In an interview to CNBC-TV18, personal finance expert, Gaurav Mashruwala, Certified Financial Planner shared his outlook mutual funds' colour coding.
Below is the verbatim transcript of Mashruwala's interview with CNBC-TV18.
Q: Securities and Exchange Board of India (SEBI) has issued a framework on product labeling with colour coding for mutual funds and that will be implemented from July 1, for all existing and forthcoming schemes. Could you explain how investors should read these colour codes? Are they meant only for risk?
A: Sebi has done a good job. In the past there has been issues whereby the scheme names of mutual funds were so long that investor did not know where he was investing or what was the underlying asset and how it will behave. To that extent, there are about four points that Sebi is talking about. One is the nature of the scheme. Therefore, mutual fund companies will help to disclose whether it is an income scheme or fixed income schemes or is it a growth oriented scheme from short-term, medium-term, long-term perspective. Second, they will also have to talk about one line description as to what the scheme is, is it going to be largecap, midcap, etc and the underlying asset class. So, is the scheme going to invest into debt, equity, gold etc.
When it comes to colour coding, there are three of them. There is blue colour coding, which means it’s a low risk and the principal will be more or less protected. The slightly higher one is a yellow one where we are seeing it’s a medium risk and principal will be little more volatile. The highest is brown, which says that the safety of principal is little less. So, blue is the safest followed by yellow and highest being brown. Apart from that, there will be one more line, which says that in case one is not clear with this, one can consult investment advisor. So, one single snapshot, which a mutual fund company will have to give in all its schemes starting July so investor can look at it and make out where the scheme is going to invest, what is the risk and the strategy of the scheme.
Caller Q: I am investing approximately Rs 13,000 per month in mutual funds and apart from this I have a money back plan and there is LIC growth plus. I have invested Rs 40,000 per year from May 2010 and I have Dynamic Wealth Plan from ICICI Bank in which I am investing Rs 24,000 per annum. Therefore, my question is whether I am investing in direction in mutual funds because I want to buy a house in next three years and for that I will be requiring Rs 10 lakh-15 lakh.
A: Rs 13,000 per month does not seem sufficient if you want to reach Rs 10 lakh-15 lakh in next three years. That’s one. Second, if the goal is at the end of three years, which is according to me is short to medium-term; equity is not the asset class because you are looking at buying a house.
If you need to buy a home then that’s one thing, which you cannot defer and if that point of time equity markets are down then you are stuck. So, park 15-20 percent of your funds in an equity scheme or 80 percent into debt or there could be a scheme, which has a combination of these two. Therefore, going 100 percent equity for three year goal is not prudent and while I do not want to comment on scheme specific and there are whole lots of them, usually does not make sense to go beyond three-five schemes because you are not getting additional diversification benefit. If you also spend time and look at the underlying portfolio, lot of them would have scrip repeated.
Therefore, in three years time if your goal is Rs 10 lakh then Rs 13000 does not seem sufficient. Second, you should not have too many schemes. Three, your asset allocation should be in a scheme, which has 20 percent equity, 80 percent debt or you can have 20 percent dedicate equity fund and 80 percent could be in a debt fund or recurring deposit, whatever suits you.
Q: Those three-four insurance schemes he mentioned, would it not make more sense to avoid those if he can and get into equity because he needs money for the house?
A: Per se insurance is never a good investment vehicle. It is basically to cover the risk of death and this is because the amount of brokerages and the expenses that gets charged. So, if he has an option of stopping that then that will be ideal, if he can take out money from that that will be still better. So, if he can maneuver with those three-four plans; he mentioned money back plan, it will be great. However, then he should keep in mind that maybe left without any kind of insurance cover and hence he may want to pickup a term plan.