News APP

NewsApp (Free)

Read news as it happens
Download NewsApp

Available on  gplay

This article was first published 14 years ago
Rediff.com  » Business » How to get richer with mutual funds

How to get richer with mutual funds

By Arnav Pandya in Mumbai
June 01, 2009 11:06 IST
Get Rediff News in your Inbox:
Several new concepts of investments have found their way to the Indian market with the introduction of new mutual fund schemes. At a time when interest in MFs might seem low, it is interesting to note several additional investment options being created. Investors must examine the details of such concepts carefully, to help achieve their investment objectives in a simple manner. Here are some themes and concepts and how an investor can effectively make use of these.

BOOKING GAINS

Buying a fund is just one part of the transaction. To make profits, there has to be a sale of the units. Often investors keep holding the units without booking any profits and in course of time are unable to realise the gains.

This happens because markets move both up and down and this can result in a situation where the investor's profits remain just on paper. One way out is to have predetermined levels at which profits will be booked. The problem is actual implementation.

The investor has to constantly monitor if the target has been reached and then has to sell. This process can be automated by giving the MF instructions to sell at a particular level. This facility is also known as a trigger. This is not available with all funds, but when present can be implemented in two ways.

A simple implementation can result in the units being redeemed by the fund. This means if you have invested Rs 10,000 in a fund at Rs 10 and given instructions to redeem these at a 20 per cent profit, then when the net asset value (NAV) reached Rs 12 this will be done and you will get Rs 12,000.

The second route is to transfer the gains or the entire investment to a debt fund. In such a situation relating to the gains, the extra Rs 2,000 earned will be transferred from the equity to a debt fund, where the risk is less. The ICICI Prudential Target Returns Fund is an example of this type of scheme, where the investor can set trigger levels at 12 per cent, 20 per cent, 50 per cent and 100 per cent. The gains or the entire investment can be transferred to one of the pre-determined debt schemes of the same fund house.

SUITABILITY

Such schemes and options are suitable for investors who do not have any time to monitor their investments regularly, but would not like to miss an earning opportunity.

It is also useful for those who want to balance their investments without relying too much on human decisions at regular intervals. The investment base is an equity fund, so the investor should consider the scheme's performance and, if suitable, use it as a part of their equity exposure, ideally restricted to 10-12 per cent of the portfolio.

QUANTITATIVE FACTORS

There are different ways to take an investment decision. The traditional route is to have a fund manager who will make all the decisions on purchase and sale of shares in the fund.

Another way is through the route of automatic decisions when certain conditions are reached. One option here involves the use of mathematical models for selecting stocks in the portfolio. This eliminates the human element in decision making, along with any bias, as the model throws up all the decisions to be taken.

Two such funds available are the Religare AGILE fund and Reliance Quant Plus Fund. These involve a scientific approach, whereby investment strategies are framed and then back-tested before being applied in real life situations.

SUITABILITY

These types of funds are suitable for all those investors who are comfortable with a slightly higher risk in their investments. It is useful for those investors who want to have stocks in their portfolio based on specific factors and these are included in the quant working of the scheme. Investors should ensure the exposure to such funds remains at around 7-10 per cent of the portfolio.

The writer is director, My Financial Advisor.

Get Rediff News in your Inbox:
Arnav Pandya in Mumbai
Source: source
 

Moneywiz Live!