, especially the credit risk mutual funds having exposure to this company.

So while planning investments in the debt instruments through mutual funds, it would be prudent to analyse the credit risk associated with it by looking into the investment pattern of the respective mutual fund  scheme. Debt  mutual funds having  more of  their  investments in  Government  Sovereign  Bonds (Treasury Bills) , AAA rated  Commercial Papers, other money market instruments,Fixed deposits of financially sound State owned and Private companies may give slightly less returns but actually provide very good risk protection to the invested capital.

In the current scenario where the interest rates are north bound and the bond yields are going up, short term / liquid / accrual debt mutual funds with quality holdings  are good options.