The fund route to assets

Through mutual funds, we can invest in equity, debt, bullion or in a combination of these. One can also get the benefit of expert advice.

Gaurav Mashruwala | Print Edition: June, 2010

Before one begins investing, it is important to understand the distinction between an asset class and investment vehicle. An asset class is the destination and the vehicle is what helps one reach the destination. Several vehicles can be used to reach the goal. For instance, to invest in debt as an asset class one can use fixed deposits, post-office savings schemes, bonds and debentures.

Asset classes can be broadly classified into tangible and intangible. Tangible assets include real estate and bullion and intangible assets include equity and debt. Almost all investments are eventually in one or several of these assets.

When we invest in tangible assets, we play the role of an owner. The investment in these is to gain capital appreciation. In the case of intangible assets, we can either play the role of a lender or an owner. If investments are in debt, say fixed deposits or bonds, we act as a lender. The return we get on our investments in debt-based assets is interest, except in the case of debt mutual funds, where we earn dividends, or in the case of traditional insurance policies, where we earn a bonus. When we invest in equities, we play the role of a shared owner.

Through mutual funds, we can invest in equity, debt, bullion or in a combination of these. There are also mutual funds that invest in global markets and provide the opportunity to diversify across the world. Today, there are variants of mutual funds to suit the needs of all investors.

Within each asset class there can be further classifications. For instance, in the case of equity funds, there are index funds, which only invest in stocks that constitute an index. Then there are equity funds, which invest in stocks based on their market capitalisations, such as largecap funds, mid-cap funds and smallcap funds. Next, we have sectoral funds, which invest in stocks of a particular sector. So a pharma fund will invest only in pharmaceuticals.

Similarly, within the debt fund category, we have several classifications. There are debt funds that invest only in government securities or g-sec funds. Then we have bond funds, which invest in bonds and debentures of companies. There are also debt funds, which invest in bonds, debentures and other government securities that mature in the immediate future. There are also hybrid funds, which invest in both debt and equity-based assets. In the past few years, we have also seen the launch of several gold-based funds.

An investment option not yet available in India is mutual funds investing in real estate. A Real Estate Investment Trust or REIT is a corporation investing in real estate and is popular in the developed markets.

Since a professional manages mutual funds, investors get the benefit of expert advice. It is not necessary to have a large corpus to invest in mutual funds, with most accepting Rs 5,000 as initial investment. They also offer systematic investment plans (SIP), which help invest a small amount periodically. Most funds accept as less as Rs 500 per month as SIP instalments. Similarly, a systematic withdrawal plan (SWP) allows for investments to be withdrawn as determined by the investor.

Gaurav Mashruwala is a certified financial planner

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