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Markets in turmoil, but stay invested if you want to get handsome returnsOne of the best ways to judge the attractiveness of mutual funds among retail investors is to look at the Systematic Investment Plan (SIP) flows during a month.
The data is quite telling. While monthly SIP flows averaged around Rs 3,500 crore per month in fiscal year 2016-17, the flows had gone up to Rs 5,500 crore per month in the fiscal year 2017-18. The average monthly flows in the first three months of fiscal year 2018-19 are well above Rs 7,000 crore. That means more than $1 billion is flowing into SIPs each month. MFs have proved to be good wealth creating vehicles in the last many years. Let us look at key benefits of investing in MFs:
Money management by experts
What can you buy in the share market with Rs 10,000? You can buy four shares of TCS or one share of Maruti. You can forget about stocks like Shree Cements and Eicher, which are currently traded at around Rs 16,000 and Rs 27,000 respectively. Even after that, you are taking on a huge stock specific risk because you have put all your money in just one or two stocks.
An MF pools monies from large number of investors and then allocates that money into equities or other asset classes like debt, liquid assets, gold etc. So, even with an investment of as low as Rs 5,000 you get access to a quality portfolio. Since fund managers are able to create a portfolio that maximises returns for a given level of risk. The fund manager is supported by a team of experts who extract value from every corner of the market. All this expertise is at your disposal when you invest in MFs.
Risk diversification
Suppose you have invested directly in equities and you are holding one steel company and one aluminium company in your portfolio. If China goes through an economic slowdown (as is likely now) it will reduce its import of metals from other countries. Suddenly, metal stocks would have corrected and you could be sitting on notional losses of 15-20%. Instead of investing directly in equities, had you put the money in diversified MFs, you could have spread your money across a wider asset spectrum. Firstly, MFs spread your overall assets across equity, debt and liquid assets. Secondly, even in case of equity funds, your money is invested across sectors and themes.
Offer more choice
If you invest in MFs, you are spoilt for choice. You can choose between different equity funds like index, sectoral, thematic, diversified, mid cap, small cap, etc. Within debt funds you can choose across credit risk and across durations. You can opt for long-term funds, short-term funds, gilt funds and corporate bond funds. If you want to synthesise the two asset classes of debt and equity, then you can opt for a balanced fund or Monthly Income Plan, where you can decide on the debt/equity mix.
Offer flexibility
SIP offers flexibility, which is not available in other asset classes. You can invest in the form of a SIP or even as a variable SIP or as a bulleted structured. Withdrawals can be structured as dividends, capital gains or systematic withdrawal plans.
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Tax efficient
Interest on bonds and FDs are taxed at your peak rate of tax, but equity funds attract lower taxes. You can structure your debt fund payouts like a Systematic Withdrawal Plan (SWP) and reduce your tax burden. The investor can take the benefit of indexation while calculating capital gains on debt funds.
By Vaibhav Agrawal
(The writer is head of research and ARQ, Angel Broking)
Source: DNA Money
