Topic: Mutual Funds

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10 Tips for New Mutual Fund Investors to Get Started

July 22, 2022

Thinking about investing in mutual funds for the first time? If so, you’ve come to the right place. Investing in Mutual funds can be an effective way to build a portfolio and meet your long-term financial goals, but it isn’t necessarily easy. There are plenty of details to understand before you jump in and buy shares, such as what types of funds are available, how much you need to invest, and how much risk you’re willing to take. There are also numerous considerations when deciding which mutual funds to buy and which brokerage service is best for your needs. This blog post will serve as your one-stop shop for everything you need to know about investing in mutual funds. Whether you’re just starting out or have some experience under your belt already, keep reading to learn all the insider secrets we have for you!

 

What are Mutual Funds?

Mutual funds are investment funds that are owned by a group of investors, such as a pension fund. Unlike stocks, where investors buy shares of a company, mutual funds are collections of stocks, bonds, and other assets that are held by a fund manager, who is responsible for the fund’s performance. Investors pool their money together and use it to buy shares in the fund. Mutual funds allow people to diversify their portfolios by investing in a single fund that includes a variety of instruments. In addition, mutual funds provide liquidity, which means investors can sell their shares whenever they want without having to wait for a stock’s trade to settle. As with most financial products, there are both advantages and disadvantages associated with mutual fund investing. Some of the most important considerations are the types of mutual funds available, how much you need to invest, and the risk you’re willing to take.

 

Types of Mutual Funds

There are many different types of mutual funds, each with their own unique investment strategy. These include equity funds, bond funds, hybrid funds, index funds, and specialty funds. Equity funds invest in stocks and are typically more risky than bond funds. Hybrid funds include both equity and bond funds, which gives investors a balance between risk and reward. Index funds track a specific index, such as the NIFTY50. Specialty funds invest in specific sectors, such as biotechnology, energy, banking etc. One of the most important decisions when choosing which mutual funds to invest in is deciding how much risk you’re willing to take. The type of fund you choose is a major factor in determining risk. Riskier funds generally have a higher potential for growth, but they also increase the likelihood that you’ll incur a loss.

 

Pros and Cons of Investing in Mutual Funds

Pros:

  • A wide range of mutual funds to choose from.
  • Easy to invest in.
  • Easy to liquidate.
  • Wide variety of risk levels.
  • You can buy into funds with small initial investments.
  • Tax advantages 

Cons:

  • No guarantee of a profit.
  • No control over the specific stocks held in your portfolio.
  • No control over the fund management process.
  • No guarantee that the fund will remain open to new investors.
  • May have to pay a front-end load.

All investments come with some level of risk. But investing in mutual funds can help you manage that risk to make sure you meet your investment goals. Mutual funds vary in type and level of risk. So be sure to select funds that match your risk tolerance. The wide range of risk levels among mutual funds makes it easy to find funds that match your risk tolerance, based on your financial situation. Plus, it is easy to put money in, easy to liquidate, and you can buy into funds with small initial investments.

 

10 Tips for New Investors

  • Invest in a diverse group of mutual funds.
  • Spread your funds across different types of investments.
  • Select funds that complement each other and create a balanced portfolio.
  • Choose funds with low expense ratios.
  • Avoid funds that have annual expenses exceeding 1%. Diversify your portfolio across different types of funds.
  • Make sure to include a mix of stocks, bonds and cash in your portfolio.
  • Make sure to take a look at the fund’s past performance. Choose funds that have done well in the past, as this may be an indication of future success. Get help from a financial advisor if you’re unsure which funds to invest in.
  • A financial advisor can help you pick the best funds for your situation.
  • Stay consistent over the long-term.
  • If you start investing early, you’ll have plenty of time to ride out any bumps in the road.

 

Conclusion

Mutual fund investing can be an effective way to build a portfolio and meet your long-term financial goals. But it isn’t necessarily easy. There are plenty of details to understand before you jump in and invest. Doing one’s own research before investing is critical, but so is taking professional advice from a certified financial advisor. Reach out to your financial advisor and begin your mutual fund investing journey.

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5 Best Strategies For Short-Term Investments

July 12, 2022

Making short-term investments is a crucial strategy for any investor. Short term investments are great tools to help you diversify your investment portfolio. Both investors and businesses can make short-term investments for many purposes. They require a low holding period and are usually low in risk. In most cases, short-term investments refers to any asset with a holding period of between one to five years. Some investors also like to invest for the short-term since it typically gives them their returns within the first five years.

As an investor, you must recognize the risks and rewards associated with short-term investments. You must not only know how to differentiate between good and bad opportunities, but also how to shield yourself from risks.

