MF math – short and simple wins the day

Given the fact that there are n number of mutual fund (MF)schemes floating around, it’s but natural that you find it a bit hard to get that elusive mix. But fret not, once you get to know the basics, life will be a cruise.

Investing in the right mutual fund scheme brings in big moolah for you. And you can even skip a distributor if he is more interested in commissions rather than adding value to your investment. The question is how to select a mutual fund that fits into your profile and makes your money work doubly hard.

At the outset, you need to specify very clearly why you find an investment in mutual funds so necessary. It could be to earn better returns than fixed deposits, or maybe, to take advantage of expectations of falling rates, or to participate in an expected equity market rally. Other reasons could include a bullish outlook on gold and other commodities or a positive view on global shares. The list is not exhaustive by any means, and you could have your own that strongly explains your decision.

Once you get your priorities in place, the process of selection becomes much, much easier. To illustrate the point, let us take three reasons for investing in MFs and then pick up the schemes.

First, you want better returns than fixed deposits, but do not want risk to liquidity or capital. In this case, a cash fund — also known as liquid fund — is your best option, which is a money market tool that invests in short-term securities. If you believe that returns on fixed deposits are too low on a tax adjusted basis, you can invest in liquid funds as an alternative.

The second-case scenario is you believe that interest rates are going to fall after going through an analysis in DNA. The options for you are mutual fund schemes that invest in government bonds or corporate bonds, or both. The two main categories of fixed income funds that invest in bonds to take advantage of softer rates are short-term income and gilt funds and long-term income and gilt funds. You can invest in both.

Third, you are bullish on equities and you want to ride piggyback on MF schemes to make the most of rallying markets. There are many offerings to choose from, but the best to invest in are index ETFs (exchange traded funds), index or plain vanilla diversified equity funds. You can be assured about the returns even if you have a hazy idea about the scheme objectives or other factors like expenses, exit loads and the like.

Selecting mutual fund schemes sounds simple, isn’t it? The process, however, gets a tad complicated only when you are sold products that you do not need in the first place or you look for high returns. So, the funda is keep it simple if you are not too greedy or you do not have the time to go through the fine print.

The writer is the editor of www.investorsareidiots.com, a website for investors