Readers' Corner: Mutual Fund

My daughter is two years old. I am looking to invest for her education, as well as my retirement. I have a monthly surplus of Rs 30,000, and am looking for Rs 1.5-crore corpus in 18 years. What sort of mutual funds should I be looking at? 

While making investments, it is important to have a clarity in terms of investment horizon, risk profile and goal. As you have mentioned that you are looking at making investments to secure your retirement corpus and for your daughter’s education, you can continue to remain invested for a long time. Currently, most of the fund houses will help you identify your risk profile with the help of few basic Q&As or risk profilers. Based on your risk profile and other factors mentioned earlier, you may look at diversifying your investments to balance the risk-reward ratio by adjusting the percentage of amount invested in different asset classes. This will ensure that you gain from the investment opportunities in both the equity and debt markets across market cycles. There are online calculators available as well, which will guide you.

I am looking for a short-term investment (eight months) for Rs 65,000. Are mutual funds the right way to go? 

Investments in mutual funds can be made for different tenures. There are different product offering to match various investment horizon of an investor starting from a day. You can select a fund based on your risk profile and investment horizon. For short term investments, you can invest in debt funds or arbitrage funds as they are relatively less volatile as compared to other funds. Here you need to consider the exit load that will be charged depending on your tenure of investments. Also, gains in investments in debt funds for a period less than 3 year and in arbitrage funds for a period less than 1 year attracts short term capital gains tax.

I redeemed my investment in mutual funds. They sent me a cheque for the bank account I used many years back. The account is closed. The cheque got damaged. What can I do now? Don’t mutual fund houses issue a regular cheque that I can encashed in any account of my name?

It is always advisable to update your personal details like address, contact number or e-mail id and bank account details with your fund house. This will help them in serving you better and prevent you from any unnecessary hassle. In your case, you may inform the mutual fund house that the bank account for which this cheque is issued is now closed, so that they can update their system regarding the same. 

Additionally, you need to update your new bank account details with the Registrar or Fund house. 

Upon updation of the same, a new cheque will be issued or funds will be directly credited to your new bank account through NEFT/ RTGS.

Are arbitrage funds a good alternative to bank fixed deposits or should I opt for pure debt funds?

Bank deposits have been the instrument of choice for generations of low risk investors. However, it is becoming difficult to ignore the benefits presented by debt funds or arbitrage funds. The primary areas of difference lie in returns, taxation and liquidity. In case of arbitrage funds, one can get the benefit of long-term capital gains as tax free after an investment of one year and in case of the debt fund, same is applicable after a period of three years. Mutual fund investments also offer investors the benefit of liquidity, there is no lock-in period in both debt (open-ended) and arbitrage funds, although exit loads may be applicable upto a period specified. Currently, when interest rates are falling, better returns are offered by mutual funds. A lot of investors are showing interest in these schemes. 

Is the dividend reinvested in an equity-linked savings scheme also eligible for deduction?

Currently, equity linked savings scheme do not provide dividend reinvestment facility. These schemes have two options Growth and Dividend and within the dividend option, there are two facilities available - dividend payout and dividend transfer.

Why are many direct funds giving much higher returns compared to the regular scheme of the same funds. I understand that there could be a difference of 1-1.5 per cent because of expense ratio. But I have seen difference as high as 2-3 per cent. 

Why do the rating for direct and regular fund differ when the underlying portfolio is the same?

Mutual fund ratings provide a summary of how a fund has performed historically relative to its peers, but it should not be considered as a recommendation to invest in a specific mutual fund scheme. It is based on different parameters like risk adjusted returns, minimum assets, etc. Though the investment objective, asset allocation pattern, investment strategy and portfolio of both the regular and direct plans are same, direct plan has a lower expense ratio as compared to regular plans in the same schemes since there is no commission to be paid to the distributor under this plan. Different expenses of Direct and Regular Plans result in different NAVs for both plans, and hence an impact on the performance can be seen. This variation in the risk adjusted performance plays a major role, leading to difference in ratings of regular and direct plan of the same scheme.