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Your work does not stop after you’ve invested in a mutual fund. You need to monitor your <keyword id="6362476" type="ORGANIZATION" weightage="20" keywordseo="investments">investments</keyword> with as much care as you took to select them. The performance of <keyword id="6357979" type="ORGANIZATION" weightage="20" keywordseo="mutual-funds">mutual funds</keyword> can change over time and you must take appropriate action. Keep in mind to periodically carry out the following actions to keep your investments in the pink of health: 
 
1. Track your portfolio 
The first thing you need to check is whether you have received the account statement from your mutual fund (MF) company. You might receive it from them either as a hard copy by post or as an email statement. Verify the amount invested and scheme name including the plan. 
Mutual fund companies will also regularly send you announcements related to your investments along with various promotional announcements. But don’t ignore them; especially watch out for mandate changes and mergers of schemes. Besides affecting the reason for your selection, scheme mergers could also lead to costs in terms of short-term capital gains. 
 If you’re investing regularly, like a SIP, you need to be careful about recording the NAVs and dates of purchases for tax purposes. Use an Excel spreadsheet at a minimum. Or you could also use free ‘portfolio tracker’ tools given by websites such as Money Control or <keyword id="6363100" type="CITY" weightage="20" keywordseo="Yahoo">Yahoo</keyword> Finance. 
 
2. Monitor performance 
While a short-term blip in performance should not bother a long-term investor, you need to take cognizance of it. For often, you witness a slippage in relative performance of a fund that was top rated at the time of investment. Keep track of relative fund performance on a regular basis and exit on signs of consistent underperformance. We would recommend evaluating your portfolio afresh every year. There is no reason to invest in a fund in 2015 just because you invested in it in 2014. Use the evaluation process we discussed earlier in this series. 
 
Scripbox uses a review period of 12 months, before removing a fund from its equity portfolio. The tools you use for reviewing performance will be the same as you use for selecting. Your online tracker will also most likely provide fund performance tracking for at least a few key metrics. 
 
3. <keyword id="109711" type="POSITION" weightage="20" keywordseo="Fund-manager">Fund manager</keyword> changes Sometimes, a fund manager or <keyword id="6396662" type="POSITION" weightage="20" keywordseo="chief-investment-officer">Chief Investment officer</keyword> of a fund house quits creating uncertainty as to its future. The fund houses are required by <keyword id="35210" type="ORGANIZATION" weightage="20" keywordseo="sebi">SEBI</keyword> to inform the investors of such changes. While the exit of a fund manager might not matter if the stock and bond picking processes are in place in a mutual fund house, large-scale exodus of fund managers or its CIO is a cause for alarm. Investors in such funds are advised to closely monitor fund happenings and exit on any signs of slippage in fund performance. 
 
4. Fund house mergers/ acquisitions 
There have been quite a few mergers and acquisitions in the Indian MF industry. For instance, Zurich mutual fund was taken over by HDFC MF more than a decade back. Investors are advised to keep tab of such M&amp;As in the MF industry. Many a time, post such merger or even otherwise, fund managers are changed, schemes merged or the nature of its investment mandate tweaked. As per SEBI rules, existing investors have to be compulsorily informed of such developments with options to exit (if it is a close-ended fund). Investors should ensure that the merged scheme meets your criteria of consistent performance and its fund mandate matches your investment needs. 
 
5. Significant portfolio changes Investing is a dynamic process and a fund manager occasionally shuffles his portfolio to adjust to varying business conditions and economic outlook. Sometimes, a fund might be overweight on sector like oil and gas and at other time <keyword id="34523" type="CITY" weightage="20" keywordseo="fmcg">FMCG</keyword> goods. An investor in a diversified equity fund need not worry about the same as it is part and parcel of fund management. However, if you notice any abnormality – like say a very high exposure to a single sector or stock than its peer funds – it should be cause for alarm. It signifies that a fund manager is taking undue risk on the portfolio to generate returns. 
 
However, if you have invested in a sector fund, say banking or infrastructure, focus on the overall sector outlook. Newspapers, magazines and investment websites are dime a dozen giving a good collection of viewpoints that could help in your opinion making. As a rule, stay away from sector funds that you don’t understand. 
 
To repeat: You must track and review your investments periodically for best results. Trust the professionals to manage your money but keep a watch on them. 
 
