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HOW TO SELECT A MUTUAL FUND SCHEME ?
HOW TO SELECT A MUTUAL FUND SCHEME
Although investing in a Mutual Fund is less risky than investing in the capital market directly, it is not risk-free. Therefore, it is necessary to check thoroughly before selecting a Mutual Fund scheme. One should assess the targeted Mutual Fund scheme on the following criteria:
Fund's performance
Evaluate the track record of the Mutual Fund. This is important as your retirement kitty could be with the Mutual Fund for as long as 30 years. There is an indication that there is significant investment expertise in the fund family. Players such as HSBC, Franklin Templeton, Alliance, Birla, ITC, HDFC and Prudential ICICI are examples of good Mutual Fund families.
Sponsor credentials
Sponsors can make a big difference to a Mutual Fund's performance. Find out how long have the sponsors been in business, and what is their financial health? Sponsors of public sector funds (such as LIC, SBI and Canara Bank) and foreign investment large funds have been around for a long time to allow you to judge their performance.
Scheme's performance
The performance of schemes within the same fund family may vary, as they are managed by separate Fund Managers. Hence, take a close look at the targeted scheme's performance, its
portfolio and the investment strategy followed. This will give you an idea of the scheme's prospects.
Risk profile
Choose a scheme that suits your risk profile. You can rank the various schemes on a risk-return scale. In descending order of risk, sector-specific schemes top the list. They are followed by growth schemes, balanced schemes, debt schemes and gilt schemes, respectively.The best way to reduce your risk is to diversify.
Investment options
It is advisable to park your money in an open-ended fund, as it gives you an exit option at a NAV-linked price.
Most Mutual Fund schemes offer a choice between a growth option and a dividend option. If your objective is to accumulate wealth, choose the growth option. Even if you opt for a dividend plan, choose the re-investment facility, wherein the dividend is automatically re-invested in the scheme.
Retirement schemes
At present, only Unit Trust of India and Kothari Pioneer Mutual Fund offer retirement schemes. You can invest on a monthly basis, and get a pension after retirement. Unlike normal pension plans, these schemes do offer flexibility. Take the case of Kothari Pension Plan. At the time of retirement (in this case, 58 years), you have several repayment options to choose from. These include the pension plan (regular income, with your capital intact), flexible plan (a fixed amount
per month, which includes a part of your capital) and a lump sum plan (withdraw the full amount). Tata Mutual Fund is also planning to launch a similar scheme.
Investment mix
The current SEBI guidelines do not make any distinction between pension schemes and normal Mutual Fund schemes. Consider the Kothari Pension Plan. For the first three years, the entire corpus will be invested in debt instruments. Subsequently, there will be an equity component, of up to 40 per cent of the corpus. UTI's Retirement Benefit Plan is similar to Kothari Pension Plan, with the equity component being capped at 40 percent. Before investing your money, make sure that you are comfortable with the investment mix proposed by the scheme.
Withdrawal charge
Most Mutual Funds offering retirement plans levy a stiff charge on unit holders in case of an early withdrawal. While Kothari charges a nominal load of 3 per cent, UTI is charging a whopping 10 per cent. Tata Mutual too plans to peg the load amount on the higher side charging an exit load of 5-7 per cent."
Investor servicing
In recent times, most Mutual Funds have strived to improve investor servicing. In fact, some private sector players are even offering value-added services like cheque-writing and ATM cards.
Transparency
Choose a fund that discloses the scheme's portfolio and NAV on a regular basis.
HOW TO TRACK YOUR INVESTMENT?
It is important that you don't forget about the scheme once you receive your unit certificate. A lot can go wrong at the Mutual Fund's end. Take the case of investors who put their money in the Taurus Starshare scheme in January 1994. Even after a holding period of five-and-a-half years, their return is still negative and the scheme's NAV is languishing at Rs 6.57.A periodic review not only keeps you updated on your scheme, but also with events in the Mutual Fund industry. Monitor performance Track your scheme's NAV on a monthly or quarterly basis. Look for changes in the portfolio. Compare the scheme's performance with that of the Sensex, or similar schemes of other Mutual Funds. Ensure that the fund is adhering to the objectives stated in the offer document. Keep track of various periodic statements like newsletters, and half-yearly and annual reports. Read them thoroughly and file them for future reference. If you have queries, contact the investor service centers or agents. Some Mutual Funds also maintain websites, which provide information on schemes, NAVs, the industry and the investment outlook. Changes in constituents Sponsors often change the composition of the asset management company, trustees or custodians, which can affect performance. Whenever such changes take place, review your comfort level. Warning signals If your scheme fares badly in two consecutive quarters, find out whether it is because of a depressed capital market, or due to reasons specific to your scheme. Don't get hassled if your scheme underperforms in a runaway market. But if it is under-performing in a falling market (the fall in the scheme's NAV is greater than the fall in the benchmark index), review your investment. Read the Fund Manager's comments in newsletters and the annual report. Continue with the scheme only if you are satisfied with the explanation.
