Pankaj, my friend just realized that he had been facing some financial instability. Not that he was not able to manage his funds well but was just too unsure whether he had a good portfolio of investments or not. Just like Pankaj, today the common man not just looks for growth of his investment but also safety of his fund. In such a scenario investing in mutual funds is still regarded as unsafe bet. If you feel yourself stuck in a situation like this then definitely the article below will help you with some understanding.

It has been seen in the recent past that Mutual funds have been in the top most rung as regards to investment tools. Thanks to the much needed hype by the mutual fund agencies by its immense advertising and publicity gone for it. Very few people realize that inside of all the rosy look there lies a dark picture of mutual funds which is hidden. There are few mutual fund myths which if not carefully taken into consideration can lead to serious trouble

In this article, we debunk 5 popular mutual fund myths.

1. Funds with more stars/higher rankings make better buys

Often people fall prey of the rating of the mutual fund and blindly invest in the same. People must understand that these ranking are done on the basis of past performance which does not take into consideration the future market conditions. Moreover these ranking keep on changing with time according to the performance of various funds. Ranking does not specify the kind of investor it will benefit. Different investors look for different kind of gains.

TIP- One must not blindly look at the ranking and rating but should conduct his own research as the financial goal for each investor may be different and ranking may not have been done taking in mind the individual financial goal.

2. Once the fund makes a grade, so do all its funds of same fund house

It is not always true that a good fund house may have all good funds. Many investors often make this mistake of judging a fund because of its fund house reputation. It’s quite a possibility that one fund in a particular fund house may perform exceptionally well and on the other hand another fund may not perform well. It is true that negligence of the fund house towards a particular fund may lead to its performance but it is not correct to say that all funds in a particular fund house will be equally good.

TIP-It is good to review the fund house but along with this it is equally important to access the performance of the fund separately.

3. Equity funds also invest a high %age in debt

Many mutual fund state that their strategy is to invest up to a certain percentage of the funds in debt so as make use of the assets and generate growth by use of both equity funds as well as debt funds. Unfortunately the reality is that the equity fund basically invests most of their assets in equity market and very little in debt funds. In such a scenario investors whose main aim is to invest was to get maximum revenue due to asset allocation are misguided.

TIP-If you are looking to generate revenue by making use of asset allocation the its advisable to invest in balanced funds or hybrid funds.

4. A fund invests in the same stocks as its benchmark index

Many investors are under a preconceived notion that mutual fund operates under a specific index. This may be true but only in the case of an index fund. In all other case it is under the will of the fund manager. Hence in other cases it becomes difficult for the investor to benchmark the performance. In case of an index fund it is easy for the investor to find out the size of the fund and its performance.

TIP-It is wrong to assume that the fund will always invest in one kind of fund from time to time. This is just possible in case of the index fund and all other funds have the desecration of the fund manager.

5. Dividend option is better than Growth Option

Due to lack of understanding and wrong information many investors believe that investing in dividend option of a mutual fund is better as it yields more returns in the form of dividends. It is mostly concluded the dividend option is better than the growth option as it keeps you happy when money comes home after every few months in the form of dividends. But you must take this into consideration that your mutual fund NAV is reduced by the similar amount once you get dividend. And you won’t be able to take the best possible advantage of power of compounding which is considered as the eighth wonder of the world.

TIP: Dividend option may not always prove to be beneficial .In fact the investor must value his goals and liquidity while deciding on growth or dividend option.

This article is written by Mr. Mayank Gupta who runs a personal finance blog Ninemilliondollars.com where you can find articles on tax saving options and provides financial planning services

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Mutual funds are a popular way of investing in the stock market. For people who do not understand the basics of the stock market, it seems mutual funds are a good way of getting a piece of the stock market pie. They feel that it is best to leave their money in the hands of a professional, namely, the fund manager to handle it, which should then obviously yield good returns. However, it is not as simple as that. Before you decide which mutual fund to invest in, it is important to understand the basics of a good mutual fund portfolio.