A handy checklist for everything discussed above; 
 
A.Track your portfolio 
· Check your transaction advice and account statement for any discrepancies 
· Carefully read the announcements sent out by the mutual fund companies 
· Keep tab of changes in fund mandate or scheme mergers 
· Ensure that you update your e-mail address and mobile number with the mutual fund company in case of any change 
 
B. Monitor performance 
· Monitor fund performance and exit on signs of consistent under-performance 
· Mass exodus of fund managers or CIO is a cause of alarm 
· Exit the fund if you witness a consistent slip in performance post exit of a CIO 
· Avail of load-free exit options, if you do not want to continue with schemes with changed investment mandate 
· Don’t panic on news of portfolio shuffle- it is part and parcel of portfolio management 

	 
	
		
			
				(About the author: This article has been contributed by <keyword id="2135489" type="UNKNOWN" weightage="20" keywordseo="Sanjiv-Singhal">Sanjiv Singhal</keyword>, CEO, <a class="Xx" dir="ltr" href="http://www.google.com/url?q=http%3A%2F%2Fscripbox.com&amp;sa=D&amp;sntz=1&amp;usg=AFQjCNFsdc4REpgrwdhfLOmYa7-DR8XAEw" rel="nofollow noreferrer" tabindex="-1" target="_blank">scripbox.com</a>.)

If you’ve made your first Mutual Fund investment, here is what you should do next

After deciding between an advisor/distributor or investing directly with the mutual fund, you are ready to make your first investment. At this juncture, each of these parties provides a few options to carry your <keyword id="6362476" type="ORGANIZATION" weightage="20" keywordseo="investments">investments</keyword>, which are: 
· Paper application form &amp; cheque 
· Online investment accounts. 
 
To avail either of these options from both parties, you should follow the steps mentioned below. 
 
Option 1: Paper application form &amp; Cheque 
This is the traditional way of investing and the most common one too. For this you need to get yourself a form. If you are investing via advisor/distributor, they will provide you with a form, however, if you are investing directly via the mutual fund, you can download one from the mutual fund company’s website. 
 
Filling up the form: Please ensure that you fill the form correctly. When doing so, do pay special attention to: 
<ul>
	<li>
		Bank details</li>
	<li>
		Nominee details</li>
	<li>
		Mobile number: You will get an SMS confirmation of the transaction. The best and fastest way.</li>
	<li>
		E-mail: the mutual fund company will send you transaction confirmation as well as statements to this address. It’s best to fill it up in all caps</li>
</ul> Please also note that an "<keyword id="35471" type="ORGANIZATION" weightage="20" keywordseo="SIP">SIP</keyword>" form is different from the "one time investment" form as the former also contains an ECS Mandate allowing the <keyword id="6358378" type="CITY" weightage="20" keywordseo="AMC">AMC</keyword> to debit your bank account every month. 
 
Payment: The form needs to be accompanied by a cheque for the amount of investment made. The cheque is made out in the name of the mutual fund scheme. In case of a SIP, you need to provide a cheque for the first investment in addition to the ECS mandate. 
 
Accompanying documents: The form needs to be accompanied by a copy of your PAN Card and a copy of the KYC acknowledgement. 
 
Submitting the form: Your advisor will usually collect the form from you and submit it to the mutual fund company. If you invest directly, you need to submit the form to the nearest office of the mutual fund company or their RTA. 
 
Confirmation: You will receive a confirmation when your investment is accepted by the mutual fund company. This will come in the form of an SMS to your mobile number and an E-mail. If you have not provided an E-mail address, you will get a statement by post. 
 
Option 2: Online Investment Accounts 
Online investment options are much simpler because a lot of your paperwork goes away. You need to submit your documents only once and all investing and withdrawal instructions can be placed online. 
 
Registering: You will need to complete a registration form and sign an investment agreement to open an account. This process may be done by you visiting the office of your distributor, an RM visiting you or online. Typically when you sign up online, a paper form incorporaing your details will be sent to you and you need to sign and send it in. 
 
Investing: To invest, you have to go to the website of your preferred agent/fund website/trading platform and open an account. Once your account is opened, you will be emailed/couriered pre-filled application forms based on the data you provided during account creation. 
 
Payment: Payments can be made through the following means. 
· ECS debit: The distributor will send your investment instruction to the bank and money will be transferred to the mutual fund company. This usually takes 3-4 working days. 
· Payment gateway: After you specify your investment account, the online portal of your distributor will direct you to your bank’s net banking gateway and you will need to authorise the fund transfer. Payment gateway investments usually happen on the same day. You cannot use a payment gateway for SIP investments. 
· Direct Bank Account debit: If your distributor is also a bank, then whenever you invest through the online route, your bank account gets debited directly. 
 