Your investment goals usually decide the type of investment that is best for you. Some investors invest with a motive to create alternative income, while others may want to pursue it as their main source of income. No investment can guarantee you high returns as there is always an element of risk. In simpler words, are you willing to take the risk? That is the question.

Here are the 5 best short-term investment strategies that can deliver returns with considerably lower risk factors:

1. Savings Account – This could be a good short-term savings option. The average savings account generates a small amount of interest, but if you can open a high-yield savings account, you can get higher returns. When compared to regular savings accounts, high yield savings accounts typically offer higher interest rates.

2. Corporate Bonds – These are a kind of debt security sold to investors. Many conglomerates issue them to generate money for various purposes. Corporate bonds are only at risk if the company issuing them dissolves, but a company’s assets can be used as collateral, maximizing your chances of being  reimbursed for your losses.

3. Government Bond Funds – These work on similar lines as corporate bonds; the only difference is that they are issued by the government. It’s a low-risk investment as it pays low-interest rates. Most government bonds are issued to boost infrastructure, public services, and domestic programs.

4. Money Market Accounts – Borrowing and lending of short-term funds in financial markets comes under the money market segment. These account mature anywhere from one day to one year. RBI and SEBI regulate this market in India. 

5. Certificates of Deposit – In this, you deposit a large sum of money for a fixed  period of time such as 6 months, one year, or five years. You must keep it untouched, or you will be charged a penalty for an early withdrawal. In return, you will get a premium interest rate. You will get higher interest rates than any savings account. It can be a great way to make your savings work for you.

Short-term investments use many routes to make money. The catch is that you must educate yourself on applying these investment vehicles to attain success. As you learn more about short-term investments, you’ll find yourself drawn to one strategy or another before settling on the right mix for your preferences and risk appetite. The goal of any trading strategy is to keep losses at a minimum and profits at a maximum, and this is no different for short-term investment. 

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Technology’s role in shaping customer preferences

June 20, 2022

Becoming profitable is the primary objective of any business, and in the process, they try to operate by getting ahead of their competition. Getting ahead of the competition depends highly on your brand’s perception and acceptance among consumers.

Being accepted by consumers ensures that a company grows and flourishes to strengthen its market position and increase its customer base. However, with the increase in the use of technology, there has also been a change in the behaviour of consumers. As per stats by InternetLiveStats, Google processes over 40,000 search queries per second. According to Oberlo, 27.6% of the global population shops online. This reflects the impact that brands can have with a strong digital presence.

While technology has helped many businesses scale up their operations, it has also caused the customer’s mindset and behaviour to evolve, which must be taken into consideration by brands. As a brand, you should always evolve along with the consumer in order to remain competitive and relevant in these changing times.

Let us take a look at a few ways in which customer preferences are changing, and how you can leverage them.

Decreased attention spans

The amount of content online is increasing massively with every passing day, and consumers are flooded with more content than they can realistically interact with on any given day. This abundance of content decreases the attention span of your consumers and visitors to such an extent that you must grab their attention within a few seconds, or they are gone. According to Facebook, consumers spend a maximum of 2 seconds when viewing a piece of content on their smartphones.

You need to get your message across in the quickest and most effective manner possible for it to be heard completely, and hope at getting a conversion. The key is to highlight the benefits presented by the product or service that your company is providing. Ensure that it stands out and speaks to the consumer in a manner that is easily understood.

In the financial world, it is necessary to put the message across in the simplest way possible so that the content can be easily consumed and understood.

Making the world a smaller place

The increase in the use of technology and the internet has truly made the world a smaller place. Consumers are more connected to businesses than ever before. They have the capability to research, review and question your products or services, irrespective of their physical location. According to GlobalWebIndex, social media is used to research products by 54% of the users.

With the increase in the use of social media, consumers are enabled to interact with your brand directly. This lets them ask questions and also influences their purchasing decisions to an extent.

With the hyper-connectivity that consumers are being subjected to, there is an increasing sphere of opportunities of engagement towards new, as well as existing customers. Nevertheless, you must ensure that your communication breaks the clutter and fulfils the demands of your consumers.

This change in consumer behaviour can be taken advantage of by ensuring that your brand has a strong presence on both social media and digital platforms. Creating a dynamic digital ecosystem, coupled with an omnichannel marketing strategy ensures that you check all boxes and are reachable by consumers all the time. Providing consumers with an experience that is cohesive, irrespective of the channel ensures that you retain them.

The urge for personalization

Consumers crave attention, and desire products that are created after taking their individual preferences and interests into consideration. This gives them a feeling of personalization, which enhances their trust and affinity towards your brand.

