Is Mutual Fund really risky?

Let's understand difference between Risk and Volatility.

If someone would have invested Rs. 100,000/- in popular scheme of MF in January 2008, the value in March 2009 was Rs. 45479/-  (-54.5% down)
(Those who withdraw here will end up making loss)

But do you know the value in November 2010 ? it was Rs. 136,687/- (200% up from March 2009).

Not only that, the value in January 2015 was Rs. 212855/- (55.7% up from November 2010)

But again in February 2016, it was Rs. 156398/- (-26.5% down from January 2015)

And 18th May 2018 value was Rs. 252049/-

But despite the roller coaster ride, from Jan 2008 to May 2018, Rs. 100,000/- has grown to Rs. 252,049 (152.05%)

Mutual fund is not risky but it is volatile.

Please do understand one thing...Give time to your investment to grow. Don’t jump on to conclusion by looking at 1 or 2 years return. Stay Invested!

When should we redeem our mutual fund investment?

Mutual funds reclassification, rising crude oil prices , trade war worries and a falling rupee have taken toll on mid- and small-cap stocks. some of my friends and clients calling me and asking that should we withdraw our money out? Just falling market should not be the only reason for Exit. When we do start any investment or SIP, it is for a Goal. Market cant move northwards only. It has its own cycle. We all have seen the financial market crash in 2008 and we have also witnessed the recovery it had shown. Who have exited at that time, have exited with loss but who didn't have, earned tremendous return on their investment.

So when should we redeem our mutual fund investment? We must ask following question to ourselves before redemption:

Is my Goal Achieved? : Every investment must have some goal. it would be a very wise decision to exit from then equity investment when you reach near the goal. It will be better to start SWP (Systematic Withdrawal plan) to come out from your investment from equity and keep the proceeds in some fixed asset.

Is my fund is under performing its class or benchmark? : If you fund is under performing its peers and benchmark for one  or two or years consistently then you can switch to some other fund as per your requirement and goal. Many new investors are betting big on small cap schemes. They believe that they will make them rich quickly. and as soon as market turns south word they become impatient. Mostly people compare the fund return with Nifty or Sensex. it is same as comparing Apple with Orange. Investors must compare fund with correct benchmark.

Is the re-balancing required? : Risk profile of any investor can change with time. If someone, having balanced profile, have invested any mid cap fund which have outperformed the market then he can think to redeem some part of investment and move it to Fixed Asset. It can also happen that, fund have changed its investment strategy due to which it does not fit into someone portfolio, then he can exit from the fund.

What is the tax implication? : Investors must consider the exit load before redemption. After the long term capital gain, we need to plan the exit according to your tax bracket. From April 1, LTCG made on transfer of equity mutual funds that have an equity exposure of 65 per cent or more will have to pay a 10 per cent tax on long-term capital gains above Rs 1 lakh a year. This new tax will apply in any financial year whenever there is LTCG on redemption of equity MF, if you have held those units for at least 12 months.


Investors need to remind themselves that investing regularly in a good scheme which suites their risk profile, over a long period is the only way to create wealth.

No Loss Mutual Fund Investment

When it comes to investment in market, most of us first think about safety. Safety of principal amount becomes more crucial if you have a large sum to invest. I must say this in the start of discussion that when we go for safety then we should not expect return more than 7-8% per year, which is very near to standard FD a rate. But the products available in Mutual Funds we can generate alpha over this FD return. We must also need to consider the Liquidity aspect of an investment. This plan is useful for:

• Investment for Emergency Fund creation.

• Funds for Down Payment of Home, Car etc.

• Investments for the proceeds of Redemptions near Goal.  

• Retired Person.

What is the plan?

Suppose an investor have Rs5,00,000. He needs this money for down payment for home. This means he can’t take risk on this amount. So what does he has as option for the risk free investments? One of the most common answers would be fixed deposits. But if he finalized any property then it will attract the pre-closure penalty. This will reduce the value of investment. If decision takes longer than inflation will also play its role.  This has the same effect on the value of investment.

