Transcript of the Podcast
Hi This is your editor Arjun Parthasarathy speaking. The Friday podcast is a value add feature for the followers of Investors are Idiots.com. The brief podcast will select one topic for analysis and will be released every Friday.
This week’s topic is on “ How to select a mutual fund schemes”
Many of you are confused on mutual fund schemes. Given that there are 1000’s of schemes, it is understandable that you are confused on what schemes to invest in. However, once you get the process of selecting the schemes right, you will find the right scheme to invest in.
Investing in the right mutual fund scheme makes money for you and you need not go through a distributor, if the distributor you are dealing with is more interested in commissions rather than adding value to your investment.
How to select the right mutual fund scheme?
At the outset you will need to pinpoint the reason you want to invest in mutual funds. The reasons could be to earn better returns than fixed deposits, to take advantage of expectations of falling interest 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 equities. The list of reasons is not exhaustive and you could have your own reason for wanting to invest in mutual fund schemes.
Once you arrive at a reason on why you want to invest in mutual fund schemes, selecting the schemes become a much easier task. Let us take three reasons for investing in mutual fund schemes and then select the schemes to invest in.
First reason is you want better returns than fixed deposits but you do not want liquidity risk or risk to capital. In this case a cash fund (also known as liquid fund) is your best option. The liquid fund is a money market fund that invests in short term money market 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.
Second reason is you believe that interest rates will fall after reading the analysis on interest rates in www.investorsareidiots.com. The options to 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 falling rates are short term income and gilt funds and long term income and gilt funds. You can invest in short term or long term funds to take advantage of falling interest rates.
Third reason is that you are bullish on equities and you want to invest in mutual fund schemes to take advantage of rising equity markets. There are many equity schemes to choose from but the best funds to invest in to take advantage of rising equity markets are index ETF’s (Exchange Traded Funds), index funds or plain vanilla diversified equity funds. Investing in these funds will give market returns or better than market returns without you having to understand more of a schemes objectives or other factors such as expenses, exit loads etc.
Selecting of mutual funds schemes now sounds simple and it is simple. The process is complicated only when you are sold products you do not need or you look for high returns. Keep it simple if you are not too greedy or you do not have the time to go through various fine prints.
Thank you for listening in. Have a good weekend.