With the increase in technology, globalisation has also increased. This has caused many brands, offering similar services and products, to pop up. With so many similar options to choose from, consumers are spoilt for choice. In this scenario, personalization is a massive influencing factor. According to Khoros, 86% of brands convert one-time clients into long-term customers by giving them a satisfactory experience.

In order to cater to consumers on a personal level, the first thing that you need to do is get a comprehensive understanding of your target market, and direct tonality in a manner that they speak to your audience on an individual level.

Nearly all financial products or services should be prepared in a manner that is tailored to fulfil the consumer’s needs.

Increasing consumer expectations

With an increasing number of brands entering the market, the expectations of consumers are sky high. Consumers nowadays look for a one-stop solution that caters to all their needs. They expect a targeted approach from companies in terms of communication, products and services, with responsive customer service that caters to their needs on demand.

If a consumer faces even the slightest inconvenience in getting the desired product or customer service, they will switch to a competitor with the same offerings without the slightest hesitation. According to a report by Zendesk, nearly 80% of users switch to a competitor because of one bad experience. The bar for customer satisfaction is set extremely highly, with more and more companies entering the market, and looking for the same target audience.

For your business to work, and succeed, in this highly competitive environment, you need to analyse your consumer’s behaviours minutely, and devise strategies that extensively caters to all their needs.

In today’s always online, hyper-connected world, you should form plans that give you an edge over your competitors, and gain for you a stable market share.

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Factors to consider when making investment decisions

June 9, 2022

It is important to make investments that help fulfil your financial goals and ensure that you have a stable and secure future, but be aware that this is not always an easy process. There are several factors you need to consider that can influence your decisions. 

It is crucial that you make the right choice, and the right investments for you. Although there are several financial instruments that can help you build a corpus, not all of them may be suitable for you. It is important for you to know which investment format is good for you, and which ones best fit your financial needs. 

Let us take a look at a few such factors that you must consider while making an investment decision. 

Reason of investment 

The first, and most important thing to consider is the reason for making an investment. While it is true that investments are the key to a financially successful future, it is also important to understand that not all investment vehicles are the same. Each investment objective has it’s own pros and cons and a different objective. You must have a clear objective for your investments and then arrive at the right investment choice for you. 

In simple terms, if you are looking for a short term goal, the investment modes would be different than the financial instruments which cater to long term goals. Knowing your investment reason, and fixing on a goal gives you clarity on which investment vehicle is right for you. 

Researching the market 

Making an investment is an important decision, one which can alter your future significantly. Therefore, it is always advisable to conduct thorough market research before you make an investment decision. Doing this will help you understand the current market and give you an idea of the companies you should invest in. 

Knowing your investment goal and the type of investment you want to make, along with having a good understanding of the market, will enable you to make investment decisions that are best suited for you and help you succeed. 

Risk levels 

Nearly all investment vehicles carry with them some kind of risk. Therefore, it is important to understand the risk associated with the investment before you get involved. Your risk appetite should dictate your investments to help you make the most of your investments. If you want to ensure that your principal investment remains safe, go for lower risk investments, though the returns on those may not be high. If you’re looking for high returns and do not mind taking a few risks, then your investments will look a little different. 

Investment Tenure 

Your financial goals must have a time limit, which implies that the investments you make also have a specific tenure. The longer you make investments into one instrument, the higher corpus you are able to build for yourself. You also have a higher chance of earning a profit if the investment tenure is long term. However, not all investments provide a guarantee of positive returns. 

Depending on your financial goal, and the reason for investment, you should decide upon the duration for your investment. 

Taxations 

Before you make investment decisions, it is important to consider the taxation rules, and potential tax implications that may arise in the future. The reason is that different investments cause different taxation levels, which can affect your investment returns. It is imperative to understand the taxation laws and regulations before arriving at your investment. Understanding tax laws help you make sound investment decisions, which can help protect your financial future. 

Liquidity 

When making an investment decision, you should consider that you may have to liquidate that investment to meet other unforeseen needs. You should also consider the appreciation of value for your investment in the long run. If your chosen investment has long term potential and has high liquidity, as an investor, you can take advantage of the price movements in the market, and easily sell the investment if you wish. 

Volatility 

Volatility can be defined as the measure of how much the price of your asset can fluctuate over time. This can be a key influencer in your financial decisions, and is one of the most important factors to consider. Depending on your risk appetite, you should consider the volatility of your investment. This can highly influence your investment decisions, based on your investment objectives.  

For example, if you are investing for the purpose of a retirement plan, you are likely to invest in an instrument that has consistent returns with low volatility. 

The Company 

Before you invest in a company, it is imperative that you conduct a full research about the company, its operations, finances, and market projections. This gives you an idea of whether it is a good idea to invest in the company, and whether you see your financial goals get fulfilled by making the investment.  

