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Foundations

Mutual Fund FAQs

Mutual Funds can invest in the stock market, govt bonds or tax bonds or anywhere else. So do we, the investors, have any control over it?

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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