Now see the option in mutual fund space for this type of investment, where risk should be zero with variable time period. The option is Liquid Funds. it invests primarily in money market instruments like certificate of deposits, treasury bills, commercial papers and term deposits. These funds are designed in such a manner that it helps a fund manager in meeting the redemption demand from investors. We can take out our money any time without any exit load. We can get proceeds of redemption in 1 day. Liquid fund can also give instant payment. Sebi has capped this limit to  90% of your folio's value, whichever is lower. CRISIL Liquid Fund Index has given 6.9% return in one year.  But you can say that where the alpha is then? Let me explain.

Liquid fund investment (rs500000) with 7% CAGR will give about Rs2900 per month. If an investor invests this amount any large cap equity Mutual fund then it will create an alpha with. If the Equity fund give return 12% per year then the investment would be Rs732795 where as Liquid fund alone will give us only Rs704701. But if we choose fund having better return than difference will be more significant. Nifty has a CAGR of 12.1% in last 20 years (since 1997).

You can download the Excel file for your reference from here.

Choose ELSS based on risk appetite, not on Ratings

An investment must be good in terms of yields and should be available when we need money. This applies to tax saving investments also. It should be good investment first and tax-saver later. There are many instruments for tax saving in India. We have various options available under section 80C as

• PPF
• NSC
• NPS
• ULIP
• ELSS

If we validate all these available options in of terms of return and liquidity then ELSS will be the most appropriate option. ELSS funds are pure equity funds with three year lock-in.  The returns on redemption (after lock-in) will attract LTCG (10% of the return above 1Lakh, introduced this year).

There are various funds available in ELSS category. We should not see all ELSS funds of same kind. Like any other equity funds each ELSS funds have their own nature of investment. They can be categorized as large caps funds, multi-cap funds, value funds, growth funds, etc. So we before choosing any ELSS fund for investment one should know where his money going to be invested. We mostly ended up comparing all of ELSS funds purely based on return and ratings. The decision should also be depended on the risks taken to produce returns. Selected fund must be aligned with the investor’s risk profile, i.e. fund’s profile should be matched with your risk appetite. So please take the star ratings with a pinch of salt.

For example Reliance Tax Saver, Sundaram Tax Saver and IDBI Equity Advantage have a clear mid-cap bias which leads more volatility. Franklin India Taxshield, DHFL Pramerica Tax Savings and Edelweiss Tax Advantage have predominantly large-cap exposure. Whereas, Axis Long Term Equity, Birla Sun Life Tax Plan, ICICI Prudential Long Term Equity have a more balanced portfolio.

At the beginning this financial year, calculate the amount you have left over from the Rs 1.5 lakh limit after deductions like PF, insurance  Premiums and Home loan Principle, divide it by 12 and start an SIP. You can get a decent return that beats inflation with a good margin.

Hope this help.

Mutual fund's Expense Ratio

Expense ratio tells that how much a fund is expending to run the business. Rest would be invested. We cant judge a fund on the basis of expense ratio. It is used for all type of expenses like salaries, agent commission, office expenses etc.

A good fund manager can charge more salary than the other fund manager. A newer fund house may offer higher commission to its agent. All these are included in expense ratio.

As per SEBI regulations, the maximum expense ratio of an equity fund can be 2.5% and for a debt fund, it should not cross 2.25%.it will additional allowance 0.3 per cent given for selling in Tier II and Tier III cities for equity schemes. The return from an fund returns is always exposed after such expense ratio.

The expense is charged on daily basis. Suppose some fine day NAV of a fund is 100rs and it is moved 5%then the final NAV would not be 105. If the expense ratio is 2% then the expense ratio for that particular day would be 2%/365 (that’s 365th part of 2% as charges, as it’s for 1 day, remember 365 days in a year) and the final NAV would be 105-0.5479=104.45rs.

So dont decide the fund to invest on expense ratio. Go for the fund which has good consistent CAGR return for 3 to 5 years. if there are two equally good performers and one has a lower expense ratio than the other, then you should perhaps go for the first one.