Mutual fund products can help you to accumulate money to pay for long term goals. You can be a regular saver in these to ensure that you remain on track to your goals.
Many times individuals look for readymade solutions for their long term goals. Child insurance product is a case in point, wherein people buy them with a hope to build large corpus for their child’s education. Enough has been written about the sub-optimal performance of traditional plans that fail to cope up with rising inflation in the long term. Despite the limitations of over-reliance on a single product, many individuals want simple solutions to address their wealth goals. Since hybrid products offer exposure to both asset classes - equity and debt, they can be considered for meeting long term goals. Here is how one can look as these mutual fund offerings:
How the fixed allocation hybrids work
These are first and oldest offerings in hybrid category - hybrid equity aggressive (also known as balanced funds), hybrid debt aggressive & hybrid debt conservative. The level of equity & debt investments varies in each of the option. While this differs from fund to fund, the hybrid equity aggressive funds carry highest equity exposure at approximately 70%. The hybrid equity aggressive funds offer taxation benefits like normal equity mutual funds. The hybrid debt aggressive & hybrid debt conservative category offer taxation benefits like a normal debt mutual fund. These funds are actively managed & rebalanced regularly. The focus on fixed asset allocation ensures automatic rebalancing which most people otherwise miss out.
How about dynamic funds?
Dynamic funds focus on market valuations & target a dynamic asset allocation based on certain parameters. Some funds use PE (Price to earning) multiple & some include government securities yield in their model. Some of them work as fund of fund. This means that taxation treatment is like a debt mutual fund. These funds are rebalanced dynamically. Some funds however buy securities and their tax treatment depends on the asset allocation at the time of selling these funds. Dynamic funds don’t perform at the top of the market charts but they provide cushion in the falling markets & protect you on the down side. They aim at buying the undervalued asset class and sell over valued asset class.
Are these funds for you?
Fixed allocation hybrid funds are considered a good start for first time investors. However, the hybrid equity aggressive category includes exposure to mid & small cap stocks resulting in short term fluctuations. The hybrid debt categories are good if you are comfortable with low exposure to equity & debt mutual fund taxation. The asset allocation mechanism is decent but not directly linked to valuations or earnings.
The dynamic funds are good for conservative investors who prefer to let the fund manager take a call on the asset allocation as they themselves do not want to decide their asset allocation. If the fund is working on ‘fund of fund’ model then you have to accept debt fund taxation. Buying a not so favourable asset class and selling an overheated one, may mean that there is a cap on earnings, though it also brings you downside protection. The cost structures in case of fund of fund structures may be on the higher side. Also these funds cannot be seen as a debt allocation as they may have steep exit loads and you may not want to use them as your emergency corpus.
New kid on the block – equity savings funds can also be looked at by investors. These schemes offer to invest in equity, debt and arbitrage positions. These are tax efficient vehicles as they enjoy equity taxation. However, the exposure to equity is capped around 35% of the total investments in these schemes. These schemes should be seen as a means of investing in equity with relatively less volatility.
What should you do?
Power of compounding helps to beat inflation & instruments like equity aggressive hybrid mutual funds can also save on taxes. The trick here is to start as early as possible & push as much of surplus in to such goal based investments. If you plan to stay invested for long term goal say five years and above & don’t expect to manage the portfolio actively, then the dynamic funds can be a good starting point. Ensure that you review your funds at least once in a year. Getting influenced by overall ratings is not a good idea. One way to measure your fund performance is to apply the relative measurement i.e. compared to other funds in the same category how consistently has your fund performed?
Remember that biggest trick is to stay invested for a really long time & manage the portfolio with asset allocation principles.
Author is a SEBI Registered Investment Advisor and has founded www.gettingyourich.com.The Great Diwali Discount!
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First Published on Mar 29, 2016 07:38 pm