Top 9 questions answered about mutual funds

Mutual funds can be an excellent approach for young investors to experience market volatility while also seeking capital appreciation. Mutual funds are classified based on their distinct qualities, such as the objective, risk profile, and benchmark. This way, mutual funds can accommodate investors with various investment objectives and provide nearly everyone with a unique investing strategy. Below are the top nine questions frequently asked by the new investors as well as the existing investors:

1.    Investing in mutual funds has a lot of benefits? How can one back it up?

In India, mutual funds are one of the most acceptable ways to save money and build wealth. Simple investments in mutual funds have spawned a slew of “lakhpatis” and “crorepatis.” Additionally, investors that make systematic Additionally, investors that make Systematic Investments, such as allocating a portion of their salary each month and investing it, get a higher return.

Sebi has the investor’s best interests in mind and has done an excellent job of regulating this area. It is up to the investor to determine if he wants to redeem his money at any point in time or do it all in one go using a systematic withdrawal plan. Investors are constantly aware of the value of their investments.

Because of these advantages, investing in mutual funds is a safe, simple, and effective way to build money. Lastly, and perhaps most importantly, the investor is putting his money in the hands of one of the country’s most experienced fund managers for a little fee in exchange for the promise of steady returns.

2.    What factors should an investor consider when deciding whether to invest in equity or debt funds?

Your time horizon, risk appetite, and the desire to optimise your investment so that you achieve the best risk-adjusted return are all factors to consider. If you have a low-risk appetite, you should put more money into debt funds. Be mindful that this does not imply zero risk but rather a smaller risk than that of equity.

Also, if an investor needs money in the next year or two, he is better off investing in debt schemes. Also, equities markets have ups and downs, and there will be instances when the equity market underperforms, necessitating the use of debt funds to offset the equity fund investment.

3.    Is there a set amount of mutual fund schemes in which one should invest?

While there is no perfect number, one should avoid investing in too many funds under the misguided idea that diversification is achieved. Diversification does not mean investing in a variety of funds. A typical equity fund has around 50 equities and is divided into four categories: large-cap funds, diversified funds, mid and small-cap funds, and thematic/sectoral funds.

A normal investor should make sure he has enough exposure to the first three categories (the thematic/sectoral category is for investors willing to take a more significant risk and handle their investments more dynamically). In the same way, there are three types of debt funds: liquid and ultra-short-term funds, income funds, and duration funds.

Again, an investor’s urgent liquidity needs should be allocated to liquid and ultra-liquid funds. Income funds should be used for intermediate requirements of 1-3 years, and if the investor wants to bet on the direction of interest rates, he should choose a duration fund.

4. What are the best criteria for selecting a mutual fund scheme?

Examine a few factors, such as the fund’s track record – the longer, the better – and, more crucially, look for consistency in returns rather than sudden spikes. Check to verify if the fund is sticking to its mission. The worst-case scenario is a mid-cap fund investing in large-cap stocks and vice versa, demonstrating a lack of confidence and a robust procedure within the fund house.

5. How do ETFs fits into an investor’s portfolio?

ETFs are already popular among institutional investors, but they are progressively gaining traction among regular investors because of their transparency and cheaper costs. Exchange-traded funds (ETFs) are mutual funds traded on the stock market, like stocks and shares of publicly traded corporations. Exchange-traded funds, or ETFs, often track an underlying index as their benchmarks, such as gold, PSU banks, Sensex, or Nifty.

The fund manager’s job is to acquire and sell equities in accordance with the performance of the underlying index with the least amount of tracking error possible. Exchange-traded funds (ETFs) seek to replicate the index they follow, and because they require no involvement from the fund manager, they are termed passively managed funds.

One advantage of ETFs is that individuals with no prior knowledge can purchase them. This is because investors considering ETFs do not need to conduct significant research or have in-depth knowledge of the industry or stock market. It’s also easier to track your ETF performance because the fund tracks its underlying benchmark.

6. Are classifications such as large-cap, mid-cap, and small-cap significant from an investor’s perspective, given that they all want to create wealth?

They are certainly significant, as investing in mid-and small-cap stocks is more likely to produce long-term wealth than investing in large-cap stocks. Mid- and small-cap stocks have generated tremendous wealth and posted much greater returns than large-cap stocks in the past, as seen by historical performance statistics. As a result, an investor must be aware of this and allocate his portfolio correctly.

The reason for this is simple: large-cap stocks are well-tracked and limited in number, so the possibility of generating alpha is limited; however, mid-and small-cap stocks have yet to be identified by the investing community at large, so the potential for generating alpha is much higher if a fund manager can identify an emerging stock or sector.

7. SIPs have become a popular option to invest in mutual funds, but isn’t their flexibility a source of confusion?

SIPs are a very disciplined and profitable investing technique because they provide rupee cost averaging while not putting a strain on the investor’s wallet. Because it includes some type of “smart” averaging, variations around SIPs are a desirable feature. It works both ways when it comes to flexibility. It provides reassurance to a client, but it is the investor’s responsibility to keep on course. This is where a Financial Advisor’s position is critical since he holds the client’s hand when things get tough.

8. How can the CAS be used to analyse fund performance?

Consolidated Account Statement (CAS) provides a holistic view of one’s entire portfolio. It is not a goal in and of itself, but it allows clients to rebalance their portfolios regularly if their asset allocation becomes skewed. It also aids him in eliminating slackers from his portfolio and replacing them with more qualified funds.

It is unquestionably a valuable tool for taking a comprehensive look at a portfolio. While it is true that many retail investors do not know how to analyse their investments, this emphasises the need for and importance of a financial advisor in guiding the retail investor in making appropriate investments, as well as constantly monitoring fund performance and making course corrections as needed, in addition to periodic rebalancing and other services.

9. Which is better: direct stock investing or mutual fund equity investing?

Investors with sufficient knowledge of the stock market, the ability and appetite to take risks, and the willingness to invest for the long term might benefit from investing in equity markets. On the other hand, most retail investors lack the knowledge and time to research and educate themselves on the intricacies of the stock market. In this situation, it is preferable to put your hard-earned money in the hands of a professional fund manager by investing in Mutual Funds.