Choose The Right Mutual Fund

Investments through mutual funds help one attain various financial goals. If planned well, mutual fund schemes are not only financial products but they are also solution providers, irrespective of whatever category of an investor one may be. Hence, if a mutual fund scheme is well thought of and selected and invested with a disciplined approach with focus on financial goals, the journey to attaining one’s goals will be very smooth. However, the key here lies in selecting the right kind of mutual fund. In the process of choosing the right mutual fund, factors such as risk-taking abilities, financial goals and tenures help figure out which type of fund should an investor invest their money in.

Goals can be broadly classified into short-term, medium-term and long-term. Given the tenure, the types of schemes one should consider also differ. It essentially means that schemes which are suitable for the long term may not be advisable if goals are to be met in the short to medium term. Likewise, funds for meeting near to mid-term goals may not be appropriate for long term financial goals. Investors with moderate risk appetite may look at Hybrid Funds for their various financial goals of different tenures. That said, hybrid schemes are suitable for any investors to meet their short to medium term goals. 

Typically, a short-term tenure means 1-2 years while a mediumterm may range from as low as two years to seven years. Tenures over seven years plus are generally classified as long term. Hybrid mutual fund schemes, as the name suggests, are funds which offer investors an exposure to more than one asset class. Having diversified asset classes as underlying securities ensures investment related risk is not concentrated and they get the benefits of several asset categories like equity and debt with a balanced approach of investments.

Financial goals such as buying a two-wheeler, a car, an international holiday, home renovation and down payment for buying a property, among others, are normally treated as short-term to mid-term goals. Since such goals have shorter tenure, conservation of capital is of prime importance and inflation-beating returns on top of it helps create value and grow the investments. Therefore, it is advisable not to take undue investment risks by choosing aggressive funds. Preferably, one should go for a balanced investment approach while limiting exposure to high risk asset classes from the short-term point of view.

Else, one may run the risk of erosion in capital which thereby may not let the goals get fulfilled in the stipulated time. Here, depending on one’s individual risk-taking capacity, investors may choose equity-oriented hybrid schemes, debt-oriented hybrid schemes or the dynamic asset allocation schemes also known as balanced advantage category of funds. If one’s risk appetite is moderate, one may opt for equity-oriented hybrid funds while conservative investors can consider hybrid funds with larger exposure to debt assets. However, if investors have moderate risk appetite but want a dynamic asset allocation strategy as a means to make the most of equity and debt asset classes, then consider balanced advantage fund.

Choose SWP over Dividend
Option Very often investors tend to rely on dividends from their investments as a means to build a robust cash flow pipeline during, say, retirement years. For such purposes hybrid categories such as conservative hybrid or aggressive hybrid schemes can be considered. Here, it is advisable to opt for a systematic withdrawal plan (SWP) over the dividend option from such schemes. This is because, as per the regulations, dividend can only be paid from the profit made and not from the invested capital. Therefore, if the NAV of the fund is less than the NAV on investment date, indicating bad fund performance, no dividend will be paid.

Hence, periodic payment is solely dependent on fund performance. Another drawback is that the dividend received will attract taxes as per the investor’s Income Tax slab. On the other hand, SWP option proves to be very tax-efficient. This is because, apart from benefitting from growth in investment, here investors are subject to short or long term capital gains depending on the timeframe they opt. One of the best strategies is to start SWP after a year from investment date. This ensures that the withdrawals are only subject to long term capital gains in an aggressive hybrid scheme category.

The writer is Mutual Fund Distributor • Email : sunilsawhney1952@gmail.com