Click to play videoParomita Chatterjee: Hello and welcome to mutual fundas, special on IBN-Money, where we try and solve all your queries on mutual funds. We have got with us a very special guest, everybody familiar with in the mutual fund world, Dhirendra Kumar, CEO, valueresearchonline.com. He is here to understand all the investment options, which are there before us. In fact, mutual funds have become huge market, they have seen huge amount of growth and Indian investors like you and me have been shifting to mutual funds in a big way.
According to RBI report household savings in mutual funds are estimated a little over Rs 21,000 crore. In pure percentage term, that is 1200 per cent jump just in one year. However, it is a small portion of the total pie of household savings. Bank deposits still account for almost half, about 47 per cent. Mutual funds just account for 3.6 per cent – so there is a huge potential for growth, small savings account for a little over 12 per cent and insurance at 13.5 per cent.
So, mutual funds, they are definitely very hot, they have seen a huge growth and there are still more capacities for it to grow. “Not very much on share market, but they concentrate more on mutual funds or fixed deposits,” says Amitabh Bachchan, endorsing the fact. Amitabh Bachchan there keeping it short and simple saying, look, I invest in mutual funds and bank fixed deposits, those are the two vehicles for investments.
Today of course, we are here to talk about MFs. So, lets start with the most basic question.
Dhirendra, we heard it of Amitabh Bachchan. He loves MFs, all of us in fact actually. We have been getting thousands of queries. Tell us in one clear cut answer, why are MFs so hot? Why is everybody jumping on to it? What are the advantages of putting your money in MFs?
Dhirendra Kumar: Simple and convenient vehicle to save. Because, everywhere else your choice is difficult. Here is something, which democratises investments. With Rs 500 you can participate in equity, no other way you can do that. You can take your money back in 48 hours. And your friendly neighbourhood and the guy actually come and help you do everything.
Paromita Chatterjee: So, that’s convenience, the guy comes to your doorstep.
Dhirendra Kumar: Yes, diversification, that is the core of it. You don’t have to make choices when it comes to equity. In India, you cannot buy a bond, but you can write a cheque and invest into bond funds. So making available something which otherwise is not available. For buying stock, go to a stock broker, open a demat account, give your PAN number. Here, fill a form; write a cheque and end of the story.
Paromita Chatterjee: Let’s bring in the next question on the show. We went out to the viewers to the street to ask them questions, and we got the next question coming in from Delhi.
Query: fixed deposits are getting eight per cent of interest as well as benefits. So, is it beneficial? You deposit in FDs or MFs?
Ans: It’s the way of looking at it. If you are seeking guaranteed return, don’t come to MF. MFs don’t give you guarantees. You are likely to get superior returns with equity. And the key is you get the return from equity fund over time and it could be failure a take. The moment you invest your money, it cam go down in value. I think over a period of time, you will be much better of with equity fund. But if you are securing guaranteed return, don’t even come to a bond fund, because even a bond fund can go down in value. If interest rates go up you can lose value even in bond fund.
Tips: You are getting 8 per cent from FD. However, in MF, you probably get much more, but there is no guarantees and some risk element is there.
Paromita Chatterjee: If you have decided that you are going to MFs, how should one get started? When you have a MF agent comes to you he throws terms to you, growth, income, tax savings which one you want to go in for. Explain to us these categories.
Ans: Forget about the category, the starting point of most investors should be his objective. And broadly, most investors have two objectives, either you depend on your investment for your income, that you are a retired person or for any reason you want to put some money and you want a periodic outflow, whether it could be annually, quarterly or monthly, but you depend on that income. That is a need, which can be fulfilled by variety of funds, which are fairly conservative. The other way, you have savings - you don’t know when do you need it. You need it sometime in future - you don’t have a consumption or income requirement from that investment. That all could be your growth investment, for that you need to choose a equity fund, rest of it, you should be choosing conservative fund, MIP which has very small equity component or a bond fund and that’s about it. It can be kept these simple ways.
