Consider these 9 things before investing in mutual funds!
What is the right way to invest in mutual funds? How do mutual funds work? What kind of risk is involved? Which fund is right for whom? What things should be kept in mind before investing? Watch this video to know-
Given the backdrop of the current pandemic situation, it is natural for the investors to turn to passive investment believes financial experts. With many fund houses like Navi Mutual Fund, Kotak Mutual Fund, and Mirae Asset, which have recently launched such funds, investors have a huge scope to choose from the broader selection of passive funds.
“As the passive investment mimics the market, it is comparatively less volatile than the active funds, and this makes it a good choice for new investors as well as investors who prefer safety over returns,” said Manish P. Hingar, founder, Fintoo.
That said, in contrast to active funds, which constantly attempt to exceed benchmark indexes, passive funds closely track any market index by investing in the same equities at the same weight. Active funds are projected to acquire popularity in an environment where generating alpha, or an excess return over a benchmark index has become increasingly challenging.
Agreed Harshad Chetanwala, co-founder of MyWealthGrowth.com: “One of the biggest reasons for the surge in the interest in passive funds was the underperformance of actively managed funds compared to passive funds in the last couple of years. Many investors started investing in passive funds, which would have prompted the AMCs to launch such funds. Along with outperformance, the cost of managing passively managed funds is quite low.”
What should be the investor’s course of action?
A passive investment may not be suitable for aggressive investors who wish to get higher returns in the short term.
“With the speculations and unpredictability about the third wave, the volatility in the market is believed to continue for 6-8 months. So, investors who prefer to take less risk can opt for passive funds. If you are already a seasoned investor, then it is suggested to go for active funds in consultation with your financial planner,” said Hingar.
“A blend of both active and passive funds will always work well for investors. Investors who are beginning with their investment can have higher allocation in passive funds whereas existing investors with moderate to high-risk appetite can consider around 15-20% allocation in these funds,” pointed out Chetanwala.
However, some experts are of the view to hold the passive investment for the longer term and avoid if you want to lock in the fund for a short term period. “So, for a time period of one year, select a liquid fund or an ultra-short-term debt fund. Liquid funds might not allow SIPs, so you might have to opt for ultra-short-term funds. These funds will invest in debt instruments and will keep your money safe. Returns can vary, but you can expect 7–9% in one year,” said Manoj Dalmia, Director, and Founder, Proficient Equities..
Will the passive investment trend continue?
“Passive investment products trend is here to stay. These strategies to our mind are good complementing strategies to active schemes rather than substitutes from an investor point of view. Thematic plays etc. too can be played out well via passive offerings,” claimed Lakshmi Iyer, chief investment officer (Debt) & Head Products, Kotak Mahindra Asset Management Company.
What prompts investors to look at passive investing or passive funds were is the fact transaction costs associated with active funds and the failure to beat the index performance. Therefore, in the managed space, only funds that outperform the index will stay relevant and attractive.
“At no point in time, the entire portfolio of any investor is going to be into passive funds. It would be just a portion of the portfolio that will be invested into such funds. The share of passive funds is likely to grow in the coming years. Still, it will be a relatively slow process in India considering the very small percentage of funds which is into equity markets as of today,” concurred Joseph Thomas, Head of Research, Emkay Wealth Management.
Your risk tolerance and expected return determine how you allocate your portfolio between active and passive funds. If you are unable to decide on your own, see a financial planner.
“Of late, passive investment products have seen tremendous growth globally as well. From an overall mutual fund industry perspective, it is a positive development given that it widens the investment and savings options available to investors,” said Prateek Pant, chief business officer at White Oak Capital Management.