What factors should you consider while investing in mutual funds?

Mutual funds have become the preferred choice of investment for many new investors in India. In recent times, many top-performing mutual funds have been offering attractive returns to investors. This investment option is ideal for those who have extra funds available and want to park them in a safe avenue for the long-term. 

While mutual funds attract millions of investors, they have some amount of risks and disadvantages. Before investing in mutual funds, investors must make themselves fully aware of all these factors and make an informed investment decision. In this blog, we will discuss some important factors that investors should try to remember before investing in mutual funds. 

To begin, let’s first understand the basics of mutual funds.

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Why choose mutual funds as your go-to investment option?

“An investment in knowledge pays the best interest.”
–Benjamin Franklin

Mutual funds are one of the most lucrative personal investment options available in India and it is has been booming in recent years with the advent of increasing accessibility, powered by the Internet. But, before we give you the reasons to consider investing in mutual funds it is essential that you decide on it with at least the basic understanding and knowledge of mutual funds.

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Is it a good time to invest in midcap and small cap funds?

The equity market is never meant to take a straight-line trajectory. It has its shares of ups and downs based on a number of other factors like the general economic and political conditions within and outside the country, the interplay of global capital markets, movement of the local currency, and many other factors.

There are 5000 odd stocks listed on the Bombay Stock Exchange, there is a classification put in place to differentiate between the stocks based on market capitalization. For the uninitiated, market capitalization is the market value of all outstanding shares of a company.

According to changed norms for fund categorization, large-cap funds can only invest in Top 100 stocks by market capitalization, mid-cap funds can choose between the 100-250th stocks and small-cap funds from the 251st stock by market cap.

What Is So Interesting About The Mid Cap And Small-Cap Space?

The Upside of Mid & Small Cap Space

Is it only the market capitalization that makes mid-cap and small-cap space unique and interesting? Of course not!!

Mid-caps and small-cap space represent that universe of the stocks which are budding or has the highest potential for growth. These companies are in their expansion phases and often prove to be value buys. These companies are not very popular so there are a limited number of value seekers investing in this space.

In a phase when the market is growing, the mid-cap and small-cap stocks often perform better than the large-cap stocks due to their potential for growth. Similarly, the mid-cap and the small-cap funds that majorly invest in these companies do well than the large-cap peers.

No wonder there is a lot of interest in this space.

The Downside of Mid & Small Cap Space

The Mid& Small Cap universe has a number of green-horn companies.

While the management of large-cap stocks is seasoned and can better weather a crisis, midcaps and small caps stocks might still be reaching there. Also, these stocks can quickly go down when there is an economic crisis/bear phase in the market.

Therefore investment in this space is not free from risks as these stocks show higher highs and lower lows (volatility).

Although, Mid-caps and small-cap mutual funds are handled by experienced fund managers yet they cannot guarantee you lesser volatility.

Performance of Mid-Caps/Small Caps vis-a-vis large caps

All said and done each one of us looks to maximize our investments. So performance is a key factor.

We looked into the performance of BSE Large Cap 100, BSE Mid Cap, and BSE Small-Cap indices over a 5 year period. This is considered as a proxy for Large Cap and Mid& Small Cap funds.

5 year performance of indices

We see that all 3 indices had a common base figure (almost) in 2013. While the index figure for Large Cap is just nearing the double-figure, the Mid-cap and Small Cap indices have moved way past that figure indicating growth in these stocks.

On the other hand, the volatility (ups and downs) for the Mid and Smallcap indices is also much higher when compared to volatility for the Large Cap index. For Ex: Consider a one-year horizon from Dec 2017 to Dec 2018, the fall in mid & small-cap indices has been much more than the fall in large-cap, thereby validating our view of higher highs and lower lows.

Takeaways

There is no right or wrong time to invest in any fund. Every fund stands to satisfy a certain need like large caps allow lesser returns with lesser risk and it is the vice-versa for mid and small caps.

The time horizon for holding also matters. Investments in mutual funds generally pay well over longer time horizons.

