What are the differences between Nifty exchange-traded fund (ETF) and any equity mutual fund? Could you also highlight the pros and cons of both?
ETFs are passively managed funds. The portfolio of an ETF fund is determined by an algorithm and quantitative details about the companies listed in the market. No human judgement enters the decision-making process regarding which stock the fund will hold and in what percentage. General equity mutual funds, on the other hand, are actively managed. These have a fund manager and a team making decisions about all aspects of the portfolio, including what stocks to hold, how much and when to buy/sell.
The advantages of an ETF is transparency and cost. Since there is no active management involved, the costs are lower than actively managed funds. The disadvantage is that due to a specific mandate, there is lack of flexibility in terms of reacting to market conditions or opportunities. In general, actively managed funds have better manoeuvrability since they can make a judgement based on what they observe.
I want to invest 30% of my portfolio in debt funds. Kindly suggest whether I should go for monthly income plans (MIPs), income funds, floating rate funds, gilt funds or money market funds. My investment horizon is long term and I want to build a corpus.
A regular retail investor needs to consider only MIPs, income funds, short-term funds and liquid funds. MIPs have an equity component (sometimes as high as 20-25%) and hence is the riskiest of the lot. Income funds have some capital risk, but generally give better returns compared with fixed deposits over three-five years. Short-term funds have less capital risk and are meant to be held for six months to a year. Liquid funds are the safest of the lot with returns comparable to savings account returns. These, however, are typically used less as investment vehicles and more as source funds for systematic transfer plans to equity funds.
Please help me understand the concept of a debt fund and MIPs. What’s the difference between the two? Please suggest some good debt funds.
Pure debt funds invest exclusively in various bonds, deposits and money market products (as opposed to equity funds that invest primarily in the stock market). MIPs are hybrid products that invest in debt as well as equity. Typically, MIPs invest 75-85% of their portfolio in debt products and 15-25% in equities. MIPs try to preserve capital with their debt investments while aiming for higher returns with equity investment.
Some good debt funds are Templeton India Short-term Income Retail fund and HDFC High Interest Short-term fund.
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