Return on Investment  

The ROI, or Return on Investment is one of the key determinants to consider when making investment decisions. The entire point of making an investment is to generate returns and garner profits. Therefore, you must always consider your ROI when making financial decisions. An ROI can help you measure the profitability of your investment in relation to the principal amount. In case you decide that your investment is not generating enough ROI, you can stop investing in that instrument, and look for better options. 

Rate of Inflation 

Inflation is real, and it is something that is beyond your control. Therefore, it is a crucial factor that you must consider when making investment decisions. Over time, inflation can kill your savings, and erode your investment value. You should consider the effects of inflation on your investments before you make them. 

We hope a better understanding of the factors you should consider before you make an investment decision will help you make sound choices and have a successful financial future. However, nearly all investments are subject to market risks, and you should always consult your financial advisor before you make a decision on investments. 

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How many mutual funds make a good Portfolio

May 27, 2022

If you are investing in mutual funds, you may have asked or been told about diversification and the number of mutual funds you should own to make your portfolio stronger, and safeguard your investments from sudden market risks.  

It is necessary to ensure that your investment portfolio is diverse and you don’t have all your eggs in one basket. At the same time, it is also true that too much diversification can prevent you from making high gains. This gives rise to the question of how many mutual funds you should have and how much is too much. 

Diversification vs. overdiversification 

Diversification of investments is done with the aim of spreading the risk out across a number of assets. If you have invested too much in the stocks of a single company, your investment is at greater risk, because if the company does not perform well, it’s share prices drop and so will your investments. To mitigate this risk, you should diversify your investments and invest in multiple companies, so as to ensure that even if one company does not perform well, the investments in the other companies helps you overcome that loss. 

However, investing in too many companies can result in you not being able to make the most of your investments. Even if one of your investments does really well, you will not be able to see a great difference in your corpus because your investments are spread thin and the investment in any one company is bound to be smaller. It is usually suggested that you keep your investments diversified across industries, but limited to a few companies per industry. 

How many mutual funds should you own? 

Since there are several types of mutual funds, let us talk about each kind of mutual fund specifically. 

Large-cap equity mutual funds make their investments specific to shares of large-cap companies. Investing in one large-cap mutual fund that is well researched and chosen diversifies your investments enough that a second one is not strictly necessary, but can be an option. Owning multiple large cap funds increases the chance that there is a significant overlap in the shares owned by these funds and does not really guarantee more diversity in your holdings. 

Mid-cap equity mutual funds, as the name suggests, diversify their investment across companies belonging to the medium capital spectrum. These companies have much higher growth potential compared to companies belonging to the large capital spectrum. However, the risk involved with mid-cap mutual funds is also considerably higher.  

There exist a lot more mid-cap companies than there are large-cap ones. This means that even if you invest in multiple mid-cap mutual funds, the chances that there is significant overlap in your investments is smaller. This means that you have more options to invest in, but only invest in mid-cap funds after you have throughly researched them and are confident in their prospects. 

Though the high potential return can increase appeal for these funds, remember that there is a higher risk factor associated with these funds, which may be detrimental for your overall portfolio if things do not go your way. For mid-cap funds too, you should limit yourself to two funds only. 

Small-cap mutual funds, as you can probably guess by now, invest in small-cap companies. Investing in them is a high risk, high reward strategy. If they do well, you stand to earn extremely high returns, but if they do not, you could lose out on a lot of your initial capital. Given the number of companies that fall in this bucket, the chances of your investments overlapping are smaller and the reason you should limit yourself to approximately two of these is more because of the risks associated with them. Again, only invest in small cap funds after a lot of thorough research. 

Debt Mutual Funds are investment schemes that allocate your funds to bonds and other similar market instruments. These are considered very safe and low risk investment which means that the returns are also low. You can probably invest in one or two of these as well, but investing in more than that means lower returns overall. 

Sectoral Mutual Funds allocate your funds to companies from one particular industry. This is very similar to investing in only one company, since if the industry as a whole sees a downturn, your investment in it will also take a hit. These funds are only a good option if you happen to be an expert in, or know a lot about, that particular industry. The number of sectoral mutual funds you invest in depends on the industries you are familiar with. If you’re not sure about a particular fund or industry, it is best pass on these them. 

Though there is no exact number that is right for everyone, anywhere from six to ten mutual finds is usually the number of funds you want to be invested in. But this, by no means, set in stone. You could invest in more or less depending on multiple factors, such as your risk tolerance, your expected returns, your knowledge of particular industries etc. You should always ensure that the funds you are investing in are of different types, rather than funds with different names but similar outputs. As always, please research thoroughly and consult your financial advisor before making any financial decisions. 