There is no doubt that investors are looking to strike the right balance between safety and aggression. They want to maximise their returns without taking on too much risk. Before you invest in a mutual fund it is important to answer the following questions:

1. What are your investment needs? Depending on what stage of life you are at right now, your investment needs might be different. Also factors like current income, expenses, commitments, debt liabilities will also affect your need for flow of money. Either you would be saving money to buy a house or to give your children a world class education or just looking at a comfortable retired life. You will also need to analyse how much risk you are willing to take and whether you are looking at returns in the short term or long term. Depending on this you can choose the mutual fund that is right for you.
2. Choose the right mutual fund. After you have identified your needs, you can look at the offer document of the company and see if it matches your needs. Also you should look at other funds managed by the same manager and see how successful have they been. Also look at factors like consistent performance, risk adjusted returns, total returns and protection of capital. Each of these factors is very important and has its significance for different categories of funds
3. Balance the mutual funds in your portfolio. Different mutual funds have different objectives and serve different purposes, so it is important to carefully select the right mix of funds to suit your needs. Your portfolio should be a balance of debt and equity mutual funds. A minimum exposure of 65 % to equity is a good combination. Further, you can enjoy the tax benefit of an equity scheme by investing in a balanced fund. You don’t want overlap, and also probably do want things that don’t correlate. For example, gold funds are considered an inflation hedge. While they typically move in sync with oil- and energy-sector funds, they tend to move in the opposite direction of the U.S. dollar.
4. Portfolio diversification. The mutual funds should provide a diversification across different asset classes, sectors and even geographical boundaries. A diversified portfolio has lower risk associated with it, rather than a sector specific one. Also historically, the biggest gainers are from the multi-cap and mid & small-cap categories. The simple reason for this is the higher allocation to mid and small-cap stocks, which see a sharper rise (or fall) in rising (or falling) markets. Just to cite an example of best performing mutual funds in small and mid cap section in 2011:
   

   	Returns (%)
   Name of mutual fund	6 months	1 year	3 years
   Birla Sun Life MNC Fund (G)	-5.6	-5.6	37.1
   HDFC Mid Cap Opportunities (G)	-7.3	-9.9	36.7
   IDFC Premier Equity – A (G)	-4.6	-10.1	37.8

5. Take advantage of market fluctuations. To do so would require investing in the market regularly. When the price is high, then investing the same amount of money would get you lesser units. So when you buy again when the market falls you average your price of units, thus increasing your return.

Therefore depending on an individual’s risk taking ability and investment term, his mutual fund portfolio should look like this:

Ultimately, an investor can build a winning portfolio with no more than six funds covering large and small stocks, bonds and money-markets. Sector funds and other issues can be used to invest in areas the investor prefers, without creating massive overlap with the core holdings.

A portfolio that’s a little more complicated is fine, but going much further — with closer to 20 funds than a half-dozen would make the portfolio extremely difficult to handle. The funds should be able to work together to maximize returns and not fight with each other.

This article is written by Mr. Mayank Gupta who blogs at www.ninemilliondollars.com where you can find articles on tax saving options and on mutual fund investments

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My view was – Eradication of entry load would actually mean lesser investment in mutual funds by non-savvy investor and so it is not at all a wise decision.

Do you still think no entry load was the right way forward at that time?

Similar phenomenon is also occurring to ELSS Funds through New Direct Tax Code. I know quite a few of my friends and colleagues who invested in ELSS fund with as little as 10,000 to complete 100,000 tax saving option under 80C now have a portfolio of few lakhs in mutual funds. Removing ELSS option would actually mean such investors will not be able to judge the kind of returns mutual funds can actually give and so will never think about investing in equity market.

Share your opinion in comments below.

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So let’s begin.

1. Independent websites – There are many independent websites that offer online investing services for many mutual fund AMCs. FundsIndia.com is one such good website I have heard about but I don’t have any personal experience investing through them.

2. Mutual Fund Websites – You can invest in mutual funds through each mutual fund’s website as well but I personally never prefer doing that because I don’t prefer registering with each mutual fund separately.

3. Using your online broker interface – Online stock broking sites like icicidirect.com, sharekhan.com … etc. offer online services for investment in mutual funds. I personally use both the above websites and so I will create very detailed steps to investing in mutual funds with them.

ICICIDirect

Numbers in the image represent the step. Click on Image to enlarge.