One cannot totally shun or embrace the mid-cap and small-cap funds. The investments in these funds should be guided by your risk appetite, holding horizon, and financial goals rather than timing the market.

Key pitfalls of investment that every investor must avoid

“The stock market is a device for transferring money from the impatient to the patient.”
-Warren Buffett

Your investment portfolio should consist of those products that match your needs and work towards your financial goals. Investment is a must these days. Because investments allow an individual to create a corpus, but they also enable us to earn a good return on the savings and can even generate regular income if done right. If you are a first-time investor or have been in the investment game for a while, you should consider these points and that will surely help you in your investment tactics and will also maximize your long term returns.

Mentioned below are the few factors that can help you find the right type of investment:

1. Understanding your financial product

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Is it a good time to invest in midcap and small cap funds?

The equity market is never meant to take a straight-line trajectory. It has its shares of ups and downs based on a number of other factors like the general economic and political conditions within and outside the country, the interplay of global capital markets, movement of the local currency, and many other factors.

There are 5000 odd stocks listed on the Bombay Stock Exchange, there is a classification put in place to differentiate between the stocks based on market capitalization. For the uninitiated, market capitalization is the market value of all outstanding shares of a company.

According to changed norms for fund categorization, large-cap funds can only invest in Top 100 stocks by market capitalization, mid-cap funds can choose between the 100-250th stocks and small-cap funds from the 251st stock by market cap.

What Is So Interesting About The Mid Cap And Small-Cap Space?

The Upside of Mid & Small Cap Space

Is it only the market capitalization that makes mid-cap and small-cap space unique and interesting? Of course not!!

Mid-caps and small-cap space represent that universe of the stocks which are budding or has the highest potential for growth. These companies are in their expansion phases and often prove to be value buys. These companies are not very popular so there are a limited number of value seekers investing in this space.

In a phase when the market is growing, the mid-cap and small-cap stocks often perform better than the large-cap stocks due to their potential of growth. Similarly, the mid-cap and the small-cap funds that majorly invest in these companies do well than the large-cap peers.

No wonder there is a lot of interest in this space.

The Downside of Mid & Small Cap Space

The Mid& Small Cap universe has a number of green-horn companies.

While the management of large-cap stocks is seasoned and can better weather a crisis, midcaps and small caps stocks might still be reaching there. Also, these stocks can quickly go down when there is an economic crisis/bear phase in the market.

Therefore investment in this space is not free from risks as these stocks show higher highs and lower lows (volatility).

Although, Mid-caps and small-cap mutual funds are handled by experienced fund managers yet they cannot guarantee you lesser volatility.

Performance of Mid-Caps/Small Caps vis-a-vis large caps

All said and done each one of us looks to maximize our investments. So performance is a key factor.

We looked into the performance of BSE Large Cap 100, BSE Mid Cap and BSE Small-Cap indices over a 5 year period. This is considered as a proxy for Large Cap and Mid& Small Cap funds.

5 year performance of indices

We see that all 3 indices had a common base figure (almost) in 2013. While the index figure for Large Cap is just nearing the double-figure, the Mid-cap and Small Cap indices have moved way past that figure indicating growth in these stocks.

On the other hand, the volatility (ups and downs) for the Mid and Smallcap indices is also much higher when compared to volatility for Large Cap index. For Ex: Consider a one-year horizon from Dec 2017 to Dec 2018, the fall in mid & small-cap indices has been much more than the fall in large-cap, thereby validating our view of higher highs and lower lows.

Takeaways

There is no right or wrong time to invest in any fund. Every fund stands to satisfy a certain need like large caps allow lesser returns with lesser risk and it is the vice-versa for mid and small caps.

The time horizon for holding also matters. Investments in mutual funds generally pay well over longer time horizons.