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Mutual Funds for Tax Saving

May 20, 2022

One of the largest avenues of income for most governments is the taxes that it’s citizens are required to pay, in various forms. This income is then used to fund the development of the country in various areas. We should never consider income tax as a burden, but as an essential responsibility that helps move the wheels of the country’s economy. 

The Indian government has many provisions that allow you to make investments of your choice to increase your wealth, and at the same time, help you cut a significant amount from your taxable income. Cutting down on taxes by making investments also has a number of benefits, which we shall discuss below. 

Why should you incorporate tax-saving investments to your portfolio? 

Incorporating tax-saving investments to your portfolio ensures that you have a head start on your financial future. A longer duration for your investments to grow not only means more returns for you when the investment matures, but also that you get them when you need them the most, which is towards the end of your career. The earnings from these investments that you make over a long period of time will help you cover for your expenses later in life. 

The habit of planning your investments to save tax is also financially healthy because you tend to set aside a portion of your income in order to make investments, which can help protect your finances and future in the long run. Tax-saving vehicles also offer multiple other benefits apart from just helping you save your taxes. They are mostly long-term plans that build a corpus over a long period of time and help you meet your long-term financial goals, like retirement. 

Tax Saving Mutual Funds 

As already implied by the name, these are just like other mutual funds, but with an added benefit of saving taxes. The speciality of these tax saving mutual funds is that they make investments which provide tax redemption benefits under Section 80C of the Income Tax Act. Most of these Mutual Funds are Equity Linked Savings Schemes (ELSS) which investment into the equity market, and are growth oriented. They usually come with a lock-in period of around 3 years, which also helps you inculcate a good habit of investing. 

How do they work? 

When you invest in a mutual fund, your money is pooled into a larger fund. This accumulated capital is then invested into the equity market in a manner such that even if one of the investments incurs a loss, the other investments help mitigate the same. 

The long term capital gains from these Equity Linked Savings Schemes are not taxed, and the investments made are eligible for a tax deduction of upto Rs.1.5 lakh. 

Tax saving mutual funds make investments with at least 80% of their assets into equities. These mutual funds also allow you to invest all the year round, since these are open-ended in nature.  

Schemes under the ELSS funds can be categorised into two section: dividend schemes and the growth schemes. The dividend schemes provide you an extra income as dividends from the fund house from time to time, depending on the availability of the surplus which is distributable. On the other hand, the growth schemes operate towards generating long-term returns that you can redeem upon maturity.  

The dividends you derive from dividend schemes are untaxed, and can be withdrawn even during the lock-in period or can also be reinvested into the fund, making them eligible for tax benefits. However, the growth schemes under ELSS do not provide these benefits. 

Benefits of these mutual fund schemes 

The tax saving mutual funds provide you with multiple benefits, like making your investment eligible for tax benefits upto Rs.1.5 lakh. Furthermore, the capital gains that you make from these funds in the long run are devoid from taxes. You can also make investments in monthly instalments through SIPs, which would ensure that you do not incur a heavy financial burden while making the investments, and negating the need for a lump sum investment initially. 

These funds are also highly diversified, which means that your investments are considerably safe from the market fluctuations because of the risk being spread across several verticals. Although you cannot withdraw the principal before the lock-in period ends, you can still choose to withdraw the dividends. Nevertheless, in case you choose to not withdraw the investment, it will form a substantial corpus which you can later utilise to fulfil your financial goals and needs.  

Now that you have a fair idea of how you can save tax using mutual funds, and the benefits that they present to you, you can choose to make investments and start your financial journey. However, it is imperative that you always consider the opinions of your financial advisor before making any investment decisions. 

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Mistakes to Avoid to Grow your money through SIPs

May 12, 2022

One of the most common methods of growing your wealth is through a Systematic Investment Plan or SIP. As the name suggests, an SIP means saving small sums of money over a period of time, which ultimately results in you ending up with quite a large corpus. An SIP is one of the most convenient investment vehicles that lets you accumulate a considerable amount of wealth in the long run. 

In order to ensure that you make the most of your SIPs, and grow your wealth to its fullest potential, there are a few basic things that need to be taken care of. Let us discuss some of the common mistakes made by investors that you need to avoid to make the most out of your SIP. 

Do not set unrealistic goals 

One of the most important things to consider when making an investment decision is to set a goal. Having a definitive goal will give you clarity on several factors, like the tenure of your investment, the number of instalments you have to pay, the target amount, and the time it would take you to fulfil your goal.  

Having goals that cannot be monetized within the given time frame makes the goal unrealistic, which can harm your goals and lead you to make investment decisions that are not right for you. Setting a goal that is achievable and suitable for you according to your income and tenure will help you choose the right SIP. 