Step 1: Click on Trade & Invest
Step 2: Select Mutual Funds
Step 3: Click Purchase
Step 4, 5: Select Fund house from the list of AMC’s and select the fund category.
Step 6: Click go and you will see list of Funds for the selected AMC.

Select the fund you want to invest into and Click on purchase. You will see the screen as shown below where you can enter the amount you want to invest and then proceed to confirmation screen to confirm your order.

ShareKhan

Step 1: Click Mutual Funds
Step 2: Click Place Order
Step 3, 4: Select Fund house and select the fund type from the drop down box.
Step 5: Click filter to see the list of funds from your selection criteria
Step 6, 7: Select the fund of your choice and hit the buy button

Enter the amount you want to invest along with your trading password to place your order. Remember once you Click place Order button you will see a confirmation screen where you should confirm your order.

Final Conclusion

I prefer using Sharekhan because they have no fees for placing a mutual fund order online but ICICIDirect do charge a nominal fee for placing an order through their website.

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Let us begin.

How ETF’s differ from Stock?

Exchange Traded funds are a lot different from stocks because they are more like fund and less like stock from an asset allocation perspective. Let us take a simple example. If you purchase a stock you buy into a single company but with fund you actually don’t buy one company shares but diversify the amount into the asset of various companies included in the fund.

Similarly in exchange traded funds you don’t invest in a single company but mainly into a group of companies. Of course there are some exception to the commodity ETF’s like Gold ETF’s where you invest only in Gold as a commodity.

How ETF’s are different from Mutual Funds and Index Funds?

Mutual fund NAV’s are updated once daily at the end of the day and so you cannot trade in mutual funds. By trade I mean buy and sell on the same day or may be in a day or two. ETF’s are traded in exchange like stocks and so you can buy any ETF and square off your position almost like a stock on the same day or in few days.

Again for buying mutual funds you need to be KYC Complaint but stocks and ETF can be bought and sold directly on the exchange from your trading account with your stockbroker during trading hours.

Final Thoughts

ETF’s in Indian market are still very new and so we don’t have many ETF’s to choose from. According to me this is one of the biggest disadvantage because you don’t have ETF’s for even major sectors of Indian market.

Over to you

If you have more questions, post them in comments below and I will be more than happy to answer them all.

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So you can always ask your broker’s to get you forms and submit them for your KYC but as there are no mutual funds fees they may not be very helpful at times and so it is better you also know how you can get your KYC done yourself. The process is really very simple.

1. Get the Form

The KYC application form is available at the investor service centres of the Fund and CAMS or at any designated ‘Points of Service’ (POS) of CDSL Ventures Ltd. or can be downloaded from your broker, Advisor or AMC. I have uploaded them here for you to download. (KYC Form Individual / KYC Form-Non-Individual).

2. Documents

Documents required to be submitted along with the KYC application form are:

1. A recent passport size photograph
2. PAN card copy
3. Address proof (Recent bank statement will work but if you have get your bank statement in email you need to visit your bank branch to get an original one.)

Once you have the documents ready submit at CAMS Online office in your city. You can find the address of your CAMS Office here or here or here. Make sure you carry the originals along with a xerox copy of the documents because at times they want to check with the originals.

3. Verification

After verification of the KYC application form and accompanying documents, investors will receive a letter certifying their KYC compliance. They normally give you the letter in few hours to a max of 24 hours and there is no charge for this verification.

You can verify your KYC status online here. The day you submit your form your status should be processing and once it is processed your status should become VERIFIED.

Actually KYC need not be done at your broker’s end but some online system does not accept order if they don’t have the data in their own system and so it is better to get that done as well. Once you have the letter you can send that letter’s copy to your broker to update. For ShareKhan you have to Fax the verification letter to 022-24982626 (Details here).

I hope this helps my fellow investors. Share your feedback in comments below.

No related posts.

One thing I don’t find here (understand) is “how should I distribute money”.

Lets say for ex, I select 1 equity and 1 debt and 1 balanced fund and I am looking for higher returns then how should I invest?

Before I answer this question let me first drop a line about what is an Equity fund, Debt Fund and Balanced fund.

Equity Funds:

Equity funds invest a majority of their funds in equities (More than 80%) and a small portion in money market instruments. Such schemes have the potential to deliver superior returns, however, because they invest in equities, these schemes are exposed to fluctuations in value especially in the short term.