Paromita Chatterjee: Entry and exit load. What are these? Are these like hidden points that every MFs have an entry load. When I go and enter into, do I have to pay certain percentages costs?
Ans: Yes, it is almost like a toll tax, you go on to a bridge, you pay for it – so MFs charge you. Most equity funds today charge 2.25 per cent as entry load. Most bond funds in India, even cash funds in India, in which you invest for few days, they do not charge any load. This 2.25 per cent, the entry load on equity is like if you buy a fund the NEV is Rs 10, you pay Rs 10 and 22.5 paisa more, which will not go to worth. That is the money, which will go towards expenses paying for the person who have sold you the fund. So 22.5 paisa is not invested, that is your entry load. Exit load is of a different kind. In India, the convention is that every fund company charge a load, which act more as a deterrent because equity fund is a long-term vehicle.
Paromita Chatterjee: So basically an exit load is to stop somebody from getting out of the fund too soon. Is there any minimum time frame?
Ans: Yes, it could be minimum of six months to one year to two years. And it actually get reduced, if you get out in six months, they will charge you 2 per cent and it incrementally get reduced as your horizon goes up.
Paromita Chatterjee: So if I invested in a fund for more than two years that means I need not necessarily pay the exit load?
Ans: No, then you may not have to. Every fund works in different way. Exit load is a very desirable kind of load for a long-term investor, because what it is saying that, if you go away too soon, we will charge you. And that will benefit the long-term investor of the fund. So, if you are thinking short-term with an equity fund, ideally you should not invest, it could be disadvantageous for you. But many a time you just feel happy that my money has gone up rapidly and so I want to feel happy and celebrate and consume and then you may not mind pay the tax.
Paromita Chatterjee: You have two funds, which are pretty much look the same, both are offering equity schemes, is it just a question that, which brand you prefer over the other? Is it just question of branding? How do I pick and choose the right fund?
Ans: There could be difference in underlying portfolio. As a starter, I would not invest in a new fund. I will not invest in a fund with brief history say four-month old fund. I will not invest in a sector fund. I will not invest in anything that sounds exotic, too good to be true and without a history. I will go for two-three credible things – one is a credible history, how the fund has done in a falling market. How did the fund participate in a rising market? I think, these three things and how long the fund managers are around. Four things and I get a clear roadmap.
Paromita Chatterjee: I think these are very important parameters that you have given to us, that will be of a great help. I am talking about tracking of funds, especially when we have seen the Sensex skyrocketing, going to 12,000, everybody is talking about index funds. Tell us whether it is a good idea. What exactly is this one?
Ans: Index fund basically is a compromise. It is like most fund managers claiming that we will beat the market, index funds say that we will not beat the market, we will match the market. And you are going to perform as well as or as poor as the index, so for index fund, you don’t need a fund manager. Money can be allocated to exact proportion in the index.
Paromita Chatterjee: Essentially like investing in the index.
Ans: Yes, but there is a difference that index funds likely to give you lower returns than the index, because the fund companies are going to get their expenses out. Third thing I like to pinpoint is that, indexing have a very poor case in India. Because today, 95 per cent of the actively managed funds today beat the benchmark handsomely and by a wide margin.
Paromita Chatterjee: So, don’t go in for index funds. Give us your recommendation on top five growth schemes. Everybody just wants to know blindly where I put my money. Top five growth funds, what do you recommend?
Ans: Four funds which I like, which comes clearly to my mind instantaneously as equity funds are – HDFC Equity, Franklin Marina Plus, DSP Merril Linch Opportunity, Prudential Growth, Reliance Vision. I will put my long-term money in any of two funds and spreading your money across more than one family over the period is a good idea.
Paromita Chatterjee: Dhirendra, why is Systematic Investment Plan (SIP) usually the best option?
Ans: It eliminates anxiety out of investments. Equity market is erratic…
Paromita Chatterjee: What is it exactly when I say I am getting into SIP?
