Mutual Funds have an objective. For instance the "Sundaram Select Midcap" will only invest in Midcap funds (with some market cap limits). Franklin India Bluechip Fund only invests in "blue chip companies" which has a certain definition. And then there are debt funds, fixed income funds and so on which specify exactly where they will invest and in what ratio. Balanced funds may choose to invest upto 60% in equity and 40% in debt.
How do we identify which MF is good? What is the right NAV of MF to Buy or Sell? How do you decide whether the NAV will go up or down? What is the basics to identify the right time to put your money or take back?
Tough question. Firstly, do understand that past returns don't guarantee future income, but lack of past returns is probably a negative. Secondly, the fund manager plays a key role in fund performance, so if a fund manager changes, the fund performance will change.
From my perspective, you should choose a fund based on:
a) Is the mutual fund running for over five years? Funds are allowed to amortise initial expenses, upto 6% of the initial cost, for a period of five years. This usually means their returns will be subdued to that extent. Secondly, you can't really analyze fund performance in less than five years, since you need to know how well it does in booms as well as busts.
b) Is the fund manager stable in the fund? If not, don't buy, period.
c) Is the fund overinvested in a specific stock? If you buy a diversified equity fund (like HDFC Equity fund) they must invest in SEVERAL companies, but not more than say 10% in any one stock.
Read this outlook money for a good article on rating MFs.
3. Is there anyway where you can ensure that Principle amount will never be lost? Or is it like stock market? Where there is a possibility of losing your investment?
There are debt funds where the principal investment is never lost. Check out SBI Magnum Income Fund, for instance. Remember, returns are usually between 4 to 8% p.a.
4. What are the best MF's as of today. Where you get the history of MF's to analyse how they have performed in Past? Check out the http://www.mutualfundsindia.com for ranking mutual funds. Some other sites are also given in my Introduction to Mutual Funds.
5. In some articles they talk about Systematic Investment Plan? What is SIP?
SIP: The idea is that you can never time the market. You earn a salary every month. So if you're thinking, "I'll save 5,000 every month and then when the market is low I'll invest", that will almost never happen. You will perhaps hit it when it's going to go lower, or never hit it at all.
An SIP means putting a fixed sum of money every month, regardless of whether the market is up or down. You then cost-average your investment so that in a really rising market or a volatile one, you gain in the long term. Also, remember that most funds reduce the entry load for SIPs to 1%, lower than the 2% you pay for a one timer. Read this personal fn article for more details on SIP.
6. What are risk factors? Risk factors are potential value eroders. Meaning, if you invest in an equity fund, risk of loss is high, so the risk factors will mention that there is a good chance of losing your money - all of it! On the other hand, a debt market fund or a gilt fund has near-zero risk, but there is still a risk that the government will go bankrupt. (VERY VERY rare, but has happened in Lat-Am)
More questions?
Write me a comment.
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>During past two months , I am loosing heavily on well known mutual funds purchased last year , and now almost started getting erosion of original investments . Should I redeem all MF’s at this stage ? I am not able to decide – please advise
06.14.06 at 5:39 PM
>Redemption would be premature at this point, but you should exit specific sectors in stages. Get out of funds that are sector specific and work with diversified funds.
Two months is really nothing – don’t worry, the funds will turn around within one year. You also have had to deal with initial issue expenses at 2.25% or so.
07.28.06 at 12:49 PM
>Hi Deepak,
Can you please throw some light on STPs? I am a medium risk averse person who wud like to invest a bulk amount. My MF advisor suggested to invest the bulk amount in a debt fund and use STP so that I can enjoy the best of both Debt fund’s security feature as well as growth of equity fund. Can I know your opinion on this strategy ?
06.25.07 at 1:19 PM
>Can you please throw some light on STPs? I am a medium risk averse person who wud like to invest a bulk amount. My MF advisor suggested to invest the bulk amount in a debt fund and use STP so that I can enjoy the best of both Debt fund’s security feature as well as growth of equity fund. Can I know your opinion on this strategy ?
07.07.07 at 6:38 AM
>anon: STPs are simply systematic transfer plans. You can transfer from one fund to another. THis has nothing to do with risk – i.e. you can do STP with debt or equity funds.
What you need to do is to simply put your money is somehting like a mixed fund – there’s HDFC Monthly income plan (long term) which has 20% equity and 80% debt, or balanced funds which have balanced equity and debt investments.
For zero risk, you might want to buy an FMP (fixed maturity plan) or such.
07.07.07 at 8:00 AM
>How do you calculate return for 1 year in mutual fund? Is there any formula?
07.26.07 at 11:19 AM
>subbu: Get the NAV unit price one year ago, and subtract from current price. one year Return = (profit)*100/(price one year ago)
07.26.07 at 2:40 PM
>I had Rs.12000 10 months ago and thought of investing in mutual fund, because of good returns in Equity-diversified. I had chosen & invested in FT India Prima Plus – growth (One portion of it)and Sundaram BNP Paribas Select Midcap – Growth (another portion)and opted for SIP. For instead, I received statement of account Of FT India Prima Plus. It was showing only 20 % return where as newspapers and net (Value reserach online and Rediff Money Biz)also on the same day, it has shown 56 % return. I asked customer care and they replied me because of you opted for SIP, your NAV are not constant. That’s why you are getting very less return. Why that much difference of calculating returns? I am confused, pl clarify me.
08.08.07 at 11:35 AM
>subbu: when you buy a stock at Rs. 10, Rs. 20, and Rs. 30 in three different months, each time investing Rs. 3,000 each time you get:
1st Time: 300 shares @ Rs. 10
2nd Time: 150 shares @ Rs. 20
3rd Time: 100 shares @ Rs. 30
Totally you have 550 shares for a total investment of Rs. 9,000. Average buy price is: Rs. 16.36
Let’s say the price today is Rs. 33 so total value is 18,150. your net gain is Rs. 9,150.
But if you had bought all shares in the first month (i.e. full 9000 Rs. in the first month) you would have 900 shares, whose current value is 29,700. Your net gain would have been Rs. 20,700.
the difference is nearly double, as you can see! This is because your money wasn’t applied in one month, it was applied in consecutive months where each month the NAV went up.
08.08.07 at 12:40 PM
>Hi Deepak,
This is Subbu again. I have a query. In line with my earlier question/comment no 9, would I get same return from a tax saving fund like SBI Magnum tax gain (close end)if I invest in SIP mode for 3 yrs?
10.18.07 at 11:30 AM
>Hi,
Could you please help to understand the concept of REIT – Real Estate Investment trust?
I am willing to know about it and if its really beneficial then would like to invest in REIT.
Thanks!
Nilesh
01.14.08 at 12:58 PM
>Is there any folio no. based trackeer for mutual funds of SBI mutual fund.
03.11.09 at 10:17 AM