It is a known fact that costs are an important parameter to consider when investing in mutual funds.
As mutual funds are the most preferred vehicle for retail investors, there is often a debate on mutual fund expense ratios or fees being too costly.
The regulator, knowing the benefit of lower costs, introduced a direct plan option under mutual fund schemes. Direct plans come with a lower expense ratio because it eliminates distribution costs, which translates into huge savings over the long term.
Actually, it was not long before direct plans of mutual funds began trending. Investors began shifting out of regular plans to direct plans having realised that the difference of a few percentage points in the expense ratio could lead to an immense savings in costs.
Read: Mutual Fund Direct Plans - Everything You Need To Know
However, the only drawback of direct plans is that the investor is left to his own devices.
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This means, though you maybe “penny wise” by saving on costs, you may end up being “pound foolish” by ignoring multiple aspects that go into mutual fund investing.
There are multiple aspects to look at when investing in mutual funds, such as:
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Setting realistic and measurable goals
Before embarking on your investment journey through mutual funds, first set S.M.A.R.T. financial goals. This means that your investment goals should be Specific, Measurable, Adjustable, Realistic, and Time-bound. Investing in an ad-hoc manner without any focus will lead to the sub-optimal utilisation of your savings.
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Investing as per your risk profile
Remember, your investments in mutual fund schemes should always be aligned with your risk profile and its suitability for your financial goal; because every mutual fund scheme carries some investment risk. It would be best to first consider your risk appetite and the suitability of the investment for your financial goal, and then decide whether to invest in a particular financial product or not.
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Adopting the right asset allocation strategy
Choosing funds as per your risk profile is half the job done. It is pertinent to focus on optimal asset allocation as well. Asset allocation refers to distributing your investible surplus across asset classes such as equity, debt, gold, real estate, or even holding cash for that matter. Through proper allocation, you are essentially adopting an investment strategy that can balance your portfolio’s risk and rewards keeping in mind your risk profile, financial goals, and investment time horizon.
(Note: This video is for educative purposes only)
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Picking the right mutual fund schemes
To enhance your returns, you need to pick the right scheme as well.When picking mutual fund schemes, you need to analyse the risk-return parameters vis-a-vis other schemes and the quality of fund management. All mutual funds do not have the capability to perform consistently. Those who are unsure about which mutual fund schemes to invest in may try PersonalFN’s unbiased mutual fund research services.
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Regularly reviewing your portfolio for changes in the scheme’s investment attributes
The mutual fund industry is under constant change. As seen recently, the regulator mandated proper categorisation of mutual fund schemes. Only one scheme is allowed per category. Hence, to meet these guidelines, the fund house may need to alter the schemes investment objective or merge the scheme with others. Such amendments may induce you to make changes in your portfolio. However, before doing so, you need to judge the long-term impact.
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Tax implications on redemptions
The gains on equity mutual funds and debt mutual funds (non-equity funds) are taxed differently. Only schemes that allocate over 65% of their assets to qualify as equity funds.
Equity mutual funds attract a Short-term Capital Gain (STCG) tax @15% on units redeemed within a year. STCG tax is applicable for debt fund units sold within 36 months. In the latter, the gains are added to income and taxed as per the income-tax slab. Long-term Capital Gains (LTCG) on equity mutual funds are now taxable @10% (for gains over Rs1 lakh). For non-equity funds, LTCG tax is chargeable @20% with indexation. Keep this in mind before investing and during the redemption of mutual fund units.
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Monitoring your goals regularly and making appropriate changes
Without a timely review of your financial plans, you are most probably hindering your financial goals! Most of us also get our personal assets (such as car, air-conditioner, refrigerator etc.) serviced at least once a year in order to keep them in optimum condition. The same principle needs to apply to our financial plans as well.
A change in income, dependents, tax bracket, status, etc. will often warrant a review or your financial plan and investments. Based on the performance of your investments, you may also need to adjust the investment amounts or switch to an alternative fund. A review of your financial plan enables you to determine whether or not your pre-determined goals are achievable under the present conditions.
When investing through direct plans, you need to manage all this yourself or opt for the services of a fee-based financial planner or investment advisor.
Over the past few years, the way we invest and the way we receive advice has changed drastically and for the better.
A new form of investment advisory has emerged – robo-advisors. These online platforms use technology that runs complex algorithms to develop automated customised portfolio allocation and investment recommendations.
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These platforms are convenient, engaging, and simple to use.
Some robo-advisors are able to attract clients with their attractive low costs and offer direct plans. Some even claim it to be a free service or virtually free.
Read here: Why a robo-advisory platform should offer you direct plans?
However, under mutual funds, there are hundreds of plans available under the different categories. A good and unbiased robo-advisor will help you separate the wheat from the chaff.
In other words, the robo-advisor needs to select mutual funds backed by sound research. Performance should not be the only criteria. There are different qualitative and quantitative parameters that need to be looked at before arriving at the top schemes.
Do read: Is Robo-Advisory An Option for You? Find Out Here…
Even when picking the right robo-advisor too, avoid being “penny wise and pound foolish”.
An advisor with lower fees may not be equipped to pick the right mutual fund schemes in comparison to an advisor charging a higher sum. Also, the advisor with the lower fees might be less professional and have poor customer service, leaving the investor in the lurch when there are urgent questions about investments.
Stay tuned, as PersonalFN Direct, a robo-advisory platform is just around the corner. Unlike the other models, we do not charge any indirect commission or per transaction cost.
Additionally, we intend to save your costs further by offering you direct plans.
P.S. – If you are seeking holistic financial planning, PersonalFN's Financial Guardian will assist you in planning for different investment goals. You can reach out to PersonalFN on +91-22-61361200, or write to info@personalfn.com
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