Opt for direct plan of a mutual fund only if you are well versed with principles of investing

Absence of an adviser to guide you through the investment choices could also have a negative effect on your portfolio


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I am new to investing and want to opt for a direct plan of mutual funds rather than taking a regular plan to save broker commissions. Is it wise to do so? What else should I keep in mind when opting for a direct plan?

—Mahesh Kapoor

Direct plans have lower expense ratios compared to regular plans of the same fund. This difference in expense ratios can indeed add up substantially when investments are made for the long term. However, the absence of an adviser to guide you through the investment choices could also have a negative effect in terms of your portfolio performance.

People who choose direct plans should satisfy three criteria. One, they should have a good grasp of the arithmetics of investing (some basic understanding of compounding and the ability to plan for financial goals). Two, an understanding of financial products and how to sift and sort the good ones from the mediocre ones. Three, the discipline to do this over the long term with an understanding of self and the markets’ behaviours.

Those who can take care of these three elements, should definitely opt for direct plans and save on advisory commissions. In your case, however, as a person who is new to investing, my guess is that you may not be quite up to the mark on some of these requirements. If that is the case, I would recommend that you engage the services of an investment adviser to guide you with your mutual fund investment portfolio.

I have Rs7 lakh to invest in the market. My investment horizon is 5 years. I am planning to invest Rs3 lakh in fixed deposits, Rs2 lakh in a systematic transfer plan (STP)—from a debt fund to an equity-based fund over 20 months, Rs1 lakh into e-gold and Rs1 lakh in Franklin Templeton Large Cap fund. Should I change anything?

—Vinod Kumar

At the end of the day, the most important thing is asset allocation of your portfolio and whether or not it is suitable for you and the time frame you are investing for.

In your case, you are investing for a period of 5 years. Since you have not indicated your age or your risk profile, let me assume that you are relatively young and you are a moderate risk taker.

Your proposed asset allocation is 43% in debt, 43% in equity (of which 29% will be deployed over time), and the rest in gold. In my opinion, it is a tad conservative, and if that is the way you want to go about your investing, then it is fine. However, if you are okay with a little bit more risk in your portfolio, I would suggest increasing your equity allocation to 55-60% by reducing from the other asset classes.

Also, in terms of deployment, it is a fine choice to use STP to invest in an equity fund, but I would suggest reducing the time frame from 20 months to 12 months so that the invested money gets more time to spend in the market.

Regarding investment instruments, the large-cap fund from Franklin Templeton—assuming you mean Franklin Templeton Bluechip fund—is a fine choice. You can also choose another fund from Franklin Templeton—Prima Plus fund—for the other equity fund that you may plan to invest in. Regarding debt investments, investing in a bond fund would be better than a fixed deposit because with a 5-year time frame, you could get the advantage of indexation when it comes to paying taxes on your gains.

I have Rs4 lakh to invest and want to put 80% of the sum in equity mutual funds. But a friend of mine is suggesting that I invest via a systematic investment plan (SIP) rather than making a lump sum payment. What is the advantage of doing so? Are the returns more if you opt for the SIP route?

—Keshav Bhargav

The advantage of taking the SIP route is that investors get to reduce the market timing risk of their investments. If you invest Rs4 lakh in one go today, you are hoping that right now is a good time to invest in the market. Truth is, nobody really knows whether or not that is true.

At the present time, the markets could be priced high and your investment could fall, even if temporarily, as a result.

However, if you invest over a period of time—say, 12 months or 24 months—the average cost of investment would likely be lower than making a point-in-time investment. As a result of this, yes, the returns from your investment could be higher if you take the systematic route.

However, please note that there are two ways to take the systematic route in your case. As you have a lump sum in your hand, you can also choose the STP route and deploy the money in a liquid fund (or a set of liquid funds), and transfer them slowly to an equity fund (or a set of equity funds).

The advantage of doing this is, primarily, the money stays invested in funds and out of your bank account—which means you would have less temptation to withdraw it and spend it before completing your investments.

Srikanth Meenakshi is co-founder and COO, FundsIndia.com. Queries and views at mintmoney@livemint.com

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