Increase your SIP investment amount 

It is always advisable to make investments in an SIP, or any investment, for that matter, based on your income. It is also important to increase your contributions as your income and surplus increase year on year. As you move ahead in your career, your income increases, which results in a better, more expensive lifestyle. Over the course of time, it is crucial to ensure that your investments also increase along with your expenses so you can maintain the same quality of life.  

Increasing your SIP contributions over time ensure that your corpus grows and you are able to derive the maximum benefit through compounding and reap the  maximum possible returns on your investment. 

SIPs & market fluctuations 

It is always advisable that you invest in equities in the long term. Equity funds perform the best when there is a long-term timeline along with a proper target amount. However, the market is meant to be volatile and market fluctuations are a part of the investment journey. You should never cancel your SIP during periods of market correction since it can have a negative effect on your investment. While planning your SIPs, you should have a somewhat flexible timeline that lets you accommodate for market fluctuations. During the ups and downs of the market, remain patient instead of cancelling your Systematic Investment Plan. 

Review your SIP performance 

Investing in an SIP is one of the first steps of your investment journey. Therefore, you need to monitor the investment from time to time, to ensure that your long-term goals are in sync with your SIP. 

It is important for you to review your SIPs to help you understand which of your mutual fund schemes have performed according to your expectations and which haven’t. If you find that one of your schemes has been underperforming for the last 18-24 months, you may choose to exit the scheme. 

Furthermore, if you monitor your SIPs periodically, you also get an idea of how to rebalance your portfolio depending on your asset allocation. 

Invest early 

You can invest in an SIP at any point in your life, but it is advisable to start investing as early as possible. Investing early ensures that you get the chance to accumulate a higher corpus, and have a high wealth ratio. Even if you have a lower contribution margin, provided you start early, you have the chance to maximise your returns through the power of compounding. The power of compounding ensures that your principal earns returns, and your returns earn returns. The earlier you invest, the more time you leave for your principal to compound. 

Have a disciplined approach 

When investing in an SIP, it is important to understand that you have to remain invested until the investment tenure is over. In case you choose to leave the SIP, you may not be able to fulfil your financial goals. Therefore, it is important to be disciplined when making contributions to the SIP. 

Before you start your investing in your SIP, you should decide on an amount that is feasible for you, after you meet your regular financial obligations. You can use an SIP calculator to estimate if an SIP will be able to fulfil your investment needs based on your budget, your risk tolerance and the tenure of your investment. It is important that your investment amount is not extremely high, leaving you enough room to navigate your regular expenses. 

Following these easy, but important steps ensures that you make the most out of your SIPs. However, always understand that these investments are subject to market risks, and you should always consult your financial advisor before making a financial decision. 

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How does determining your investment objective indicate your risk profile?

May 9, 2022

All investments carry with them a disclaimer that states that returns are subject to market risks. Investing in the market carries with it a certain element of risk, and you must understand these risks before you make any financial decision. While it is important to make investments to fulfil your financial goals, it is crucial that  you understand the risks to avoid any mistakes that may set you back. Your risk profile indicates the kind of investment vehicle you should choose, and your investment objective determines your risk tolerance.

Let us first understand what a risk profile is, followed by how your investment objective can determine the risk profile you’re a part of.

What is a risk profile?

A risk profile can be defined as your willingness or tolerance toward taking risks. Creating a risk profile is an imperative process towards determining the right investment asset allocation in your investment portfolio. It enables you to identify the acceptable amount of risk that you can endure. In this particular case, risk refers to your tolerance to market fluctuations and volatility.

If you’re looking for your principal investment amount to not decline, and are willing to let go of potential capital appreciation in this process, you have a low willingness to take on market risks, and hence have low risk tolerance. On the other hand, if you desire to make the highest possible earnings from capital appreciation, and are willing to take the chance that your principal investment amount may decline if a particular investment may not pan out, you have high risk tolerance.

Your ability to take risks is determined by reviewing your liabilities and assets. If you have more assets than liabilities, you can take more risk, and vice versa. However, your will to take on risks and your ability to sustain them might not always match up. For example, you may have a lot of assets, but are of a conservative nature, and showcase a low desire to take on risks. In this case, the ability and the willingness to take risks are different, which affects the portfolio construction procedure.

Now that we have a fair idea of what a risk profile is, let us understand the factors that determine your risk appetite.

Factors that dictate your risk appetite

Prior Experience: Just like you become better at a sport, or any other task with practice and experience, you gain more experience as you continue investing in the market. Your knowledge of investment products, market trends, your last portfolio, and its performance are all key factors that  are included in your past experience. These experiences make you a veteran investor and can impact your risk appetite.