Debt Funds:

Funds that invest in corporate debentures, bonds and in money market instruments. Although these funds are less volatile, they carry a credit risk. They are known as Liquid Funds / Liquid Plus funds.

Balanced Funds:

Balance funds invest in equity and debt instruments in varying proportions pre-defined by fund manager at the time of inception of the fund.

Now the question – what should be ideal investment and distribution of money. The answer lies in your risk profile. I have all my investment in only equity funds and at times I transfer everything into one single fund as well. I prefer dead money in my bank account than to put in the debt and liquid funds.

Ideally I recommend you to start the way I suggested here if you have a low risk profile but if you can risk a bit more it should be more equity investment.

I hope it helps but do remember that my advice will always be biased towards equity investment and you should take the final decision based on your risk profile.

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1. Best Infrastructure Funds
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5. Best Midcap Funds

Do let me know in comments below what other best categorization of mutual funds you will love to read and I will be more than happy to compile it for you?

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I don’t think so.

You may ask Why? And even argue that – I do not pay anything for buying mutual funds which means that I am benefiting a lot. May sound true but … let us see if it actually benefiting common man or not.

Normally I do not visit my bank but last week I happen to visit my bank aka HDFCBank and as I entered I saw one big change. I saw that May I help You desk was used to be full of mutual fund forms and now they are all insurance forms. This is something expected. You showcase products that make you profit but then … As expected like every person visiting the branch I was also asked to do some investment. I thought let me see what they offer me and you will be astonished to know that when I talked about mutual funds the sales person told that mutual funds do not perform well these days. I asked about HDFC’s best performing funds (I am in HDFC Bank remember) and they quoted me that these fund performances are of past and it is written on the mutual fund reports that they may not be maintained in future.

Now I wanted to investigate if this is a one of case or is a common practice and I found that it is a common practice especially by banks to do mis-selling.

Now let us say any common man with very little knowledge about mutual funds wants to invest small amount i.e in range of 10,000 to 25,000. He visits his bank. Now bank representative will make sure he does not invest in mutual funds but goes for insurance which according to me is the worst possible investment option.

Do you still think SEBI’s decision to abolish mutual fund entry load is benefiting common man? Share your views in comments below.

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1. DSPBR Midcap Fund – By far the best mid cap for quite sometime now and I plan to move out of Birla Midcap fund to move into this fund. In fact in the middle of this post I placed the order in ICICIDirect.com to move out of the Birla Midcap Fund and would wait for the right time to get into DSPBR Midcap Fund.
2. Fidelity Equity – Fidelity Equity Fund has been a great performer for me and I am planning to add more to this fund when the market corrects. I think large cap funds will not show the same kind of performance as small and midcap funds in the future and so I plan to add very little position to the large cap funds.
3. Canara Robeco Infrastructure Fund – I think with the kind of result BHEL has come up with Infrastructure funds would outperform the market and so adding position in Infrastructure fund would be better option and who other than one of the best Infrastructure fund.
4. Sundaram BNP Paribas Select Small Cap Fund – I have not invested in small cap funds for quite sometime and the reason I did not do that is because I was sure that when market moved out of recession fears large cap funds would perform better than mid and small cap funds but as we are heading towards the 5500 Nifty there may be a period where large cap funds do not perform as good as mid and small cap funds and so this time I have more plans to add more position to the small cap fund.

Have you visited your portfolio to create a new list of funds for future? If no it is the time to do so and if you have some list of funds in mind share them in comments below. We would love to see your list.

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We can clearly see that Sensex and Nifty are in a very broad range for quite some time now especially in whole of 2010.

Now let us look at the chart of Midcap Index over last 1 year.

We can clearly see that there has been lot of activity in the Midcap segment of the market over the same period of time.

So it would be a good idea to have the list of best midcap funds that have performed well in the last one year.

Before I share the list of funds a line of thought about Midcap Funds.

Funds that invest in small to medium size companies are termed as Mid Cap Equity Funds but there is no standard definition for classifying a company as small or medium sized but as a general guidelines which is followed is market capitalization of up to Rs 500 crore are classified as small and between Rs 500 crore and Rs 1,000 crore are classified as medium sized.

