Important Tips For Mutual Fund Investors

Mumbai, November 28: The first thing a large number of first-time mutual fund investors does is to look at the rate of return on a particular scheme. They want to earn more money in a short span of time. Experts say patience is the key to earning more profits from equity markets. While many investors go by past performances, there are still many who do not know how to allocate assets and form a portfolio. Almost all the certified financial planners we spoke to suggested their clients to build a portfolio of different assets. 

They said building a portfolio is very disciplined way of investing money in mutual funds. Also if you are stayed invested for a longer period of time through assets allocation, your chances of making more profits are high.  In this article we will explore as to how a retail investor should divide his investments over various categories of mutual funds. Is their risk appetite and risk tolerance at the same level? To answer these questions we need to consider few aspects while taking this investment decision. 

Time horizon matters

Karan Gupta, Wealth Manager, Sykes & Ray Equities, says, usually, if the investment time horizon is for five years plus, a large or large and mid- category can be considered. For a longer time horizon of probably 8-10 years, mid- or small- cap category schemes can be considered. “On the other hand if the time horizon is shorter than expected and between 3-5 years then, a balanced scheme is best suited for such a time horizon. Debt should be considered for any time horizon less than three years or up to three years,” he said.

No margin of safety from peak

Presently, the large cap index is at its life time high, thus there is no margin of safety from the peak, for the retail investors. 

“In such a case, the investors should enter the equity component, in a staggered form through a Systematic Transfer Plan (STP). He can transfer 5 per cent every month, where in less than two years the entire amount will shift from debt to equity component in installments,” Gupta said.

On the other hand, there is a good margin of safety in the mid- and small-cap categories per say. If the goals of investment are of a longer duration than mid-cap or small-cap category schemes can be considered since they are actually trading at a discount in comparison to the large-cap index. For a shorter duration it is advisable to invest into a balanced cap category or large and mid-cap category schemes.

Enter sectoral or thematic MF scheme

Gupta says it is advisable not to enter sectoral or thematic mutual fund schemes since in the present scenario of economic slowdown and macro uncertainties, in case the particular sector does not perform, the gestation period could be long till the investor looks at above average returns if not negative returns. 

“Similar instances can be seen in the Infra sector schemes, where investors saw returns lesser than bank FD rates,” he said. Thus, according to Gupta, investors should carefully select categories for diversifying their investments over well, defines duration for meeting your personal life goals.