Make Your MF Portfolio Count

Investing money is a process that requires investors to plan at the beginning and tackle the numerous challenges that may emerge periodically during their defined time horizon. This needs to be done in a manner that portfolio remains on track to achieve various short-term, medium-term and long-term investment goals. Unfortunately, not many investors plan their investments well, and even those who plan, often abandon the process when faced with uncertainties. At times, even the most seasoned investors allow their portfolios to drift and thus pay a heavy price in the form of compromising long-term goals for short-term gains.

Hemant Rustagi
Chief Executive Officer, Wiseinvest Advisors 

No wonder, investors have had mixed experiences with their mutual fund investments. However, it is good to see increasing number of investors adopting SIP route to invest in mutual funds with a clear time commitment. This has enabledthem to tackle the current volatility in the stock market well and remain committed to their investment process. As more and more investors join this disciplined section of investing public, mutual funds will find a rightful place in their portfolios. 

While this entire process is likely to take time as it involves changing the mindset, investors will do well to take a few steps in the interim to make their portfolio more effective. Here are a few key steps and how these can benefit investors. 

Embrace ELSS 

We often see investors making haphazard decisions to save taxes at the fag-end of the year. Also, since tax saving investments are not made an integral part of their overall investment process, due consideration is not given to asset allocation and investment options like ELSS that have the potential to provide highest returns amongst all eligible investments under Section 80C. 

ELSS are often ignored as investors have misconceptions about equity as an asset class. Those taxpayers who face this dilemma need to realise that investing in ELSS is the best way to understand the stock market vagaries and learn how to tackle them. The mandatory lock-in period of three years and discipline of investing through SIP helps them stay invested and realise how investments grow over time despite bouts of volatility. Once they get comfortable with equities, it becomes much easier to increase exposure to this asset class. This goes a long way in improving long-term returns on their portfolios. 

Dividend Payout vs SWP 

For those who require regular income from their mutual fund investments, there is a choice to opt for dividend payout. Depending upon the type of fund one is invested in, dividend is received at a pre-decided interval.The Union Budget 2018 introduced a Dividend Distribution Tax (DDT) @10 percent on dividend paid by equity and equity-oriented hybrid funds. Debt funds were already required to pay DDT of 25 percent. Therefore, investors must review their strategy to reduce the impact of DDT on their regular income. Enrolling for a Systematic Withdrawal Plan (SWP) can be an effective strategy as long-term capital gains, that is, gains from redemption of units after 12 months from equity and equity-oriented hybrid funds up to `1 lakh are not taxable. Moreover, when a fixed sum is redeemed every month, only a part of the proceeds is taxed as capital gains. However, one should sign up for SWP only after allowing investments to grow for a period that makes them eligible for long-term capital gains. 

Invest in Hybrid Funds 

While it is a proven fact that equities have the potential to outperform other asset classes over the long-term, many investors hesitate to invest in pure equity funds. Also, equity funds are not suitable for investors who cannot put the money aside for longer durations. This is where hybrid funds, that is, those investing in a mix of equity and debt, have a role to play. Investors have the option of choosing between debt and equityoriented hybrid funds based on their time horizon and risk profile. 

Some of the examples of hybrid funds are equity savings funds, balanced advantage funds and hybrid equity funds. These hybrid funds, especially those that have a combined exposure of equity and arbitrage to the tune of 65% percent or more, have the potential to provide higher gross and post-tax returns than options such as fixed deposits and debt funds.