Present Scenario: Your present age, financial liabilities, income sources, and engagement levels are key determinants of your risk tolerance. If you’re a young investor with no financial liabilities, you can have high risk tolerance. On the other hand, if you are a middle-aged man with a family, you’re unlikely to take heavy risks with hopes of high returns.

Investment objectives: The most important factor that determines your risk appetite is the reason why you started your investment journey and why you’re continuing the same.

How does determining your investment objective indicate your risk profile?

You can begin investing for a plethora of reasons, and every reason has a different mode of investment suitable for fulfilling the objective. From wanting to go on an international vacation, to buying a car, to a retirement plan, everything can be a reason to start investing. Depending on your investment objective, your risk profile can be indicated.

For instance, if you’re starting your investment journey to create a stable retirement plan, it is unlikely that you will undertake huge risks and be an aggressive investor. In this case, you would rather invest in funds that provide consistent market returns despite any fluctuations.

What are the types of risk profiles?

There are three broad brackets in which risk profiles can be categorised into. Based on this categorization, you can identify which profile you come under.

Conservative: A conservative risk profile indicates an investor with a low risk tolerance. If you’re a conservative investor, you will be inclined towards investment methods that are safe and protect your principal corpus. Returns on investments are secondary as long as your investments do not depreciate.

Moderate: If you’re a moderate risk taker, you tend to strike a balance between risk and reward. You would opt for a high returns scheme on an acceptable risk level, but you’d probably skip anything with extremely high risk elements.  

Aggressive: This particular risk profile showcases the most willingness towards withstanding market fluctuations, aiming at high returns on their investments. Usually, this profile constitutes veteran investors who are well versed with the market and investing intricacies. Moreover, these investors also have long-term plans, which is why they are okay with absorbing any short-term market fluctuations.

All being said, fixing your investment objective can help you analyse your risk profile better, and no matter what risk profile you consider yourself to be, you should always consult your financial advisor before making any financial decisions.

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Factors to consider while choosing a mutual fund

April 21, 2022

Money makes money, is an often quoted mantra and investors are willing to do just that, aiming to fulfil their personal financial goals. However, with the number of options available at hand when it comes to mutual funds, it is very important for us, as an investor, to understand the kind of investment we want to make, and the exact mutual fund we want to invest in.

Choosing the right mutual fund is a two-step process, and we need to carefully consider multiple factors before we lock in on an option. The two factors that matter the most are our appetite for risk and the reason we’re investing in a mutual fund. Even so, it isn’t a one size fits all solution and the same mutual fund scheme is not perfect for all investors.

Considerations before choosing a mutual fund category

Let’s take a look at some of the more crucial ones now:

Investment Objective: The first, and most important thing to consider before you choose a mutual fund category, is the reason for starting the investment in the first place. The investment can be either short or long-term, depending on our financial aspiration. It can be as short as going on a vacation, or as long as the time it takes for us to retire. The mutual fund category choice we make should depend on the goal we want to achieve with it.

Time Horizon: This is the amount of time we want to keep our money invested in the mutual fund scheme. Some funds invest in shorter-dated debt periods than others. If our investment period is more than 5 years, an equity fund is likely the best option for us. For shorter terms, the market can be extremely volatile, which can be more risky, but there is always the chance of higher earnings as well.

Risk Tolerance: Tolerance or risk appetite is the limit of risk that we are willing to take against the money that is invested in the mutual fund category of our choice. As of 2015, SEBI issued a mandate for all mutual funds to carry a riskometer that indicates the risk level of a fund scheme. There are five levels of risk, namely low, moderately low, moderate, moderately high, and high. It is always best to choose a mutual fund category whose risk category matches our risk tolerance.

Measures to look at when choosing a mutual fund scheme

Now that we have discussed the considerations before choosing a mutual fund category, we should also discuss some of the attributes to look at when choosing the best mutual fund scheme for our purpose:

Performance Against Benchmark: This is a comparison of a mutual fund scheme’s performance against a standard benchmark, which is usually chosen  by the mutual fund house. The investment philosophy of a mutual fund scheme can be said to be guided by its benchmark index. Asset allocations of the benchmark index should ideally be the same as the investment objective of the scheme. For example, the benchmark of a mutual fund with a banking index should be focused on banking stocks. Comparisions against this benchmark will usually reveal whether our fund itself is performing above or below expectations.

Performance Against Category: While choosing a mutual fund scheme, it is important for us to compare the performance of that fund against other mutual fund schemes in the same category. Doing this gives us a broad idea of the fund’s performance, and ensures that we have an understanding of the fund before investing. However, such comparisons should be done only across the same type of mutual fund schemes. For instance, a small-cap mutual fund should only be compared with other small-cap funds.

Performance Consistency: As already stated earlier, the market is a very volatile environment, and it is critical that we know if a fund performs consistently. Consistent returns are important to ensure that our money does not to go waste, and that we get returns during both market ups and downs.

