Mutual `fund'as

The eternal conflict between protection of capital and a decent return has escalated. Bank deposits offer safety, but the interest they fetch has been heading southwards. Stock market is an option with greater potential for returns, but the faint-hearted and the uninitiated had better stay away. You cannot play ducks and drakes with your life's savings in the volatile stock market.

The new mantra on everyone's lips is the mutual fund. It is touted as the best instrument available to the retail investor for preventing capital erosion. These investments are safe like bank deposits, they claim, and offer returns like stocks. What more can an investor ask for?

How far is this route better than the other avenues open to him? Is it really the panacea that the hapless small saver has been looking for? Well, yes and no. It depends on the fund you pick. The `right' mutual fund will pay off; put your money in the `wrong' fund and your plans might come unstuck.

All funds carry some level of risk. Let us look at some of the points you have to bear in mind to minimise the risk.

Your appetite for risk is important while selecting your fund. Think about your long-term investment strategies. Select funds with risk-profiles matching your comfort level and in tandem with your financial goals.

The prospectus of the fund outlines its investment strategy and the risk it will expose you to. That a fund invests only in gilt-edged securities, or Government or corporate bonds does not mean that the risk is not significant.

If you are totally averse to risk, opt for pure debt schemes with little or no risk. Balanced schemes, which invest in the equity and debt markets are for those who prefer the middle of the road. Growth and pure equity plans give greater returns but their risk is higher. There are high return schemes, but they are definitely oriented towards certain specific sectors and hence susceptible to crashes in case of adversity in the industry.

Concentration of risk has to be avoided at all cost. A diversified and balanced portfolio ensures an acceptable level of risk. Examine how your interest in the fund you choose affects the overall diversification of your investment portfolio.

"Past performance is not an indicator of the future," says the disclaimer clause without which offer documents are not complete. True, but it does throw some light on the investment philosophies of the fund and the kind of returns it has offered to the investor over a period of time. See if there is consistency in the two-year and one-year returns.

It is obvious that a fund with high costs has to work harder than a low-cost fund to generate the same returns for you. Even small variations in fees can translate into large differences in returns over time.

Do not choose a fund simply because its price has zoomed. How little a fund falls in a bad market is the true test of the quality of a portfolio.

The last but not the least, it makes no sense to enter and exit a fund with each turn of the market; you should have patience. Nevertheless, it makes little sense to hold on to a fund that under-performs year after year.


Illustration: Manoj

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