Reap The Best Rewards

Hemant Rustagi
Chief Executive Officer, Wiseinvest Advisors 

Investing through mutual funds can be a sure-shot way of enhancing your chances to achieve your investment goals over varied time horizons as they offer a number of advantages over traditional investment options. While the key is to select those funds that suit your needs as well as have the potential to generate healthy returns over time, it is equally important to make certain key decisions relating to issues that can have wide-ranging impact on your financial future. Here are a few of these situations that may require you to adopt a balanced approach rather than looking for some short-term gains.

Direct versus Regular Plan

One of the best things about mutual fund investing is it allows you to either invest on your own or through the help of an investment advisor. However, making a decision about whether to do it yourself or not can be tricky. If you are already investing in mutual funds or looking to include them in your portfolio, you would have faced this dilemma at some stage. While there is a clear advantage of lower cost in direct plans, the issue that could make it difficult for you to decide would usually be the level of confidence you may have in your ability to select funds as well as monitor the progress of funds in your portfolio.

It is important to understand that inability to follow the right process can prove very costly either in the form of taking risk beyond your capacity or earning below average returns and that can compel you to compromise on some of your important investment goals. So, invest on your own if you are confident of making the right decisions. If not, working with an investment advisor can be more beneficial despite that additional cost.

Diversified versus Focused funds

Although there is place for both diversified and focused funds in the portfolio, a combination in the right proportion can improve portfolio returns. While beginners should focus on diversified funds, experienced investors can expand their investment universe through funds that have focused or concentrated portfolios and enhance their returns, albeit with increased volatility at times.

STP versus SIP

Both systematic transfer plan (STP) and systematic investment plan (SIP) propagate a disciplined investment approach. The basic difference being that while opting for STP, you must have a lump sum amount. This amount is invested in an option like liquid fund with an instruction for the fund to transfer a fixed sum, at a fixed interval, into a pre-decided fund of the same mutual fund. On the other hand, under SIP you commit to invest a fixed sum at a pre-decided interval (usually every month) directly into the fund chosen for investment from your bank account.

In other words, even if you don’t have a lump sum, you can still commit to invest a fixed amount every month out of your monthly income. However, if you have a lump sum amount, investing through STP can be a better option as liquid funds have the potential to generate higher return than what you would usually get from your savings bank account. Besides, parking money in the liquid fund can eliminate the possibility of money being utilised for something or the other, thus derailing your investment process.

Existing Schemes versus New Schemes

The decision to add a new scheme or to invest in an existing fund will depend upon the composition of the portfolio, investment goal as well as time horizon for which one intends to invest fresh money. For example, an investor who has built a portfolio for long-term goals will have to necessarily invest in a new fund if the objective is to park money for a period of 6-12 months. Generally speaking, investors must remember that over-diversification makes it difficult to monitor the portfolio and doesn’t offer any advantage as mutual funds themselves are a diversified vehicle.