5 Dilemmas that Mutual Fund Investors Face

Mutual funds are fast becoming the most preferred investment vehicle for Indians. As per SEBI data, the number of folios rose to a record 62,049,189 at the end of September 2017, from 55,399,631 in March-end, a gain of 66.5 lakh.

Low interest on FDs and higher liquidity post demonetization are the key reasons driving retail investors towards mutual funds. However, investors can be overwhelmed by the multiple fund houses, scheme names, scheme types and options under mutual funds.

Here are some common dilemmas that MF investors face:

  • Diversified or Sectoral Portfolio?

The assumption is that diversification helps cut risks, while a sector-heavy portfolio is better aligned to gain from rallies. Both approaches have their pros and cons. Based on individual risk appetite, goals, and investment horizon, one can take a call.

 

A prudent strategy could be to maintain core holdings in diversified funds and invest the surplus in high-risk sector-specific funds for better returns.

 

  • Growth Option or Dividend Pay-out?

Growth option is a good choice for those seeking long-term returns. Since the money stays invested, you make the most of the compounding. In most cases, it is advisable to opt for a Growth option.

 

On the other hand, the dividend pay-out option offers tax-free profits, but lowers the Net Asset Value (NAV) and hampers compounding. While the dividends are tax-free, there is a dividend distribution tax (not on balanced funds and equity) that is deducted from the NAV. Choose this is you really need the periodic (not guaranteed) pay-outs.

 

  • Actively Managed or Passive Index Funds?

Passive index funds try to replicate the composition of their benchmark index, and in doing so, give returns that are proportionate to the index. Actively managed funds, as the name suggests, are actively traded to maximize returns that outperform. Consequently, they have higher expenses.

 

  • Open-ended or Close-ended?

Open-ended funds allow investors to enter and exit at any time. Investors generally prefer these schemes as they have higher flexibility and can increase or decrease their exposure based on the market dynamics.

 

Close-ended funds, on the other hand, specify a fixed time for both. Since the fund manager is assured about the tenure and size of the investable corpus, he or she can take strategic positions to maximize returns, without maintaining cash for unexpected redemptions.

 

  • NFOs or Existing Schemes?

While NFOs offer new opportunities and the chance to explore untapped avenues, some find comfort in opting for tried and trusted schemes with sizable portfolios and a proven track record.

 

Also, while newer funds might have an attractive proposition, and present a sound investment case, they might not be ideal for investors who do not fully understand the investment objective and scheme goals. But then, past performance is not a guarantee of future returns.

 

Choose an NFO only if the fund offers a truly unique opportunity that holds merit.

 

While mutual funds often prove to be better than many traditional investment products, they also require certain degree of awareness on the part of the investor. For optimum return, the investor should match the objectives of the mutual funds with his own investment goals and risk appetite.

 

Talk to experts at Edelweiss Partners to learn more about mutual funds, and to help your clients make the most of the MF choices and options available. Become an Edelweiss Partner today and take your business to the next level.

 

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