How many schemes should I invest in? Should I invest in NFOs? You may have faced such questions from clients. To prepare you for answering such questions, Confluence Investment Marathon 2021 (CCIM 21) hosted Dhirendra Kumar, Founder & CEO, Value Research at Confluence Investment Marathon 2021 (CCIM 21). He was in conversation with Prem Khatri, Founder & CEO, Cafemutual.
Here are the ten common mutual fund queries that Dhirendra addressed.
Q. In which funds should beginners invest their money?
A: First-time investors should not start their investment journey with pure equity funds. However, those having taxable earnings should start with ELSS, which generally translate into superior performance. Other novice investors can invest in balanced advantage funds or aggressive hybrids.
Q. What is the ideal number of mutual funds to hold? Also, for how long should investors invest in equity funds?
A: If chosen carefully, four to five funds can fulfil needs of most investors. This is across asset classes (equity & fixed) and different equity segments. The underlying portfolio should be diverse and reflective of different styles. Talking about equity funds, investors should invest for at least five years.
Q. There are a lot of NFOs nowadays. Should investors go for them or choose existing funds?
A: It is advisable to choose existing funds as the character of a fund can be derived from its past performance, which is not possible in the case of NFOs.
Q. Does it make sense to invest in large cap mutual funds considering their bloated AUM? Shouldn’t one focus on large cap ETFs considering their lower expenses?
A: Very few large cap funds are able to beat the index. Fund managers will have to generate alpha of atleast 1% return to beat the index, so odds are against them. Actively managed large cap funds have lost the plot and there is a compelling case for Sensex and Nifty ETFs.
Q: What should be the allocation to international funds in one’s portfolio? Also what makes more sense - international fund of funds (FoF) or international ETFs?
A: International markets have great depth and some international companies might have greater longevity. There is no harm in having a sizeable exposure in such markets. Novice investors wanting to test the ground can allocate 10%-20% to such funds.
Investors wanting to put their investments on autopilot can consider FOFs, while active investors can opt for ETFs. ETF investors should also be mindful of the difference between NAV and price, which many times is not very efficient.
Q. Does the SIP date has anything to do with performance? Which date is most suitable for SIPs?
A: The SIP date doesn’t matter and investors can choose any convenient date.
Q. What if a fund is not performing well?
A: Two things that matter here are - since how long is the fund not performing well and what defines underperformance i.e. its inability to beat the index or peers? Give the fund a two-year time before deciding to exit.
Q. Should investments be distributed in large percentages in large, mid and small caps instead of flexi cap funds?
A: The challenge of large, mid and small cap is that it typically causes great anxiety, as one of the three kinds often tends to underperform. Investors can deal with such anxieties better and can generate reasonable results through flexi caps. These funds automate whole investment with ease, offer tax efficiency, simplicity and low maintenance.
Q: Mutual fund or a basket of stocks, which one is better?
A: It is advisable to stick to tried and tested mutual funds over a basket investing. Further, in terms of taxation, mutual funds are more attractive and beneficial for investors.
While Small case does simplify stock investing at competitive costs, they are yet to prove themselves. However, investors tempted to invest in equities could allocate a small portion of their funds to small case portfolios.
Q. How to generate regular income from the retirement corpus accumulated? Should investors invest in an annuity or remain invested in equity funds?
A: Investors should not invest in annuities as they typically generate lower yields and inflation affects the net returns further. Investors should work with their advisors to decide an asset allocation and withdrawal plan. It is recommended to limit the annual withdrawals to 6%-6.5%.
These were some of the many questions that Dhirendra addressed. Watch this video for more.