Experience of the Fund Manager: As an investor, we should always be aware of the capabilities of the person who will be handling our finances. It is important to understand how well a mutual fund scheme is being managed by the fund manager.

Company Legacy: Mutual Fund investments should always be made in fund schemes that are brought to us by credible financial institutions. Not only does this remove any chances of fraudulent activities, but it also ensures that the fund is consistent, and that our investments are well researched. A poorly selected stock can cause losses, which is why it is imperative that we check the track record of the asset management company.

Ratio of Expenditure: While our finances are being managed under the mutual fund scheme, there are some charges that are billed to us directly. There are charges for administration, management, as well as promotions and distributions, all of which are expenses incurred during the running and maintainence of the fund, and are included in this figure. The higher the overhead expenditure, the lower our net returns from the mutual fund scheme.

Now that you know what to look for when choosing a mutual fund category or scheme, you should be able to make a more informed decision on your investments. There are a lot of other factors that can influence this decision and it’s outcomes and we always suggest that you consult your financial advisor before making any investment decisions.

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The different types of Mutual Funds

April 12, 2022

You may have heard of the term ‘Mutual Funds’ frequently over the last few years, but do you know exactly what they are? 

Mutual Funds are investment platforms that pool money from different investors, and provide these investors with returns on the collected corpus over a period of time. This accumulated money pool is invested into the equity market by investment professionals, who are known as portfolio managers or fund managers. Fund managers invest your money into various forms of securities, like stocks, gold, bonds and other similar assets, which have the potential to provide satisfactory returns. These returns are then shared amongst the investors proportionate to their investment in the mutual fund. 

While the crux of mutual fund investments is market returns, they can be classified into various segments, based on their investment goals, and other forms like structure and asset classes.

Classification on the basis of structure

Close-Ended Funds: Close ended funds are ones which are available for purchase only during an initial offer period. For the purpose of providing liquidity, these schemes are often listed for trade on the stock exchange. Close ended mutual funds need to be sold via the stock market at the prevailing price of the shares.

Open-Ended Funds: Open ended funds are those which can be purchased throughout the year. Open ended funds allow you to keep investing as long as you want, without any limits being imposed on the investment amount. Because of the active management these funds are subjected to, open ended funds charge a higher fee when compared to passively managed funds. Since they are not bound to a particular maturity date, open ended funds are the perfect choice if you are looking for liquidity.

Interval Funds: Interval funds are a combination of both open ended and close ended funds. These can be purchased at different time periods during the tenure of the fund. During this time, if you are a shareholder and wish to sell the shares, you can offload them to a fund management company that offers to repurchase the units from you.

Classification on the basis of asset class

Equity Funds: These are funds which provide high returns, but also come with high risk. Equity funds invest in company shares and are linked to the stock market, which is why returns may fluctuate.

Money Market Funds: Money Market funds invest in liquid instruments like Treasury Bills (T-Bills). They are moderately safe and good for you if you are looking to gain immediate returns. The risks associated with these kinds of funds are credit risks, reinvestment risks and interest risks.

Debt Funds: As implied by the name, Debt funds invest in company debt instruments like debentures, and other fixed income assets. They are safe investment platforms and deliver fixed returns.

Balanced or Hybrid Funds: These funds combine both equities and debts, however, the proportion invested in each varies between funds. Both the risk and returns are balanced out in a similar fashion. Investments are done in a mix of different asset classes.

Classification on the basis of investment goals

Income Funds: These funds are primarily used to invest in instruments providing a fixed income. The main motive of income funds is to provide you with a regular stream of income. 

Growth Funds: Growth Funds primarily invest in the equity market with the aim of gaining revenue from capital appreciation. These are subject to market risks, and are beneficial if you are looking to make high returns on your investments.

Liquid Funds: These are very short term investments that provide you with high liquidity. While they are low risk investments, the returns from liquid funds are moderate, and good for you if you have short timelines.

Capital Protection Funds: Capital protection funds are invested in a split between equity markets and income instruments with a fixed return. The motive of making the split investment is to protect the principal amount invested by you. 

Tax-Saving Funds: With high risk and high returns, these funds primarily invest the capital in equity shares, which qualify for deductions under the Income Tax Act.

Pension Funds: These funds have the aim of providing you with regular returns on your retirement after a long investment period. While they are mostly hybrid funds, they have low but stable future returns.

Fixed Maturity Funds: These funds invest in the debt market instruments which have a similar maturity period as the fund. 

While it is definitely beneficial to be aware of the forms of mutual funds and align these with your financial goals, you should also know about the risks associated with each and consult your financial advisor before making any financial decisions.

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