How to choose between Online &amp; Offline investing 
While both methods have their pros and cons, it’s better to invest online due to onetime &amp; minimal documentations processes and ease of tracking your investments. Online distributors will also give you additional benefits like single view of investments across all <keyword id="6357979" type="ORGANIZATION" weightage="20" keywordseo="mutual-funds">mutual funds</keyword>, portfolio tracking, <a href="https://scripbox.com/blog/rebalancing/">portfolio rebalancing</a> and more. 
 
(About the author: This article has been contributed by <keyword id="2135489" type="UNKNOWN" weightage="20" keywordseo="Sanjiv-Singhal">Sanjiv Singhal</keyword>, CEO, <a href="http://scripbox.com/" target="_blank">scripbox.com</a>.)

Your first Mutual Fund investment, de-jargoned

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KYC or Know Your Customer regulations were put in place by <keyword id="35210" type="ORGANIZATION" weightage="20" keywordseo="sebi">SEBI</keyword> a few years ago to prevent fraud and money laundering. This is part of a financial industry wide initiative to reduce fraudulent &amp; criminal practices. 
 
This is why you hear the term KYC often—in reference to your bank account, your stock trading account and even if a relative sends you money from overseas. This can be confusing so a little background should help. 
 
Over the last couple of decades, criminals and terrorists have made use of the financial system to fund their activities. This was due to lax procedures in account opening. Criminals could open fictitious accounts and use those bank or stock trading accounts for their purposes. Even in India, there are a number of instances of widespread fraud. There was a particular case where the perpetrators opened a large number of bank accounts to steal and deposit dividend checks. There was another instance of IPO fraud where a large number of fictitious DEMAT accounts were used. 
 
As a result financial institutions and regulators around the world have evolved with a set of practices to detect and prevent such acts. By law every financial institution is required to “Know” the customer for whom they are opening an account or handling a money transfer. The penalties for not doing a thorough job with the same are severe. 
 
Common KYC initiatives by SEBI 
For KYC, you will need to fill up forms and provide documents proving your identity and your address to every institution that you open an account with. 
 
To prevent this, SEBI introduced a Common KYC across all entities regulated by SEBI. This includes stock brokers, depositories (who provide DEMAT accounts), mutual fund companies and portfolio management services. 
 
Under this process, SEBI mandated: 
<ul>
	<li>
		a common set of data that must be captured</li>
	<li>
		a common set of documents to prove the identity and address of the investor</li>
	<li>
		an in-person verification by a qualified entity</li>
</ul>
SEBI also created a set of independent record keeping bodies called KYC registration agencies (KRAs) to maintain an electronic record of investors and their KYC status. 
 
As a customer, you only need to submit your data and documents once to any one of the four KRAs and all SEBI regulated entities will allow you to open an account with them by checking with the KRA. This makes things really convenient for investors. 
 In practice, this system hasn’t turned out to be as smooth and magical as promised, but it works 99% of the time. Please also note that this common KYC cannot be used by other financial entities like banks and <keyword id="35450" type="COMPANY" weightage="20" keywordseo="insurance">insurance</keyword> companies although steps are being taken to create a Common KYC across the entire financial sector. 
 
Why do you need KYC? You cannot <keyword id="47916" type="UNKNOWN" weightage="20" keywordseo="invest">invest</keyword> or hold an account with any SEBI regulated entity in India without completing your KYC registration. So, if you want to invest in <keyword id="6357979" type="ORGANIZATION" weightage="20" keywordseo="mutual-funds">mutual funds</keyword>, you must register with one of the KRAs. Your broker or mutual fund advisor will assist you in the process. 
 
What do you need to do? 
<ol>
	<li>
		Complete the KYC form.</li>
	<li>
		Attach a recent photograph.</li>
	<li>
		Provide a copy of your PAN card.</li>
	<li>
		Provide a copy of your address proof.</li>
	<li>
		For NRIs a copy of passport also needs to be provided along with overseas address proof.</li>
	<li>
		Have an authorised representative perform‘in-person verification’. In order to do this, you must be signing up for an investment account with that organisation.</li>
	<li>
		Submit the form and documents to one of the KRAs</li>
	<li>
		Track the status of your registration through the KRA website</li>
</ol>
Please note that you cannot (and do not need to) register for KYC if you have no intention of investing. 
The Next Lesson on this series will be: Your First Mutual Fund Investment. If you would like to learn more, stay tuned. 
(About the author: This article has been contributed by Sanjiv Singhal, CEO, <a href="http://scripbox.com/" target="_blank">scripbox.com</a>.)

