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mutual funds

Finance

WORRIED ABOUT MARKET? INVEST IN HYBRID MUTUAL FUNDS

Several investors are often apprehensive of investing in the markets given the current market situation. As a result, these investors are often on the lookout of safer investment options that can help them take a defensive position in the market. One such great investment option for such investors can be hybrid mutual funds. Hybrid funds ensure graded exposure to equity as per your risk profile. Different types of hybrid funds aim to cater to varying goals of investors. In this article, we will understand about hybrid funds, their types and why you should invest in hybrid mutual funds.

What is a balanced fund?

Balanced funds, commonly known as hybrid mutual funds are a type of mutual funds that contain both stock and bond component in a predetermined ratio in a single investment portfolio. The stock component in the fund helps the fund to earn higher returns on their portfolio, while the bond component in the fund helps to diminish the risk exposure of the fund.

Types of hybrid funds

There are different types of balanced funds an investor can choose from. Let’s have a look at some of these mutual funds. Balanced advantage funds or BAF is a hybrid fund wherein the fund manager determines the equity allocation in the fund. On the other, aggressive hybrid funds or AHF invest around 65% to 80% of their assets in equities and equity-related instruments. In the next category, equity savings funds have an equity exposure of around 20% to 40% as per the fund’s investment objectives. The remaining corpus in equity savings fund is allocated to debt instruments and hedged equity.

Advantages of balanced mutual funds

There are several benefits of investing in hybrid funds. Let’s look at a few of these advantages enjoyed by hybrid investors:

  1. Investment discipline – Hybrid funds decide their asset allocation to equity and debt instruments as per the investment objectives of the portfolio. As market movements are not uniform, this ratio of asset allocation might get distorted. If the equity markets experience rally, the originally decided ratio might work in the favor of equities.
  2. Flexibility – In all equity-fund categories, with the exception of flexi-cap funds, fund managers are bound to invest in these funds in a specific ratio. For instance, ELSS mutual funds are mandated to invest a minimum of 80% of their assets in equity investments. Multi-cap funds are mandated to invest at least 25% of assets in small-cap, mid-cap, and large-cap funds. Large-cap funds are authorized to invest in the companies of top 100 stocks. However, hybrid funds offer flexibility to investors to determine their asset allocation mix as per their financial objectives, risk profile, and investment horizon.
  3. Tax aspect – The equity component in balanced funds is taxed similar to equity funds and the debt component in hybrid funds are taxed similar to debt funds. If you are still confused about the tax aspect on their investments, you might consider availing of the services of a financial expert.

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Finance

4 THINGS YOU SHOULD KEEP IN MIND WHILE INVESTING

When it comes to investing in mutual funds, mere mutual fund comparison to choose the best mutual fund schemes for your investment portfolio might not be enough. There are certain things that you as an investor must be aware of. In this article, we will understand four such things that you as an investor must keep in mind before investing in different types of mutual fund investment plans.

Things to keep in mind while investing

Following are a few things that an investor must be aware about before investing in mutual funds:

  1. Asset allocation strategy
    The asset allocation strategy is determined by certain aspects of risk – how much risk an investor can afford to take? How much risk does an investor need? And lastly, how much risk is an investor willing to take? Once you are clear on these questions, it will be easier for you achieve the broad framework for asset allocation – i.e., where should an investor invest and in what proportions. Based on your investment horizon, you can break your investment portfolio into three or four components – short-term financial goals that need to be in investment options with low risk profile such as fixed-income instruments, medium-term financial goals that can be invested in securities with slightly higher risk profile such as mix of both equities and debt, and long-term financial goals that can be allotted to securities with high risk profile such as equities.
  2. Portfolio diversification
    Diversifying your investment portfolio is a way of allotting and investing your money across different types of securities, asset classes, and locations. This helps an investor to considerably reduce their risks without compromising too much on the returns. Hence, rather than putting all your eggs in one basket, diversify them across different types of investments.
  3. Maintain liquidity
    It is important to maintain enough liquidity that can easily protect an investor against loss of income or drop in income or any other type of emergencies. Hence, it is recommended that an investor has an emergency fund in place that can cater to any type of emergencies that might come their way during their investment journey. As a general rule, it is advised to invest at least three to six months of your living expenses in securities that offer high level of liquidity with decent rate of returns such as money market instruments or cash and cash equivalents.
  4. Reviewing financial portfolio
    It is extremely essential for an investor to conduct regular reviewing of their financial portfolio. This will help an investor to distinguish underperforming funds and reallocate their investment if the mutual fund scheme has been constantly underperforming as compared to their underlying benchmark indices and other peer funds belonging to the same category of the mutual fund scheme. Additionally, all long-term investments are likely to turn into mid-term investments and ultimately into short-term investments over time. And it is crucial to appropriately adjust your mutual fund investments when the financial goal is near completion.
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Finance

ASSET ALLOCATION AND DIVERSIFICATION – ARE THEY RELATED?

You might have across the investment terms diversification and asset allocation quite often. These are essential concepts used while constructing a financial plan. However, often investors end up using these investment terms interchangeably. Though both these investment concepts aid in managing portfolio risk, are these two terms related? If yes, how exactly? Let’s explore that in this article.

