I want to invest in banking scrips. Do you think it is better to invest in mutual funds (MFs) with banking theme rather than going for direct equities?
An MF scheme offers two benefits over direct equity investing—diversification and portfolio management. Unless you are investing a large sum of money, you will not be able to invest in more than a handful of banking stocks if you go directly to the stock market. On the other hand, an MF aggregates funds from a lot of investors and will invest in many stocks of the sector.
Also, if you have a day job, it is unlikely that you would be able to pay attention to the market and stock movements on a regular basis day in and day out. In an MF, the fund manager will do that for you.
The disadvantages of going with a fund would be the cost that you will incur (the expense ratio of MFs) and the loss of control over where you invest. If you are ready to trust a fund manager’s acumen in making the decisions for you, MFs will be the better choice. But if you feel confident that you can select the right stocks and, more importantly, have the time and knowledge to manage the basket of stocks, then direct investing would be the right choice.
I will retire in a few months. Are monthly income plans (MIPs) good for a retired person? Or is it risky considering it has exposure to equity?
MIPs are debt-oriented hybrid schemes. They invest at least 80% of their portfolio in the debt market (to preserve the invested capital) and the remaining in the equity market (to yield growth). However, these funds are indeed more risky than pure debt funds. Loss of capital is definitely possible, although the risk of such an event is lower than pure equity funds or equity-oriented hybrid funds.
If you are unwilling to expose your investment to any risk, then MIPs may not be suitable for you.
I have systematic investment plans (SIPs) in six schemes across two fund houses. Should I diversify across fund houses and not just schemes?
Equity fund managers of most fund houses are constrained in terms of which stocks they can invest in by the “house list” of stocks put together by their research departments. Also, each fund house may have its own style of making investment decisions. By going with different fund houses, an investor will be exposed to different lists of stocks and fund management styles, and to that extent, their portfolio will be more diversified. However, this does not mean an investor should use a different fund house for each scheme. Beyond a point, the law of diminishing returns will take hold and benefits of such diversification will become less and less meaningful. For a six-fund portfolio, for example, going beyond three fund houses may not enhance the diversification in a useful manner.
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