Exiting mutual funds might become a costly proposition if the Securities and Exchange Board of India (Sebi) proposal to increase the exit load by 25 basis points is approved. The new proposal has been making headlines for quite some time now, but the load will be applicable only if the exit is made within a year. It is designed to boost long-term investments and may help the mutual fund industry with some extra leg room to meet ‘expenses’.
Whether to invest via mutual funds?
Now, with the implementation of the expense ratio the question arises whether it is advisable to invest in equity through mutual fund schemes? If not, then what are the other options through which equity investment can be undertaken? Many investors are self traders/investors in equity markets, but directly investing in equity markets require knowledge of the working of markets and also a great deal of time.
Benefit of investing in mutual funds
Small-time investors benefit from options like systematic investment plans with benefits like rupee cost averaging and long-term benefit in the form of the compounding effect. They also have the benefit of a well-diversified portfolio and no hassles of portfolio management and higher risk adjusted return.
Approach to investment
Basically there are two ways of investing in mutual funds — lumpsum/one time investment and systematic investment plan (SIP). The SIP approach scores more than lumpsum as it reaps the benefit even when the market is heading south. During market falls, for those who have done a one time investment, the portfolio value will start coming down but for SIPs, the units will be bought at a lower price — thus reducing the average investment price per unit; this concept is popularly known as cost averaging. Due to lower average cost of purchase the profitability also increases.
Choosing the funds
Choosing a mutual fund scheme these days has become a difficult task for the investor due to different investment options. There are about 35 mutual fund houses (total number of mutual funds is 44) with each offering at least 40 different schemes on an average. Thus, these lead us to over 1,400 different schemes to choose from. However, in order to make investment easy, one can consider the following approach.
Choose a fund which has a track record of more than three years and maintains consistency in returns. Choose from diversified equity funds and avoid thematic and sector-based funds as they