One cannot totally shun or embrace the mid-cap and small-cap funds. The investments in these funds should be guided by your risk appetite, holding horizon and your financial goals rather than timing the market.

loan against mutual fund

Loan Against Mutual Fund

“Vision without execution is daydreaming.”
-Bill Gates

Financial crises can occur at any time. Loans are handy and are the first option most of them opt for. So today we would look into one the topic: -Which is the better option between loans against mutual fund and a personal loan? The answer is a loan against mutual funds because it allows you to borrow by putting your mutual fund investment as collateral with the bank. And since an asset class backs the loan, the interest rates are usually lower than the personal loan. You cannot redeem the mutual fund units as long as they are pledged with the bank but can redeem if you default.

Each bank offers a loan against mutual fund as per the list of approved mutual funds. It’s the agreement that banks own, on sale and hold your investments. The banks have all rights to sell your funds in case of default or non-payment of the loan amount.

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6 Reasons Mutual Funds

6 investment mistakes to avoid with Mutual Funds

An addition of about 9.74 lakh Systematic Investment Plan (SIP) accounts recorded each month on an average last financial year and an average SIP size of about Rs.3,200 (data according to Association of Mutual Funds in India (AMFI) ), has shown the ease with which people can understand, invest and earn returns with Mutual Funds, thus making it a popular investment option. Also, the fact that investors can choose between Equity, Debt and Balanced funds (which invest in both Equity and Debt), they can invest in funds that suit their investment needs, risk appetite and financial goals. Investments in Mutual Funds help you earn higher returns than Fixed Deposits or your Savings account, provided you avoid these six common mistakes while investing in Mutual Funds:

1. Not Considering Risk
A typical behavior we see amongst investors is “The herd mentality”. Investors do not want to miss on returns, hence come under peer pressure and invest in Mutual Funds that do not suit their risk appetite. It’s very important to do a financial check of your situation and evaluate your investment horizon. If you are a risk-averse investor with an investment goal less than five years, then do not choose Equity Funds instead go for Debt funds. However, if you have longer investment goals (> 5 years) then choose Equity Funds. Remember, only the right Fund would yield the proper Benefit.

2. Investing without a Financial Goal
Have a Financial Goal. It could be saving money for your Child’s marriage or education, or you might want to save for your retirement, or it could be as simple as buying yourself a vehicle. No matter what the purpose is, every Goal has a fixed Tenure. So plan. Any allocation to equity or debt mutual funds must go hand-in-hand with your financial plan and to your inflows. And remember, once you have invested, you must not think about withdrawal until you are nearing your investment goal.

3. Over Diversification
Yes, Diversification is crucial, because Mutual Funds are subjected to market risks and putting all the eggs in the same basket could be tricky. However, at the same time, putting your money into different schemes is not the right solution; instead, you might be investing in several underperforming funds, and it could be a hassle to manage your SIPs. Alternatively, you should invest in a few schemes (4-5 schemes) which provide overall market exposure, and you can easily track your investments.

4.Timing the Market
We are not traders, we are investors. Traders/ Speculators are the ones who need to inspect the market minute to minute. On the other end we as investors, most of us are salaried people and do afford to set aside savings every month. So the best approach to invest in Mutual Funds is through a regular plan, meaning Systematic Investment Plan (SIPs). This practice will let the money grow over the investment tenure and helps you invest in a disciplined manner. Remember, with Mutual Funds, it’s the time in the market that matters and not timing the market.

5. Stopping SIPs when the market is down
It’s common amongst investors to panic and stop their SIPs when the markets are down due to fear of loss. However, investors forget the fact that it is in the bearish phase that you can buy more units at a lower price, and this will help you to achieve your long-term goals. It is important to stay invested with SIPs to reap benefits rather than changing it with the market sentiments. Remember! Every bear trend is followed by the bull, resulting in the recovery of the market.

6.Not Reviewing
It is after all your money at stake. Investors must track the performance of their investments, and it is best that you do it at a regular interval. Failing to do so can cost you a fortune. Make it a habit to conduct a periodical review of all your Mutual Fund schemes; this not only helps you to track the funds in your portfolio but also helps to get rid of the ones that are underperforming.

“Successful investment is about managing risk, not avoiding it. “
Benjamin Graham