You don't have to be an investment expert to sense trouble; you just have to keep an ear to the ground. Be wary of funds that renege on promises. For instance, Canbank Mutual is refusing to pay up the indicated rate of return on its Cantriple scheme. One can conclude that if a fund can cheat one section of investors, it can do so to others as well.
READING THE NEWSPAPER LISTINGS Although they may look pretty cryptic, fund listings are very easy to read and can tell you a great deal about the fund in a small amount of space.
You can determine the value of your portfolio by multiplying the number of shares you own by the "NAV." Multiplying the number of shares you own by the Offer Price tells you how much you would pay to buy those same shares. Or you can directly compare your purchase price per unit. 1. Funds are listed alphabetically by Fund Company with specific funds listed under each company. the number of the shares in the fund being held by the shareholders. "NAV" shows how much each share in the fund is worth. 3. "Offer Price" is the amount you would pay if you wanted to buy the shares and is the same as the "NAV," plus any sales charges. "NL" means it is a no-load fund and you would pay the same price per share to buy it as you would receive if you were to sell it. 4. This tells how much the net asset value of the fund has changed since the previous trading day. A plus (+) value means your shares have increased in value since the close of the last trading day by the amount indicated, and a minus (-) value means each of your shares has fallen by that amount. 5. Change shows the amount by which the net asset value of one share of the fund increased or decreased the day before. Mutual Fund newspaper listings are most useful for keeping track of what is happening to the funds you own. Some newspapers provide more detail than others and include investment objectives and total return data. If you are trying to make a decision about buying a fund, newspaper listings can give you some idea about fund families and provide some indication about fees and expenses. But they don't provide all of the information you need. As a long-term investor, you will probably not find it necessary to check on the daily value of your fund shares. However, whenever you want to check the progress of your fund, you can obtain performance data and daily share prices directly from the fund company by calling them, referring to current prices of Mutual Funds listed daily in most newspapers, or visit their website.
2. "NAV" means "Net Asset Value" and is the value of stocks being held in the portfolio divided by
HOW TO SELECT A MUTUAL FUND SCHEME
Although investing in a Mutual Fund is less risky than investing in the capital market directly, it is not risk-free. Therefore, it is necessary to check thoroughly before selecting a Mutual Fund scheme. One should assess the targeted Mutual Fund scheme on the following criteria:
Fund's performance
Evaluate the track record of the Mutual Fund. This is important as your retirement kitty could be with the Mutual Fund for as long as 30 years. There is an indication that there is significant investment expertise in the fund family. Players such as HSBC, Franklin Templeton, Alliance, Birla, ITC, HDFC and Prudential ICICI are examples of good Mutual Fund families.
Sponsor credentials
Sponsors can make a big difference to a Mutual Fund's performance. Find out how long have the sponsors been in business, and what is their financial health? Sponsors of public sector funds (such as LIC, SBI and Canara Bank) and foreign investment large funds have been around for a long time to allow you to judge their performance.
Scheme's performance
The performance of schemes within the same fund family may vary, as they are managed by separate Fund Managers. Hence, take a close look at the targeted scheme's performance, its
portfolio and the investment strategy followed. This will give you an idea of the scheme's prospects.
Risk profile
Choose a scheme that suits your risk profile. You can rank the various schemes on a risk-return scale. In descending order of risk, sector-specific schemes top the list. They are followed by growth schemes, balanced schemes, debt schemes and gilt schemes, respectively.The best way to reduce your risk is to diversify.
Investment options
It is advisable to park your money in an open-ended fund, as it gives you an exit option at a NAV-linked price.
Most Mutual Fund schemes offer a choice between a growth option and a dividend option. If your objective is to accumulate wealth, choose the growth option. Even if you opt for a dividend plan, choose the re-investment facility, wherein the dividend is automatically re-invested in the scheme.
Retirement schemes
At present, only Unit Trust of India and Kothari Pioneer Mutual Fund offer retirement schemes. You can invest on a monthly basis, and get a pension after retirement. Unlike normal pension plans, these schemes do offer flexibility. Take the case of Kothari Pension Plan. At the time of retirement (in this case, 58 years), you have several repayment options to choose from. These include the pension plan (regular income, with your capital intact), flexible plan (a fixed amount
per month, which includes a part of your capital) and a lump sum plan (withdraw the full amount). Tata Mutual Fund is also planning to launch a similar scheme.
