Mutual Fund is a new baby for most Indians – I keep getting lots of mutual fund questions through Comments on posts, Ask Us, or Business newspapers where I regularly write query sections. I have selected the most important & most frequently asked questions (faq) out of that. You can also ask questions in the comment section.
You can also get a “Secret Investment Guide” from the end of this post.
Mutual Fund Questions
- Is a mutual fund with a low NAV better?
- The difference in the performance of a Dividend or Growth Plan?
- What are the tax benefits in mutual funds?
- What are the charges in mutual funds?
- Is it a good time to invest in mutual funds?
- Should I invest in Infrastructure funds?
- Equity Vs Real Estate – which one is better?
- Mutual Funds or Direct Equity – who is the winner?
Low NAV Vs High NAV Mutual Funds
Question: Is it worth to go for a SIP in a fund where the NAV price is very high. Say HDFC Equity where NAV is around Rs 200?
Answer: You should not consider NAV as a deciding factor while investing in Mutual Funds. It is a myth that it’s good to invest in Mutual Fund with low NAV mutual funds because you will get more units and that means more returns. Let me clarify high or low has nothing to do with the future performance of the fund – NAV keeps changing due to the performance of the fund and that depends on markets & fund manager performance.
The only good thing with a higher NAV fund is that it is having some past track record to show. Low NAV is a gimmick used by agents to introduce you to new funds where their commission is higher. Say NO to NFO.
Check calculation of high an
Question: I want to invest in Reliance Mutual Fund, but as I am seeing the NAV, there is a huge gap in Growth and Dividend NAV. Which is better to invest in?
Answer: Most mutual fund schemes come in three options – dividend, dividend reinvestment, and growth. Undergrowth option, you get the units at the time of buying and you have a same number of units till the end. The NAV keeps changing according to performance. The fact that under the dividend option the fund keeps on declaring regular dividends so NAV reduces with such dividends. In dividend reinvestment, you get additional units on ex-dividend NAV. However, the truth is that it does not make a dime of difference which option you choose, from the pure investment yield point of view. There is a caveat, though – Investors should opt for that option that minimizes their tax liability.
Let’s take an example to understand this. Suppose an investor decides to invest INR 1000 in both, Dividend Re-invest and Growth option of the fund.
Check the calculation of dividend & growth plans.
Question: What are the tax benefits I can get while investing through mutual funds? Are there any special funds where I can invest to avail tax benefits?
Answer: Tax benefits in Mutual Funds keep changing from time to time. According to current laws, a few of the tax benefits are No long term gain tax on the sale of equity mutual fund(the long term here means 1 year plus), Tax-free dividend, No dividend distribution tax in case of equity mutual fund, Benefit of indexation in case of debt mutual fund & Lower long term gain tax in comparison to any other interest-bearing product. You can also invest in Equity Linked Tax Saving Schemes of mutual fund to take benefit under section 80 C. ELSS schemes have a locking period of 3 years & as the name suggest it invest in equity shares.
Mutual Fund Charges
Question: How the mutual fund charges its annual maintenance fee from the investor? Does it reflect in the NAV we get against the amount investor pays? How can an investor calculate it from the statement it receives? Other than this any other charges?
Answer: You are lucky that you are asking me this question in the No Entry Load era so there are only annual charges that you have to pay. Mutual Funds deduct Annual Maintenance Charges from the fund that you are investing in. Charges depend on the type of fund & the size of fund you are investing into. Charges are higher in the case of equity funds if compared to debt funds – if the size of the fund is big charges are comparatively low. Charges are levied in the guidance of SEBI & the maximum charges that are allowed in the case of Equity fund are 2.5% & in the case of debt are 2.25% in a year. These charges are used for asset management, distribution cost, custodian charge, registrar charge, etc. These charges are automatically deducted from your NAV on daily basis. So the NAV you see is after adjusting these charges. It can’t be calculated through a statement but you can check these expenses in the monthly factsheet.