Now using the above guidelines each mid cap fund manager invests in a different set of companies and so performance of Mid-Cap funds can vary considerably. So let me list the best performing Midcap Funds for last 1 year.

Small and medium sized companies have higher beta. This actually means that they move more than ever reliable big companies on either side up or down. So instead of getting into those funds right now it may be the right time to keep an eye on performing funds and accumulate them in declines.

Disclosure

I have investment in 2 of the oldest Midcap Fund aka Birla Sun Life Mid Cap and Sundaram BNP Paribas Select Midcap for quite some time now.

Over to you

Share your preferred Midcap Funds in comments below.

Data by ValueResearchOnline, Charts by Yahoo Finance

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So today I would like to ask you which one works for you and what is the main reason for it to work?

If you are Voting for Either there is no harm in it but it actually mean that you should start tracking your investment more closely from today.

My Answer is Mutual Funds and the main reason why mutual funds work for me is because I am at times too busy on my Other Websites and blogs and so could not work or track on my investments.

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First let me explain the concept of mutual fund in a very simple possible language.

Mutual fund is a pool of money contributed to by investors of various type and sizes. There will be a fund manager hired to invest this accumulated cash with a goal of this fund manager is to maximize return with minimalistic risks. To do this funds are primarily composed of variety of stocks but depending on the type of fund it may also include debt and other fixed income part to maximize return with minimize risks.

Mutual funds have an edge over stocks for majority of investors and so it is important to understand the advantage mutual fund have over direct investment in stock.

1. Less Volatile – Mutual funds by its nature is bound to be less volatile because it is not an investment into a single company or management. This actually means that mutual funds do not have sharp movement on either side (Up or Down) like movement in any individual stock or sector.
2. Diversification – Experienced investors will agree that keeping all egg in one basket is never a good option and if you can you should diversify your income potential. In mutual funds as you are not investing in any particular stock or company. Sharp movement of a volatile stock is counter balanced by other stock giving you low beta movement of your investments.
3. Tax Benefits – It becomes difficult to remain invested in one particular stock for a period of one year and more and so for gains made on returns, you need to pay capital gain tax. But for mutual funds remaining invested for one year is fairly simple and so you can save on your capital gain tax. After New Direct Tax Code this will change.
4. ELSS Funds – You have equity linked ELSS funds where you can save tax and still get the advantages of investing in equity market but you have nothing for investing in stocks and yet save tax.
5. Managed by experts – Funds are managed by fund managers with years of experience and so they have higher chances of selecting the right stock at the right time and at the right price which may not be possible for every one of us.
6. Systematic Investments – One of the biggest advantages of investing in Mutual Funds is, you have an option to invest small amounts over an elongated period of time. Check out the Benefits of SIP or systematic investment plan.

Mutual funds are not all glittering gold and they also come with disadvantages

1. No trading possible – If you are not only an investor but also looking for some trading activity mutual funds is not for you.
2. Fees of Fund Managers – Fund managers with years of experience come at a price and knowingly or unknowingly you are paying the price from your returns.

Over to you

Share your views and opinion in comments below.

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1. The first and the most important aspect of selection is you should not only know but understand the types of mutual funds available at your disposal.

Check out – Types of Mutual Funds

2. Once you understand the type of mutual funds you should understand that not all the funds in the same type of industry perform the same and you should select the best performing funds among the type of funds you want to invest into.

Let us say that you want to invest in a debt fund. You should know the best performing debt funds you can invest into to gain the maximum return for your investment.

See my Best Performing Mutual Funds

3. Now you have the list of best performing funds from the type of funds you want to invest in. The nest thing you should understand is, Is it systematic investment the right decision for you or a one time investment can help you more.

I always prefer Systematic Investment Plan

4. Once you have done all the homework the last thing you should understand is what investment option is best for your need – Growth or Dividend? I have discussed with very minute details and with very simple examples.

Which Is Right for You Growth or Dividend?

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Just to sum up the report, ICICI recommends

1. Canara Robeco Infrastructure Fund
2. Reliance Diversified Power Sector Fund
3. ICICI Prudential Infrastructure Fund

My Personal Favourite has always been Canara Robeco Infrastructure Fund and you can read why I rate Canara Robeco Infrastructure Fund as one among the Best Infrastructure Fund.

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