Investment Series: Here is why you should know what KYC is and why you need it?

The beginning of investing through <keyword id="6357979" type="ORGANIZATION" weightage="20" keywordseo="mutual-funds">mutual funds</keyword> is a decision that looks at investment options beyond cash and bank deposits. There are predominantly three financial investment options available to you in increasing order of expected returns: Cash, Fixed Income (or Debt), and <keyword id="45369" type="CITY" weightage="20" keywordseo="equities">Equities</keyword> (or <keyword id="6354298" type="ORGANIZATION" weightage="20" keywordseo="stocks">stocks</keyword>). 
 
However, among these three, mutual funds are an easier way to invest in debt or stocks. Here is why. 
 
#1: Professional Management 
Investing involves a lot of decisions, which require deep understanding of the investment options. For instance, investing in stocks requires you to have the ability to understand economic trends and company financials. But, with mutual funds you can invest in stocks without knowing any of that and rely on professional managers instead. You trust other professionals (Pilots, Chefs, and Doctors) every day to get things done for you. It makes sense to do that for your money as well. 
 
#2: Minimal effort &amp; Expenses 
Investing also involves a lot of work. Once again taking the example of stocks, you need a trading account with a broker, a demat account etc. You will then need to research stocks and monitor what you have invested in. These cost money and time. You also need to deal with multiple parties and keep records. With mutual funds one can avoid all of this. 
 
#3: One can invest in small amounts Mutual funds allow you to invest small amounts because you are a fractional investor in a large asset. This works especially well for large ticket <keyword id="6362476" type="ORGANIZATION" weightage="20" keywordseo="investments">investments</keyword> like <keyword id="6354553" type="COMPANY" weightage="20" keywordseo="real-estate">real estate</keyword>. The minimum investment for a property could be in lakhs, but with a real estate mutual fund you could invest a few thousand rupees, which could gain from investing in a large project of hundreds of crores. 
 
#4: Diversification even with small portfolios Since mutual funds invest in portfolios of assets, you get the benefit of diversification. Diversification is a method of reducing risk by investing in more than one option. Your risk is reduced because if one option doesn’t do well, the others will make up for it. Mostly, for small investors, this is not possible to do. For example: Rs 1,000 invested in a mutual fund will get distributed across 50-100 stocks whereas with Rs 1,000 you will not be able to buy a single share of <keyword id="6354512" type="CITY" weightage="20" keywordseo="Infosys">Infosys</keyword>! 
 
#5: One can invest very easily 
Investing through mutual funds is easy and convenient. You can invest online through many intermediaries, as well as directly with the mutual fund companies. 
 
#6: One can have easy access to their money 
You can withdraw your money from a mutual fund at any time and will usually get the money into your back account within 3-4 days. 
 
#7: Tax efficiency Investing through mutual funds leads to better tax efficiency in certain cases. For example: investing in <keyword id="18712" type="ENTERTAINMENT" weightage="20" keywordseo="Gold">Gold</keyword> ETFs is more tax efficient than investing in Gold directly. 
 
#8: Safety of your investments 
Mutual funds invest in assets that they are required to disclose periodically. These are also audited. The failure of a mutual fund company does not affect the investments of unit holders as legally they always belong to the investors and are only held in trust. 
 
#9: Regulatory oversight Since typical mutual fund investors are usually small investors, the regulator <keyword id="35210" type="ORGANIZATION" weightage="20" keywordseo="sebi">SEBI</keyword> has imposed strict rules and guidelines for Mutual Fund companies to protect investors. SEBI is actively working on steps that benefit investors. 
 
IMPORTANT: Safety and security, which are referred to above, relate to protection from fraud. Since mutual funds invest in market securities, there is no guarantee of return or protection of capital. This applies to Debt funds as well as to Equity funds. 
 
The Next Lesson on this series will be: Types of mutual funds. If you would like to learn more, stay tuned. 
 
 
(About the author: This article has been contributed by Sanjiv Singhal, CEO, <a href="http://scripbox.com/" target="_blank">scripbox.com</a>.) 
Image: thinkstock

Investment series: 9 reasons why you should invest through mutual funds?

In essence, mutual fund investing is about trusting your money to a professional <keyword id="135622" type="POSITION" weightage="80" keywordseo="investment-manager">investment manager</keyword> and letting them take investment decisions for you. You take a high-level decision to invest through <keyword id="6357979" type="ORGANIZATION" weightage="80" keywordseo="mutual-funds">mutual funds</keyword> and then let the professionals take over from there. 
 
