Liquid / Ultra Short Term Plans
Liquid / Ultra Short Term plans are best suited for those investors which have a very short term investment horizon ranging from 1 to a few days. Infact, this is not an investment but just parking of the “surplus liquidity” – it’s a superior alternative to a “bank saving account” wherein you will earn higher yield. Although these funds don’t carry interest rate risk but they certainly carry credit risks. The aim of the investor should be to earn accrual interest.
Short Term Plans
Short Term Plans invest in similar kind of instruments as does a liquid fund but with a slightly high maturity profile. Hence, this fund is best suited for someone having an investment horizon between 3 to 12 months. This fund finds its place between a bank savings account and a fixed deposit. These funds carry credit risks as well as some amount of interest rate risk. The aim of the investor should be to earn accrual interest along with some capital gains.
Short Term Plans invest in similar kind of instruments as does a liquid fund but with a slightly high maturity profile. Hence, this fund is best suited for someone having an investment horizon between 3 to 12 months. This fund finds its place between a bank savings account and a fixed deposit. These funds carry credit risks as well as some amount of interest rate risk. The aim of the investor should be to earn accrual interest along with some capital gains.
Income / Gilt Funds
Income Funds invest primarily in longer duration corporate papers with some Government of India Securities (GSecs) while Gilt Funds invest only in GSecs. These funds are best suited for medium to long term opportunistic investment in a steep yield curve scenario. Interest rates and bond prices have negative relation i.e. bond prices go up when interest rates come down and vice versa. Hence, timing is critical in this fund. The aim of the investor should be to earn accrual interest as well as capital gains.
Income Funds invest primarily in longer duration corporate papers with some Government of India Securities (GSecs) while Gilt Funds invest only in GSecs. These funds are best suited for medium to long term opportunistic investment in a steep yield curve scenario. Interest rates and bond prices have negative relation i.e. bond prices go up when interest rates come down and vice versa. Hence, timing is critical in this fund. The aim of the investor should be to earn accrual interest as well as capital gains.
Fixed Maturity Plan
A Fixed Maturity Plan (FMP) is for a fixed period of time and hence locks in at the prevailing interest rate for that period of time and therefore does not have any interest rate risk. However, the FMP has a very high “opportunity loss risk” in the sense that if you lock in long term FMP just before the beginning of an interest rate hike cycle then you will lose the opportunity of earning higher yields. Therefore, investment in a FMP should ideally be done at the peak of the short term policy hike interest rate cycle.
A Fixed Maturity Plan (FMP) is for a fixed period of time and hence locks in at the prevailing interest rate for that period of time and therefore does not have any interest rate risk. However, the FMP has a very high “opportunity loss risk” in the sense that if you lock in long term FMP just before the beginning of an interest rate hike cycle then you will lose the opportunity of earning higher yields. Therefore, investment in a FMP should ideally be done at the peak of the short term policy hike interest rate cycle.
Balanced Fund
As the name suggests, a balanced fund invests in both equities and debt and hence balances your asset allocation needs. The name of the Fund is Balance but it is the most imbalance of all the funds as it takes the credit of protecting and shielding your money of all the major investment robbers – inflation, income tax, interest rates, market volatility and asset allocation. The aim of the investor should be to earn attractive returns during equity bull markets and stabilize its portfolio during equity bear markets.
Equity Funds
Equity Funds invest in equity shares. Over a longer period, equities do provide higher return then fixed income because equity is growth capital. However, timing is important in the markets and you should possess the courage of buying during cyclical bottoms and selling during structural tops. There are different types of schemes like large cap, mid cap, small cap, sector funds, theme funds etc. Many new funds and schemes prop up during times of exuberance. Banking Funds will be launched when banking stocks have performed well, infrastructure funds when the infrastructure stocks are rising or IT funds when the technology boom is underway, so on and so forth. These sector funds are simply smart tactics to collect money from the gullible investors. Remember that there is no reason for you or anybody else to believe that they can pick winning stocks or time the markets. Hence, the best solution for any equity investor is to stock into low cost passively managed index funds because year after year they would beat atleast 75% of the actively managed funds and over the longer term in most probabilities beat almost all the funds.
Equity Funds invest in equity shares. Over a longer period, equities do provide higher return then fixed income because equity is growth capital. However, timing is important in the markets and you should possess the courage of buying during cyclical bottoms and selling during structural tops. There are different types of schemes like large cap, mid cap, small cap, sector funds, theme funds etc. Many new funds and schemes prop up during times of exuberance. Banking Funds will be launched when banking stocks have performed well, infrastructure funds when the infrastructure stocks are rising or IT funds when the technology boom is underway, so on and so forth. These sector funds are simply smart tactics to collect money from the gullible investors. Remember that there is no reason for you or anybody else to believe that they can pick winning stocks or time the markets. Hence, the best solution for any equity investor is to stock into low cost passively managed index funds because year after year they would beat atleast 75% of the actively managed funds and over the longer term in most probabilities beat almost all the funds.
Gold Funds
Gold Funds and ETFs are now widely available for the Indian MF investor. They offer the ease and safety of holding Gold in electronic format as opposed to the physical format. They also offer tax benefits like not subjected to “wealth tax” and become long term in 1-year as opposed to 3- years for physical gold. The investor has to remember one thing that investment in Gold ETF is as good or bad as the price of the yellow metal itself because the fund holds Gold for you and hence your view on Gold is of paramount importance. I am here not trying to predict the future price of Gold because it’s a speculative commodity with no real industrial usage whose value depends on the value of US Dollar, real interest rates in the US which in turn depend on nominal interest rates and inflation over there and then the value of Indian rupee against the US Dollar.
Gold Funds and ETFs are now widely available for the Indian MF investor. They offer the ease and safety of holding Gold in electronic format as opposed to the physical format. They also offer tax benefits like not subjected to “wealth tax” and become long term in 1-year as opposed to 3- years for physical gold. The investor has to remember one thing that investment in Gold ETF is as good or bad as the price of the yellow metal itself because the fund holds Gold for you and hence your view on Gold is of paramount importance. I am here not trying to predict the future price of Gold because it’s a speculative commodity with no real industrial usage whose value depends on the value of US Dollar, real interest rates in the US which in turn depend on nominal interest rates and inflation over there and then the value of Indian rupee against the US Dollar.
International Funds
Nowadays there are lots of international funds on offer like the feeder funds i.e. the Indian fund house just acts as a “postman” – collecting funds from Indian investors and putting it in their international funds. There are also ETFs on foreign markets now available in India. Needless to say, if it’s difficult to predict Indian markets then it would be more difficult to predict foreign markets. Besides the pure returns from those funds, currency plays a major role – the thumb rue being weaker the Indian rupee against the US Dollar, higher the return to Indian investor.
Nowadays there are lots of international funds on offer like the feeder funds i.e. the Indian fund house just acts as a “postman” – collecting funds from Indian investors and putting it in their international funds. There are also ETFs on foreign markets now available in India. Needless to say, if it’s difficult to predict Indian markets then it would be more difficult to predict foreign markets. Besides the pure returns from those funds, currency plays a major role – the thumb rue being weaker the Indian rupee against the US Dollar, higher the return to Indian investor.