Investment mix
The current SEBI guidelines do not make any distinction between pension schemes and normal Mutual Fund schemes. Consider the Kothari Pension Plan. For the first three years, the entire corpus will be invested in debt instruments. Subsequently, there will be an equity component, of up to 40 per cent of the corpus. UTI's Retirement Benefit Plan is similar to Kothari Pension Plan, with the equity component being capped at 40 percent. Before investing your money, make sure that you are comfortable with the investment mix proposed by the scheme.
Withdrawal charge
Most Mutual Funds offering retirement plans levy a stiff charge on unit holders in case of an early withdrawal. While Kothari charges a nominal load of 3 per cent, UTI is charging a whopping 10 per cent. Tata Mutual too plans to peg the load amount on the higher side charging an exit load of 5-7 per cent."
Investor servicing
In recent times, most Mutual Funds have strived to improve investor servicing. In fact, some private sector players are even offering value-added services like cheque-writing and ATM cards.
Transparency
Choose a fund that discloses the scheme's portfolio and NAV on a regular basis.
HOW TO TRACK YOUR INVESTMENT?
It is important that you don't forget about the scheme once you receive your unit certificate. A lot can go wrong at the Mutual Fund's end. Take the case of investors who put their money in the Taurus Starshare scheme in January 1994. Even after a holding period of five-and-a-half years, their return is still negative and the scheme's NAV is languishing at Rs 6.57.A periodic review not only keeps you updated on your scheme, but also with events in the Mutual Fund industry. Monitor performance Track your scheme's NAV on a monthly or quarterly basis. Look for changes in the portfolio. Compare the scheme's performance with that of the Sensex, or similar schemes of other Mutual Funds. Ensure that the fund is adhering to the objectives stated in the offer document. Keep track of various periodic statements like newsletters, and half-yearly and annual reports. Read them thoroughly and file them for future reference. If you have queries, contact the investor service centers or agents. Some Mutual Funds also maintain websites, which provide information on schemes, NAVs, the industry and the investment outlook. Changes in constituents Sponsors often change the composition of the asset management company, trustees or custodians, which can affect performance. Whenever such changes take place, review your comfort level. Warning signals If your scheme fares badly in two consecutive quarters, find out whether it is because of a depressed capital market, or due to reasons specific to your scheme. Don't get hassled if your scheme underperforms in a runaway market. But if it is under-performing in a falling market (the fall in the scheme's NAV is greater than the fall in the benchmark index), review your investment. Read the Fund Manager's comments in newsletters and the annual report. Continue with the scheme only if you are satisfied with the explanation.
You don't have to be an investment expert to sense trouble; you just have to keep an ear to the ground. Be wary of funds that renege on promises. For instance, Canbank Mutual is refusing to pay up the indicated rate of return on its Cantriple scheme. One can conclude that if a fund can cheat one section of investors, it can do so to others as well.
READING THE NEWSPAPER LISTINGS Although they may look pretty cryptic, fund listings are very easy to read and can tell you a great deal about the fund in a small amount of space.
You can determine the value of your portfolio by multiplying the number of shares you own by the "NAV." Multiplying the number of shares you own by the Offer Price tells you how much you would pay to buy those same shares. Or you can directly compare your purchase price per unit. 1. Funds are listed alphabetically by Fund Company with specific funds listed under each company. the number of the shares in the fund being held by the shareholders. "NAV" shows how much each share in the fund is worth. 3. "Offer Price" is the amount you would pay if you wanted to buy the shares and is the same as the "NAV," plus any sales charges. "NL" means it is a no-load fund and you would pay the same price per share to buy it as you would receive if you were to sell it. 4. This tells how much the net asset value of the fund has changed since the previous trading day. A plus (+) value means your shares have increased in value since the close of the last trading day by the amount indicated, and a minus (-) value means each of your shares has fallen by that amount. 5. Change shows the amount by which the net asset value of one share of the fund increased or decreased the day before. Mutual Fund newspaper listings are most useful for keeping track of what is happening to the funds you own. Some newspapers provide more detail than others and include investment objectives and total return data. If you are trying to make a decision about buying a fund, newspaper listings can give you some idea about fund families and provide some indication about fees and expenses. But they don't provide all of the information you need. As a long-term investor, you will probably not find it necessary to check on the daily value of your fund shares. However, whenever you want to check the progress of your fund, you can obtain performance data and daily share prices directly from the fund company by calling them, referring to current prices of Mutual Funds listed daily in most newspapers, or visit their website.
2. "NAV" means "Net Asset Value" and is the value of stocks being held in the portfolio divided by