The investment manager collects a pool of money from a large number of investors and makes the day-to-day decisions to invest it in a portfolio of securities or other assets. These could be <keyword id="6354298" type="ORGANIZATION" weightage="80" keywordseo="stocks">stocks</keyword>, bonds, gold, real estate, or some other securities. Each investor in the fund gets a share of the total assets. 
 Then you only need to monitor if the <keyword id="109711" type="POSITION" weightage="80" keywordseo="Fund-manager">fund manager</keyword> is doing a good job for you. If not, fire them by taking your money out. 
<h2>
	How it works in practice is as follows:</h2>
 
 A reputed financial service company with a track record of managing <keyword id="6362476" type="ORGANIZATION" weightage="80" keywordseo="investments">investments</keyword> sets up what is called an Asset Management Company (Also referred to as an <keyword id="6358378" type="CITY" weightage="80" keywordseo="AMC">AMC</keyword>, mutual fund company, or fund house). Not everyone can set up an AMC. They have to get a license from <keyword id="35210" type="ORGANIZATION" weightage="80" keywordseo="sebi">SEBI</keyword> (the regulator that governs mutual funds in India) by demonstrating a track record and solid financial standing. 
 
After getting a license, the AMC decides what kind of mutual fund they want to offer. They can offer just one or many options. Each is called a Mutual Fund Scheme (commonly shortened to scheme, mutual fund or just fund). They will also appoint one or more named individuals to act as the fund manager for that scheme. While offering the Scheme, the AMC clearly defines the investment objective and the mode of operation of the scheme in a set of Offer Documents the format of which has been specified by the regulator. This ensures that the public investor knows exactly how their money is going to be invested. 
 
Let’s say the fund house offers two schemes: 
 
Scheme 1: invests in stocks 
 
Scheme 2 invests in bonds. 
 
As an investor, you can choose to invest in whichever one suits your purpose. Like you, thousands of investors will ‘subscribe to’ or ‘buy’ that scheme. The money so collected is the pool of money or ‘corpus’ available for the fund manager. He or she will then take the decisions about which specific stocks to invest that money in. 
 
The total corpus of the mutual fund scheme is sub-divided into units (or shares), which the investors buy. To begin with the corpus is divided into units of Rs 10. 
 
As the value of the investments made by the mutual fund changes, the value of the units changes as well. This is called the NAV (Net Asset Value) of the unit. It’s calculated by dividing the total value of the net assets of the fund by the number of units. This is published daily so you know how your money is doing. You also get periodic statements with information about your holdings. 
 
The AMC does not do all this for free. They charge a fee for managing the money. In addition there are other costs such as brokerage fees, costs of publishing statements etc. These need to be borne by the investors and are deducted from the corpus periodically. These are called Expenses of the fund and the ratio of expenses to the total money managed by the fund is called Expense Ratio. To protect investors, the regulator SEBI has specified the maximum expense ratio that can be charged. Most fund houses manage to control costs and keep the expenses below the maximum cap. 
 
That was probably a lot of new stuff to learn in one go. But now you can hold your own when your advisor throws these terms at you: 
<ul>
	<li>
		Asset Management Company (AMC, Mutual Fund Company or Fund House)</li>
	<li>
		SEBI (Securities &amp; Exchange Board of India)</li>
	<li>
		Mutual Fund Scheme (Scheme, mutual fund or fund)</li>
	<li>
		Offer Documents</li>
	<li>
		Units or shares</li>
	<li>
		NAV (Net Asset Value)</li>
	<li>
		Expenses, Expense Ratio</li>
</ul>
The next Lesson in this series will be: Why should you consider investing in mutual funds? If you would like to learn more, stay tuned! 
 
(About the author: This article has been contributed by Sanjiv Singhal, CEO, <a href="http://scripbox.com/" target="_blank">scripbox.com</a>.)

Investment
series part 1: What is a mutual fund?

If you are planning to invest in <keyword id="6357979" type="ORGANIZATION" weightage="20" keywordseo="mutual-funds">mutual funds</keyword>, there are two ways to go about it: either you can go through a distributor or advisor, or you can directly approach the mutual fund companies. For either way you choose, you must be aware of the costs involved and other fine print. 
 