Good time to invest in Mutual Funds
Question: I would like to invest Rs 2 Lakh for Long Term. Will you suggest investing it right now or should I wait for correction.
Answer: Far more money has been lost by investors in preparing for corrections, or anticipating corrections than has been lost in the corrections themselves. You should understand that timing of the market is not possible even by experts. In the long term, equity has consistently outperformed all other asset classes and works well against rising inflation. Equities are volatile in the short run but have the potential to create immense and stable wealth in long run. In the last 30 years, if one has invested for any 20 year period, the worst returns are 13.35% which is double what you get in an Endowment policy & the average return of equity in the same period is 16.72% which is double than any other debt investment. But if you don’t feel that you have such patience better invest through 1 year Systematic Transfer Plan.
One more on timing the market
Question: I was running a SIP of Reliance Vision for Rs. 1500/- per month it ended the last September…I invested Rs. 36000/-in 2 years… the present value is Rs. 49,000/-. It touched Rs. 54,000/- a few months back also but I didn’t withdraw the money. But now as the markets are going down, I think I have taken a wrong move by not taking the money out.
Answer: Equity gives you two types of return, one is speculative and another is fundamental growth. 95% of the investors in shares or mutual funds are here for speculative gain that is gain from the short-term price movement. They start TIMING THE MARKET rather than giving TIME IN THE MARKET. This approach for short-term gains is the real cause of loss. Investment, in the long run, is not only rewarding but also beats inflation by a good margin and creates wealth. If you keep such a close track on your investment it is going to be very tough for you to achieve your goals through equity investment.
Question: Should I invest in Infrastructure Funds – as it is believed that India needs good infrastructure & that will be reflected in the performance of the stocks.
Answer: Infrastructure funds as a theme was started in 2003-04 at that time exposure of infrastructure-based sector was not more than 25% in diversified equity funds. But now compare the portfolio of diversified equity fund with any infrastructure funds and you will find that exposure in infrastructure-related stocks has gone up to 60-70% of the overall portfolio. So now investing in infra funds means increasing the risk of your mutual fund portfolio. Infrastructure covers a lot of things like banking, power, energy, engineering, construction, cement, metal, etc. One more thing people need to realize that any diversified equity fund can buy into any sector or theme if the fund manager sees potential. Buying theme funds should be decided only when the theme has something unique to offer, which other funds are either not offering or offering in a limited way.
Equity Vs Real Estate
Question: Which will give better returns in the long term – equity or real estate?
Answer: Both equity & real estate are growth asset classes and will always beat inflation in long term by a substantial margin. Both real estate & equity markets are driven by the growth of the economy & businesses. In the long term, equities give a better return than real estate but investors have earned better returns in real estate. The reason is in real estate people invest for long term maybe 10-20 years so it saves there undue expenses, tax & bring out greed & fear emotions from investment. But inequity we do it the other way & that’s the reason investors feel properties give better returns. Also remember there are many shortcomings with real estate as well like the size of the investment, leveraging, black money, title problem, encroachment, liquidity issue, maintenance charges, etc.
Mutual Funds Vs Direct Equity
Question: I want to invest 2 lakh in the share market for 10 years please suggest to me the best shares in infra, power, bank, FMCG?
Answer: There is one good thing & one bad thing about your question. The good thing is you want to invest for the long term in equity but the bad thing is you want to invest directly in equity rather than going through Mutual Fund Route. The biggest problem with direct equity is that a very small number of people can do it right. And people who can do it right don’t ask for suggestions or tips – they just research & make their investments. But most of the people just feel they’re right, till they get really screwed big time when the market makes a turn. I am having a big confusion that why people think they can beat mutual fund managers? Direct equity demands too much attention & at times it’s too addictive. And when you can’t control yourself, it can ruin your portfolio and wipe out your savings.
Bonus Question – Suggest Low Rish High Return Mutual Funds
Answer – Hmmm
Hope you learned something from this post. In case if you have any mutual fund questions – feel free to add them in the comment section.
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