Spruce up your MF investments

Aarati Krishnan

OVER the past couple of years, many mutual fund investors have watched the Net Asset Value (NAV) of their fund soar to dizzy heights and then plunge abysmally.

Are you one of those who regret that you failed to cash in on the higher returns when the going was good? Or are you among those unfortunate souls who invested a lumpsum in a tech fund in the heyday of 1999, and wish you had not stayed invested? If you are, you must be left thinking that mutual fund investing, like investing in stocks, is not for the layman.

True, timing your entry and exit from a fund to perfection is close to impossible. So is keeping constant track of the NAV so that you catch it at the inflexion point. But, mutual funds now offer a set of potent tools that helpyou safeguard your investment returns. Use these and make the best of your mutual fund investment:

Triggers: How would it be if your fund automatically cashed in on your units once the NAV attained a target appreciation of, say, 30 per cent? This would save you from the headache of tracking the NAV daily and from the risk of losing money, because you failed to act fast enough. This is precisely what a trigger does. The trigger facility, currently offered by IDBI and IL&FS Mutual Funds, allows you to leave standing instructions with your fund to cash in your investment, once a target return is reached.

A trigger can also be set for a specific time period or on a specific date. You can set a trigger to cash in your investment the day your son completes his 18th birthday or the day before your wedding anniversary.

Automatic re-balancing: Your asset allocation pattern (that is, how you split your portfolio between equity, debt and short-term instruments) is one of the key investment decisions you make, as it reflects your appetite for risk. However, no asset allocation decision will serve its purpose unless you are willing to periodically review and re-balance your investments.

For instance, assume you started out with 50 per cent of your portfolio in an equity fund and 50 per cent in a debt fund. Over time, if the equity portfolio appreciates, you may be left with a higher equity portion than you are comfortable with. An automatic re-balancing facility allows you to set your asset allocation pattern and leave standing instructions with the fund to re-balance your investments at periodic intervals. You can direct the fund to re-balance your investments at pre-specified intervals -- say, every quarter, half year or at the end of every year. Most fund houses which manage both equity and debt funds offer this facility.

Sweep: This is also a facility that helps in maintaining a pre-set asset allocation pattern. Suppose you have invested Rs 5,000 in an equity fund and do not wish at any point in time to retain more than Rs 10,000 in equities.

You can leave standing instructions with the fund to sweep all returns earned in excess of this sum into a debt fund managed by the same fund house. Funds also offer the facility of dividend sweep, that is, ploughing back all the dividends declared by a scheme into another scheme.

Fixed Maturity plans: Several fund houses recently launched debt-oriented Fixed Maturity Plans or have added fixed maturity options on their debt schemes. These plans, that work like a fixed deposit, try to achieve a compromise between the predictability of returns which a bank fixed deposit offers and the convenience of operating an open-end mutual fund.

One of the key problems faced by plain-vanilla debt funds is that they cater to investors with varying investment horizons. For instance, under normal circumstances, a corporate investor which has parked its temporary cash surpluses with the fund for a month invests in the same fund as an individual who has put in his nest-egg for a ten-year period. These two investors would place contrasting demands on the fund manager.

The former may force the fund to invest in short-term gilts or money market instruments, with liquidity taking priority over returns. The latters interest would be better served if the fund manager invests in long-dated corporate or government paper, putting returns ahead of instant liquidity. Inevitably, the interests of one of these investors is compromised at the altar of the other.

Fixed maturity plans on debt-oriented funds try to get around just this problem. Investors in fixed maturity plans are asked to determine the time period over which they expect to hold their investments. FMPs usually offer a choice of several time periods. In fact, you can choose among 91-day, 182-day and 366-day plans just as with bank term deposit.

The fund then tries to tailor its investment portfolio in such a way that the majority of investments in the fund mature at the same time as the plan. Apart from making the returns from the plan more predictable, the FMPs also allow investors to reap the full benefit of staying invested in a fund over a long period. Most FMPs do not impose a rigid lock-in period on investors, but do discourage pre-mature withdrawals through an exit load.

Dividend payout/re-investment: This facility is now a standard part of most fund offerings. Dividend payouts go directly to reduce the NAV of a fund, so they do not enhance investment returns from a fund. But dividends can serve a useful purpose. A dividend may be used by a fund as a tool to cash in on any part of its investment returns that it thinks is unsustainable.This being the case, investors can decide between the payout and there-investment options on the basis of their risk preferences and convenience.

Conservative investors, who prefer to cash in on their returns as and when they are available to, may opt for the payout option. On the other hand, investors comfortable leaving the declared dividends with the fund itself (much like subscribing to the growth option of a fund where the performance is directly reflected in the NAV) may opt for re-investment. The decision will also depend on the rate of return at which the investor believes he will be able to re-invest the dividends.