<keyword id="35175" type="UNKNOWN" weightage="20" keywordseo="investing">Investing</keyword> through a distributor or advisor? You should know this 
A distributor or advisor will provide you assistance with selecting a fund and with actually making the investment. For this service, they earn a commission or a fee. The primary difference between an advisor and a distributor is how they earn their fee – directly from you or indirectly. An advisor charges you an Advisory Fee that is mutually negotiated and in agreement between you and the advisor. The fee may be related to the <keyword id="6362476" type="ORGANIZATION" weightage="20" keywordseo="investments">investments</keyword> you make or it can be fixed fees for the <keyword id="25456" type="ORGANIZATION" weightage="20" keywordseo="financial-planning">financial planning</keyword> and any other advice that the advisor provide. 
 A distributor, on the other hand, earns a commission ranging between 0.5% to 1% from the mutual fund company. This will be indirectly paid by you as part of the expense ratio. Recognising that this amount is usually very small, <keyword id="35210" type="ORGANIZATION" weightage="20" keywordseo="sebi">SEBI</keyword> also permits the distributor to charge a transaction charge of Rs 100 to the customer. 
 
Before 2014, an advisor could charge you a fee as well as get paid a commission by the mutual fund company. This practice has been banned by SEBI and every entity that collects mutual fund investments must choose between offering advice or be a distributor and get paid only once. 
 
If investing directly with the mutual fund house, then be aware… 
All mutual fund companies provide a way for you to invest directly by approaching their office or online. This had no advantage for an investor until the introduction of the Direct Plan. 
 
Now investors can approach a mutual fund company directly and invest in the “Direct Plan”. You can do this in 2 ways. 
(i) Visit the office of the AMC or their appointed RTA (CAMS, Karvy, etc.) and submit a form along with your PAN Card copy and cheque. 
(ii) Sign up online with each of the AMCs that you wish to invest in and invest online using their payment gateway. 
 
How do these two options compare? 
Currently, Direct Plans of equity mutual funds have expense ratios that are typically 0.4-0.5% lower. This means that your return by opting for the Direct Plan is higher by that amount. What does this mean in actual money? For example: If you invested Rs 100 for 10 years in equity mutual funds, you could expect to have Rs 370 in a direct plan vs. Rs 354 in a regular plan. This assumes a 14% annualised return for Direct plan and a lower 13.5% return for the Regular plan. The addition of Rs 16 over 10 years is what you make by taking the direct option. 
 
Why would you want to invest in a regular plan through a distributor or advisor? 
This is a matter of great debate while distributors bring in the experience that you lack, chances are that you may take better decisions yourself by learning about mutual funds and spending the requisite time and effort. The catch however is, to achieve better results you must follow a disciplined process of investing. 
 
But if you opt for distributors and advisors, then this is what all they would: 
 
· Determine which investment options are right for you 
· Analyse and understand these investment options 
· Select specific funds to put your money into without any commission induced bias 
· Facilitate the investment or withdrawal 
· Track and monitor your investment 
· Recommend changes as and when required 
· Help you take the right exit decisions after considering tax and other costs 
· Help you follow a disciplined investing process 
 
So, in a way, you are paying your distributor or advisor an indirect fee for the service they provide. This is similar to the fee you pay your doctor, lawyer or other professional for providing their services in an area you may not be most competent in. 
If you still can’t decide whether to invest directly or through a distributor/advisor, answers to the below-mentioned questions would help you take a decision: 
<ul>
	<li>
		Is your distributor providing valuable services for the fees you pay them? Use the checklist above and ask them the question.</li>
	<li>
		Whether you need the extra help from them? Their advice and guidance may be more valuable than the 0.5% saving. This could come in the form of extra return earned on better recommendation or saved costs. Also, your own time may simply be worth much more than what you pay them.</li>
</ul>
The Next Lesson on this series will be: What Is KYC And Why Do I Need It. If you would like to learn more, stay tuned. 
 
(About the author: This article has been contributed by Sanjiv Singhal, CEO, <a href="http://scripbox.com/" target="_blank">scripbox.com</a>.)

Investing in Mutual Funds is not rocket science! It is rather easily done!

Selecting a mutual fund is like selecting any other investment and you should follow an objective decision framework. You should start by answering the following questions. 
 
