Vidya Bala, Head of Mutual Fund Research, FundsIndia

Vidya Bala, Head of Mutual Fund Research, FundsIndia

 Jinsy Mathew   
  • Mumbai,  February 9, 2016  
  • |  
  • UPDATED   11:36 IST
Vidya Bala, Head of Mutual Fund Research, FundsIndia

The Indian mutual fund industry offers are a plethora of options when it comes to mutual fund investments. However, it remains a challenge for retail investors when it comes to narrowing down on that one fund to invest in. Vidya Bala, Head of Mutual Fund Research, FundsIndia in conversation with Jinsy Mathew highlights on what should be the thought process before selecting a fund an what would the best bet during volatile times. Edited Excerpts:

The Indian retail investor is bombarded with a variety of mutual funds. Often there is confusion as to which category one should opt for? Could you guide as to which are the category of funds a medium to long term investor should opt for?

Before choosing funds, investors need to first decide the goal/time frame for which they want to invest and the surplus they can spare on a regular basis for investing. This is necessary to decide the nature of funds needed to build a portfolio. Once this is done, based on the time frame, a combination of equity and debt funds and various categories under the same can be decided.

For temporary parking of money, investors should not venture beyond liquid or ultra-short-term funds. For time frame of up 2-3 years, short-term debt funds would be an option. For 3-5 years investors can look at debt-oriented funds such as MIP as it will give them minimal exposure to equities (up to 25%) or make a start with balanced funds if they will hold it for 5 years.

One should venture into equity funds for long-term goals of 5 years and above. Here, a combination of balanced, large-cap, midcap and multi-cap equity funds with some debt exposure is an ideal allocations scenario.

What proportion of these to have would depend one's time frame, goal, risk appetite and investment amount. It is best that a first-time investor in mutual funds understands this by talking out with an advisor or reading a bit about mutual funds and more importantly inculcate a disciplined habit of investing. That is more important than any category selection.

What are the points to watch out for before selecting a mutual fund?

Before selecting a fund, investing first needs to internalise his/own goal, time frame and investment amount. Then asset allocation based on the first point and choosing categories within those asset classes have to be done. Then comes choosing the actual fund.

As for choosing the fund, some amount of ground work  in terms of the fund's asset size, track record and performance is needed. A fund with a  long track record will help you assess performance across different market phases - down market and up market. Look for steady performers and not chart toppers. A top performer in 2014 may be in the 3rd or 4th quartile of performance charts.

Look for consistency. See if the fund's risk profile will fit your own. For example: a midcap fund can be expected to be more volatile - that is fall harder in a down market. Looking at performance over down phases will help you assess whether you can take that kind of fall. There are a lot more nuances such as quality of fund house, fund manager, the fund volatility etc. that can be assessed if an investor is reasonably clued on to mutual funds.

As on date which is a better pick - a three year FD or a debt mutual fund for the same time frame? Why?

Given the fallen interest rates in deposits, for a time frame of 3 years and above, debt mutual funds would be a far superior option. This is on account of 2 reasons: one, medium to long-term debt mutual funds (with a mix of gilt, corporate bonds and liquid instruments) provide sufficient scope for generating capital appreciation in a falling interest rate scenario.

So while FD rates may be low, these funds gain as debt instrument yields fall and prices rise. In effect, higher returns. Two, the capital gains indexation benefit available for debt funds for holding of over 3 years, gives it a better post-tax return as opposed to FD interest, which is taxed at your slab rate.

What kind of a mutual fund would you advice for an investor in a volatile market situation?

In general, irrespective of market condition, it would be good for investors to go for an asset allocated approach (equity and debt) based on their time frame and goals. For shorter time investment goals, containing volatility must be the primary goal. For longer time frames, building wealth, the short-term volatility notwithstanding, should be the aim.

However, for first time investors in mutual funds, the current market volatility can be frightening. If they have a long term time frame (over 5 years) time frame, then starting investments in balanced funds and then adding a large-cap fund would be ideal ways to enter.

Do you think it would be prudent to take exposure to mid & small-cap funds currently for someone with a three year horizon?

Equity funds in general need a 5-year plus horizon as they have in the past returned negatively even over a 3-year time frame.

Mid and Small cap funds, being riskier need  such time horizon and are not meant for shorter periods of less than 5 years. The exposure to them should also be limited to not over a fifth of one's portfolio.

Currently, mid and small cap funds as a category, have just started correcting and may see further volatility this year. Many stocks in this segment still remain high on valuations and may undergo further correction. Hence exposure to them needs to be done in a phased manner through SIPs.