A report on the 69th free seminar conducted by Moneylife Foundation in the past 14 months

Moneylife Foundation trustee, Debashis Basu today cautioned investors that they should study mutual funds properly before deciding to invest in any of them. Mr Basu said there were various pros and cons for these schemes and he dwelt on these aspects during an hour-long presentation at a workshop on "How to choose the right mutual fund scheme" at the Moneylife Knowledge Centre on Tuesday.

Mr Basu began by giving the participants an overview on mutual funds, explaining the different types of schemes available, like equity funds, ELSS (equity linked saving schemes), bond funds, liquid funds and SIP (systematic investment plan). He explained about the benefits and the risks associated with each of these plans and investment strategies.

ELSS is an investment option that is usually picked by investors for tax benefits in the last quarter of the financial year. In fact investors should invest in ELSS for the entire year to get its investment benefits too, Mr Basu pointed out.

While there are hundreds of bond funds, "bond funds are not for average savers", he said. They often give lower returns than bank fixed deposits (FDs) and have costs and volatility attached to them. Bonds usually come with the notion that they are risk free. But in fact they are not. Bonds come with an interest rate risk, whereby if the interest rate rises, the bond prices fall. No one can judge the rise and fall of interest rates, hence investing in bonds could be considered as speculative. Only those who have a thorough understanding of bonds should invest in these funds, else bank FDs would be better as there is no cost attached to it.

Hybrid funds, which invest certain portion of the portfolio in equity, debt and gold ETFs (exchange traded funds) are to be avoided too, as the performance of the fund is left to the mercy of the asset class in question and the fund manager's market-timing ability. These funds used to invest mostly in equity and debt and now they have added gold to the list. Mr Basu compared these funds to a ready cup of tea. But investors with some financial knowledge should do their own allocation and not opt for these funds.

SIPs (systematic investment plans) though a good option, are flawed if they are not adjusted for the growth option. Investors usually don't consider inflation and invest the same amount over the years. In fact, the value of money falls over the years, therefore, investors should incrementally increase their investment amount.

Mr Basu introduced the idea of value averaging, a better option compared to SIP. It is a strategy through which investors should buy more when the NAV is less and vice-versa, thus increasing returns.

Equity schemes help create long-term wealth. But care should be taken while choosing the right scheme, as less than half of the schemes outperform the benchmark and the difference between the best-performing fund and the worst is huge, Mr Basu pointed out.

On how to choose the best equity scheme, ideally returns over a five-year rolling period should be considered to analyse the performance of a fund. Moneylife regularly puts out such analysis. There are usually just four-five fund houses that register consistently good performance. A portfolio which is diversified across all sectors should be chosen; therefore sector funds should be avoided. Investors should avoid NFOs (new fund offerings) and funds with fancy names.

Investors, who don't have any experience about the markets and don't want to make any effort either, can still make money from the market through index funds.

This programme, hosted by Moneylife Foundation, is the latest in a series of programmes on real estate, credit cards, wills & nominations and a range of related subjects. This is the 69th such seminar conducted by Moneylife Foundation since March 2010. The programmes have been conducted at the Moneylife Knowledge Centre in Dadar, in central Mumbai, and in various cities across the country are free. Moneylife Foundation has more than 5,700 members. Membership is free. To register as a member click here.