Step 1: Deciding on <keyword id="35475" type="UNKNOWN" weightage="20" keywordseo="equity-funds">Equity funds</keyword> vs. <keyword id="35474" type="COMPANY" weightage="20" keywordseo="debt-funds">Debt funds</keyword> 
This decision is essentially a decision to invest in Equities vs. Debt rather than being a mutual fund selection. The key elements in this decision are: 
· What’ your investment objective? 
Is it income or growth? If you’re looking for income, then go for debt. For growth, you could choose either equity or debt depending on your investment duration &amp; return expectation. 
· What kind of return do you want/ need? Your return could be in the form of a fixed returns or capital growth (with uncertainty). If you are looking for fixed returns, <keyword id="6357979" type="ORGANIZATION" weightage="20" keywordseo="mutual-funds">mutual funds</keyword> are completely ruled out. 
· What’s your investment duration? How fixed is this investment duration? 
Are you investing for 1 year, 5 years, 10 years or longer? Debt funds are better for shorter durations (5 years or less), Equity Funds for longer. IMPORTANT: Do not confuse investment duration with review period. Choose the asset class based on when you will need the money (investment duration) for example: 20 years. However, you should review your specific <keyword id="6362476" type="ORGANIZATION" weightage="20" keywordseo="investments">investments</keyword> within that asset class more often (Review period), say every year. 
· How much return do you expect? Does historical data justify it? 
A number of investors choose an asset class with unrealistic expectations of 20% or 30% returns. The long-term average return for debt is in the region of 9% and equity is in the region of 16%. Each of these comes with varying degrees of uncertainty or risk. 
· What are the risks? Are they in line with your objective &amp; return expectation. 
The variation of return in debt is usually small. A long-term average of 9% implies a band of 8-10%. This means that there is a high degree of certainty that you’d get returns of near the long-term average. The risk of capital loss is also very low. 
On the other hand equity returns vary in a broad range. The range narrows with holding period, but there is always a wide band. There is also a high risk of capital loss due to this. 
In a simplistic way the decision between equity &amp; debt is the decision between almost certain 9% return and an uncertain 16% return. 
· What is the tax applicable on the return you get? 
Interest is added to your income and gets taxed at whatever your tax slab is (10%, 20% or 30%). 
Debt funds held for less than a year get taxed at your tax slab; for more than a year get taxed at 20% with inflation indexation. 
Equity funds held for less than a year get taxed at 15%; for more than a year have zero income tax. 
Then there are tax saving equity funds (ELSS), which have a lock in for 3 years, but save you tax in the year in which you invest. 
(Note: This is a broad generalization of tax applicability and not tax advice.) 
Step 2: Selecting a specific mutual fund 
· Understand the capability of the <keyword id="109711" type="POSITION" weightage="20" keywordseo="Fund-manager">fund manager</keyword>, their investment process and track record 
The performance of a mutual fund is ultimately the outcome of the Fund Manager’s expertise and their investment process. The two are designed to complement each other. 
All funds are required to publish the resume of the fund manager. The fund managers also write articles and give interviews that reflect their thinking and the investment process they follow. You can also understand this by evaluating the risk reward characteristics of the mutual fund and things like portfolio churn. 
A good investment process is an indicator of repeatable performance. 
· Analyse performance over a reasonable period 
Very often investors are misled by recent (usually last 6 months or one year) performance of a fund. You need to analyse performance over at least 4-5 years. Also look for consistency of performance by comparing different period returns. Always remember that past performance may not be repeated. 
· Decision on picking a thematic or sectoral fund vs. diversified funds 
Themes and sectors limit the universe of stocks available to a fund manager. Choose these if you fully understand the economic conditions and their applicability to a specific sector. You must also carefully watch for changes in these conditions. 
· Focus on facts and data rather than brand names 
An investor must be diligent in researching and analyzing data. This also involves ignoring personal preferences, uninformed recommendations, advertising and brand names. Let the track record speak for itself. 
Step 3: Re-confirm that you understand how your specific chosen mutual fund works. 
· Read the offer documents 
· Understand investment/ redemption limitations if any 
· How can you invest? How can you withdraw? 
· Cost and load structure- A load is a percentage charged by the fund to recover distribution costs. This may be charged at entry (Entry Load), exit (Exit Load) or over the life of the investment. 
 
(The next lesson on this series will be: How do I invest in mutual funds? How much does it cost me? 
If you would like to learn more, stay tuned.) 
 
(About the author: This article has been contributed by Sanjiv Singhal, CEO, <a href="http://scripbox.com/" target="_blank">scripbox.com</a>.)

Investor series: 3 easy steps that will help you choose the right mutual fund to invest in

“Mutual funds investments are subject to market risks, please read the offer document carefully before investing’ goes the oft-repeated statement.” 
	 
This warning that is written on all mutual fund investment documents and websites, just like they write warnings on cigarette packs, yet mutual fund investors ignore this caution primarily because people like you or me are not generally aware of the risks involved in mutual funds. This article would cover various market risks involved in mutual fund investments and also share tips on how you can reduce them. 
 