What is asset allocation?

It is an investment strategy that allows investors to balance risk vs rewards by determining the right percentage of each asset class in a financial portfolio. This determination is basis the investment horizon, financial goals under consideration, and the income flows of the investor.

Traditionally, there are three main asset classes in the investing world – equities, debt, and cash and cash equivalents. One can also add precious metals (such as silver, platinum, gold, etc.) or real estate, and alternatives such as other collectables, coins, and art to this asset class mix.

Note that, the portfolio risk adopted is not done on some random whims, but a consequence of an investor’s wealth status.

So if you are an individual with a low risk appetite, or if you are nearing your retirement, your asset allocation strategy would be different than someone who is in their 20s or 30s or someone who has a high risk profile.

Why must an investor invest in different asset classes?

The basic principle behind investing in different asset classes is that when you invest in an array of asset classes that aren’t highly correlated, an investor can successfully reduce the volatility of an investment portfolio. What’s interesting to note here is that it is compulsory for the asset classes to be negatively corelated.

Note that, histrocially, bonds and equities do not move in same direction and the correlation between both these asset classes are low.

Diversification

Is your portfolio risk fully accounted for with just mere asset allocation strategy? What if an investor invests all their particular asset class such as debt or equity into a single fund or stock? Imagine Raj has a single stock in their portfolio while Ramesh has 10 stocks in his investment portfolio. So in case of Raj, if the company that he has invested in suffers business loss due to any reason, his investment portfolio could take a huge beating. On the other hand, in Ramesh’s case, if any one of the companies that he has invested in suffers business loss, it would not impact his investment portfolio to a huge extent as he is heavily diversified across various stocks. One stock going bad would only impact 1/10th of this investment portfolio.

However, note that though diversifying your portfolio can be quite beneficial to your portfolio, over diversification might turn the tables around and might not be as effective. Experts believe that if an investor diversifies their portfolio beyond 20 or 30 stocks, it would be counter-effective and not make much sense. You can choose to diversify your investments across asset classes (debt, equity, cash and cash equivalents), location (international funds, national funds, regional funds, etc.) and also sector funds. Next time you choose to invest in mutual funds, keep these points in mind. Happy investing!

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Investment

DEBT MUTUAL FUNDS VS FIXED DEPOSITS- WHAT MAKES FOR A BETTER CHOICE?

Though Fixed deposits (FDs) are considered as traditional investment options, they still find a place in most Indian households. As per the reports of Reserve Bank of India (RBI) released on June 2020, around 53% of average Indian household’s financial assets are dedicated towards fixed deposits as on March 2020. Though mutual funds are also seemingly popular among retail investors, these investment options raise to popularity in the recent decades. As per the date released by AMFI (Association of Mutual Funds in India), the AUM (asset under management) of mutual funds in India have grown at CAGR (compounded annual growth returns) of around 17% in the last twenty years. So, which of the above two investment options make for a better choice? Let’s understand and explore in this article.

What is a mutual fund?

Mutual funds are financial vehicles that are professionally managed by mutual fund experts known as fund managers. A fund house or an AMC (asset management company) pools the funds of several investors and invest in different securities basis the investment objective of the fund. Examples of such securities include cash and cash equivalents, stocks, money market instruments, bonds, etc. These fund managers have in-depth knowledge and understanding of the markets. You can invest in mutual funds either via a systematic and regular mode of investment – SIP (systematic investment plan) or lumpsum mode of investment.

What is a fixed deposit?

Fixed deposits are financial instruments provided by financial intermediaries such as NBFCs (Non-Banking Financial Company) or banks that offers investors with a fixed rate of interests for a fixed duration. The government of India predetermines this interest rate every year. Hence, these are relatively safer investment options than mutual fund investments. In return, investors are not allowed to redeem the schemes before the maturity of the term. Unlike mutual fund investments, you cannot make an SIP investment in fixed deposits. You need to make a lumpsum investment to invest in fixed deposit schemes.

Mutual funds vs fixed deposit

Let’s understand the differences between fixed deposits and mutual funds by referring to the following table:

Parameter Fixed deposits Mutual funds
Interest rates Fixed Vary as they are market-linked
Investment objective To preserve wealth To generate wealth
Market conditions Returns are not dependent on market conditions Market conditions play a significant role to calculate mutual funds returns
Risk Relatively lower risk as returns are predetermined and fixed Relatively higher risk
Expenses FDs do not levy any additional costs to investors Mutual funds levy certain charges and fees
Tax Dependent of the investor’s income tax slab Tax on mutual funds are dependent on the type of mutual funds invested in and the holding period of the investment
Lock-in period 5 years Except ELSS funds that have a lock-in period of 3 years, mutual funds do not have lock-in period
Mode of investment Only lumpsum investment Either SIP (systematic investment plan) or lumpsum investment

Where should I invest?

The decision to invest in mutual funds or fixed deposit lies with an investor. You must check your financial objectives, investment duration, and risk profile before deciding the right investment option for you. That being said, if you’re looking to generate wealth, you are better off with mutual funds as they have the potential to generate significant returns when invested for a prolonged duration. Happy investing!

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