Wednesday, May 07, 2008

Mutual Funds (MF) - Safer bet in choppy market

Turbulent markets are always a matter of panic for retail investors. Continuing volatility and short-term bearish outlook have led to severe bloodbath on Indian bourses in recent times. Due to the global crisis, it is difficult to take a short-term call on the Indian markets, but in the long-term, one remains positive.

There is no significant change in the fundamentals of Indian economy. If the economy is believed to grow at 7.5-8%, then there is no reason why an investor should not enter the market below 16,000 at these levels.

The current valuation is an opportunity for long-term investors to park their money in equity-oriented mutual funds (MFs) at lower NAVs. Many investors who had bet their money directly in equities had suffered in the recent turmoil. Many stocks which were trading at all-time highs have now tumbled to their 52-week lows in the current collapse.

During the time of such crisis, one often realises the advantage of investing in MFs over direct equity. Following are some reasons why one would want to invest in an MF in the current conditions.

MFs invest in a number of companies across a broad cross-section of industries and sectors. This diversification reduces the risk because all the stocks do not decline at the same time and in the same proportion. This diversification through an MF is achieved with far less money than one can be on his own.

Top-performing MF schemes have produced good returns, which a naive investor rarely achieves in course of direct stock-market trading. Not everyone has the skill, knowledge and time to plan his/her investments. The easier way out is to select the right MF and transfer the entire responsibility of managing the money to the fund manager. Thus they can avail of services of experienced and skilled professionals who are backed by a dedicated investment research team.

Today, MFs provide an attractive and simple way of tapping the potential of various investment options like equity, debt and money market instruments. If you are unsure about the equity markets this year, you can simply move to a debt fund or an MIP.

Indian markets have the potential over the long run, while it might not be a good bet for the short term. There are chances of continued volatility. It is advisable to spread out the investments rather than lump-sum ones. Here again, the MF proves to be beneficial since they provide features like systematic investment/transfer plans. Investment at regular intervals helps to average out the cost of purchase.

Equity MFs too have taken a hit in the recent stock market collapse. Yet, in most cases, their losses have been less severe than some of the single stock collapses (especially mid-cap ones). And for investors who had been investing through the systematic investment route for the past one year, they have actually earned positive returns despite the recent collapse.

Also, the right time to start tax planning for the year is now. When the markets are falling, one should grab the opportunity to invest in ELSS schemes (tax-saving mutual funds) rather than waiting for the end of the fiscal.

Although investment risk and economic uncertainties can never be eliminated, MFs have been able to ensure that investors in different segments achieve their investment objectives.