	Types of risks
The market risks are of two types. One type is of market risks are the ones that you, as an investor, can do nothing about. These are called systematic risks; these could be political factors, exchange rate fluctuations or even bad weather. Contrary to what you may have heard, these are difficult, if not impossible to predict or avoid. The second type is of risks are those that you can manage by diversification strategies. Generally, in a mutual fund, these risks are taken care of by your fund manager but you should be aware of them nonetheless. We can categorize them further into three broad types: business risk, concentration risk and liquidity risk. 
 
· Business risk: A sudden strike in the auto sector is an example of business risk. Poor financial performance of a company is another example. A fund manager mitigates this by diversifying across companies and sectors. 
 
· Concentration risk comes in when a mutual fund invests too large a proportion of its money in a single stock or sector. Sector funds, by definition, suffer from concentration risk because they invest in a single sector. 
 
· Liquidity risk arises if a fund cannot quickly convert its investments into cash, either in response to a redemption demand by investors or as part of portfolio rebalancing. Mutual funds investing in small cap stocks face this risk. 
 
 
 
What can you do about this, now that you know? 
Be careful while picking mutual funds. Ensure that you invest in large well-diversified equity funds. If you invest in specific sector or small/mid cap funds, do it with full knowledge of attendant risks. 
In our experience, mutual fund managers do a good job of managing risk. The biggest risk to an individual investor investing in mutual funds comes from faulty investment practices. And there is a lot you can do about it. 
 
Reduce risk by reducing mistakes 
Investing by definition involves exposing yourself to ‘risk’. The best you can do is: minimize risk. Having decided to invest via mutual funds, and not directly into stocks, is step 1 of minimizing risk. You are saying, “Let me entrust the task of investing to people more capable than me, and who do it fulltime”. 
 
But most investors still make lots of simple errors while investing in mutual funds. Let’s look at common errors, so can you avoid them. 
 
1. Investing with expectation of very high returns 
In an earlier section we talked about what the long-term expected returns from various asset classes are. However, we continue to see investors choose investments with expectation of unreasonable (40-50%) returns. This is just not going to happen and in an attempt to generate that return, you are likely to be misled into investing in funds that have shown a temporary blip in performance. 
Look at returns of funds over a minimum 5 year period. A 2-3% outperformance for equities and a 0.5-1% outperformance in debt funds is the best you can expect and you should be aware of that. 
 
2. Investing without understanding of underlying investments 
You already know that all mutual funds are not the same. Depending on which asset class and category of assets they invest in, you will get different returns with different behaviours. Debt funds offer lower but steadier return. Equity funds offer higher but more volatile return. 
 
Taxes saving funds (ELSS) are essentially equity funds and have the same return and risk profile. 
 
With this course, you should have enough knowledge to understand how the returns from a specific type of mutual fund will vary. 
 
3. Investing in NFOs “at par” or funds with “low” NAV 
Some investors believe lower the NAV (Net Asset Value) of a fund, the better value it provides. In other words, a fund with an NAV of Rs 20 is “cheaper” than another with an NAV of Rs 30. This belief is, perhaps, a mistaken application of the value-investing principles of equity investing. 
 
So, often such investors invest into a New Fund Offering (NFO) at par value or Rs 10, thinking they are buying value. 
 
But as you already know, from this course, that it makes no difference whether the NAV of a fund is high or low. In fact, older funds, with a longer track record, will always have high NAV and you are better off choosing those rather than a new fund with lower NAV but no track record. 
 
4. Investing for “dividends” 
We often see advertisements by mutual funds declaring dividends. Some investors are misled by these and think higher dividends reflect good performance. In the case of mutual funds, dividend declaration is nothing more than a book entry. Dividends are not interest but repayment of capital. Therefore the fund’s NAV falls to the extent the dividends are paid out to its unit holders. In fact, a growth option where you withdraw the money when YOU need it is better for you from a tax perspective. 
 
Conclusion 
Understanding market risk is important, but if you have chosen the asset class that best meets your objectives, you can trust the fund manager to manage the market risk for you. 
As an investor, you should focus on things you can control which are: Choosing the right mutual funds; following the correct process for investing; and reviewing your investments every year. 
 
(About the author: This article has been contributed by Sanjiv Singhal, CEO, <a href="http://scripbox.com/" target="_blank">scripbox.com</a>.) 
 
(Image credits: www.economictimes.com)

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