Dilemmas That Can Make Mf Investing Tricky

Mutual funds are a simple yet the most dynamic investment vehicle. However, to get the best from them, it is important to make the right selection in terms of schemes, options as well as the strategy. However, many investors face dilemmas while doing so and hence often find it difficult to make the right choices. Here are a few of the dilemmas faced by investors and how these can be tackled. 

Direct vs Regular Plan 

While mutual funds are a simple investment vehicle, investing in them is not so simple, as one has to make a number of decisions starting from ascertaining asset allocation, choosing the right fundsfor each asset class, monitoring their performance, taking corrective measures and keeping focus on their goals during volatile periods. Although direct plans reduce the cost for investors, their inability to follow the right process can prove very costly either in the form of taking risk beyond their capacity or earning below average returns and that can compel them to compromise on some of their investment goals. Therefore, opt for the direct plan only if you are confident about doing justice to your investment. 

Diversified vs focused/concentrated portfolio There is a place for funds with a diversified as well as focused/ concentrated portfolios. If you are a new investor, funds that have a diversified portfolio should be the mainstay of your portfolio. Once you become familiar with the nuances of investing in equity funds, you can expand your investment process funds that have focused/ concentrated portfolios and give yourself a chance to enhance overall returns, albeit with increased volatility. 

Open-ended vs close-ended funds One of the key reasons why mutual funds score over other options is flexibility provided by open-ended funds in terms of liquidity as well as realigning the portfolio in line with your changing personal situations during your defined time horizon. No wonder, open-ended fundsare the preferred choice of investors. However, some of the categories of funds like FMPs and ELSS require them to either have a closeended structure or a mandatory lock-in period. For most other types of closedended funds, the ills of the structure like option to invest only a lump sum amount, lack of liquidity and lack of flexibility for fund managers to benefit from different market situations makes them an inferior option as compared to open-ended funds. 

Dividend vs Growth Option 

The choice of option while investing in a fund depends upon your need, that is, whether to generate regular income or growth or both. While the obvious choice for those who require regular income is dividend option, Dividend Distribution Tax (DDT) of 25 percent plus surcharge and cess for debt funds and 10 percent plus surcharge and cess for equity oriented funds makes them tax inefficient. However, there is an option to plan in advance and allow money to grow for the period that makes it eligible for you to claim long-term capital gains and then opt for a Systematic Withdrawal Plan (SWP) to get regular income and reduce your tax outgo. If the intention is to accumulate a corpus over a period of time, growth option suits the bill. 

SIP vs STP 

If you have a lumpsum amount to invest, but you would like to invest in a disciplined manner, STP is a better option than SIP. Under STP, you can invest in a liquidfund and instruct the fund house to transfer a fixed sum, at a fixed interval,into a pre-decided fund. Considering that liquidfunds have the potential to provide higher return than savings bank account, you will not only benefit by earning higher returns but also benefit from averaging by investing in equity or equity-oriented funds in a disciplined manner. Besides, there is always a possibility of money being utilised for something else if it remains in a bank account. 

Large vs small size of fund 

The size of a fund can certainly be one of the factors in the decision-making process of investors. However, the impact varies depending on the kind of funds you intend to invest in. For certain categories of funds such as liquid, low duration and shortterm income funds as well as large-cap oriented equity and equity-related funds, the large size is not likely to be a handicap. However, for small-cap and mid-cap, sectoral and thematic funds, smaller size can be a positive as stock picking is a major differentiator for these funds..