Ans: It’s like investing in installments. The advantage of this installment investing is that it completely eliminates anxiety out of the investments because equity market is erratic. Sometimes you hold your investment because it is going down. Then before actually participate in the market, it goes up and you keep waiting. Then you try and time it and timing the market has not done by any professional manager, it cannot be done easily and it only requires some chance. So it is up to chance. The only way you are left with is averaging. Investing regularly is SIP. You do it whatever periodicity - monthly, quarterly, semi-annually, but doing it regularly at a defined periodicity is SIP.
Paromita Chatterjee: Is SIP the best option?
Ans: I think it’s the great option, it’s a great facilitation. And it actually keeps your heart problem in check because the kind of market we see, it can cause a great deal of anxiety most investors – if the market goes down by 30 per cent. And odds are very much against the individual investor if he is trying to time the market.
Paromita Chatterjee: So if you go and do it regularly, the chances are very high that you could have beaten the irregularity in returns.
Ans: Absolutely, researches have proved time and again that to benefit from this market, you need time, not timing.
Paromita Chatterjee: So SIP is best.
Ans: That’s the way to go.
Paromita Chatterjee: Income funds, what exactly are they? What is it that I am getting into income funds?
Ans: We have wide variety of income funds. If you have money for few days, which you need to consume, it largely used by companies. As an individual investor, it is comparable with fixed deposits, except that tax treatment is different, it can give you slightly superior return and gives you higher liquidity. But today the kind of return you are getting on bank deposits, they may not prove to be as compelling as used to be.
Paromita Chatterjee: What about a retiree who is sitting on huge funds and if he is also looking at a steady stream of income coming in every month?
Ans: Beyond your pension, I think, the post office monthly income plan remains the most attractive. And beyond that Rs 6 lakh, I think we should look for more tax efficiency. So MFs may have a case beyond your pension, beyond your MIP, then that money can get into funds.
Paromita Chatterjee: So income funds are more and more for large corporates, when you have huge amount of funds (short term) not for you and me. Top five income funds, what are they may be?
Ans: For most individual investors, the MIP offered by the mutual funds, they could be attractive.
Paromita Chatterjee: What is MIP?
Ans: MIP is actually misleading name for the funds. It say Monthly Income Plan, which means you will get monthly income in guaranteed way, but there is no such guarantee. So in that sense it is misleading but it is basically 90 per cent bond portfolio and 10 per cent equity and it help you beat the inflation more effectively.
Query: If I invest in MF, will I get any tax benefit?
Ans: Yes you do. Mutual Funds are generally tax-efficient. If you invest in equity funds, hold it for one year the capital gain is tax-free. If you invest in ELSS funds, that is income exempt. Up to Rs 1 lakh invested in ELSS funds can be deducted from your net taxable income. But the only disadvantage is that the money gets locked for three years. This is the only all-tax-saving vehicle available to investors at large.
Query: What would you suggest to small time investors? If I want to invest Rs 50, 000 in a tax-saving investment scheme, which one would you suggest?
Ans: In your case, mutual funds would not be the appropriate choice. I would recommend that you should invest in:
- ICICI tax-saver fund
- Magnum tax gain
- HDFC tax saver
- Birla tax gain
We have rated these investment schemes relatively higher. I would also recommend that do not invest all your money in one go. Break the amount to invest in different kind of tax saving schemes and funds.
Query: What is a Unit Linked Insurance Plans or ULIP? Should one invest in it?
Ans: ULIP or Unit Linked Insurance Plan is a popular vehicle in which lot of people invest. It is nothing but a mutual fund with a little bit of insurance combined. The pricing of the insurance is dependent on your age. So, you end up being incapable of evaluating the investment worth of your money.
According to me combining mutual funds and insurance is indeed a bad idea. Insurance is a much serious subject. Investment can be optional but not insurance. ELSS is purely an investment vehicle and a much-preferred option. On the other hand, ULIP is a mutual fund – insurance combine where you end up getting none effectively.
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