Saturday, September 29, 2012

The 3rd wealth management session – A discussion on Mutual funds

A discussion on Mutual funds – the types of MF’s and how to select the MF for investing

Mutual  funds are a very good way to start your investment journey and I recommend it to everyone who is looking at becoming rich. This session was aimed at sharing with my MBA students the logic used behind selecting the right MF -  many of my students will become Wealth managers next year  and this would be useful learning for them in their jobs (last year appx. 200 students from my institute joined the WM industry and this year I believe it will be similar numbers).

As a primer to this session, I had requested my students to read the document on MF available at

In the class, they went through a 90 min quiz on MF’s  - here we discussed the basic concepts through the quiz format.  My ppt for this session is mostly these quiz questions – may be you must look at it to figure out your basics on Mutual funds as well.  You can download it at

Post the quiz, we logged on to and studied the various types of MF’s available in the Indian market – we saw the details of a few mutual funds – we looked at where they have invested currently, what is their relative performance, who is the fund manager etc and discussed how to evaluate the mutual fund and which fund to invest in.

So the class was one half quiz and one half browsing the internet portal on MF’s .

I would recommend that you too browse and look through the various types of mutual funds available and drill down into a few funds to look at detailed data on their performance and the portfolio that they hold.

The key question in your mind would be “how do I select that particular mutual fund where I can invest  and get good returns”. My session ppt does not have much content on that as it was a freewheeling discussion.  However, my forthcoming book has a lot of content on the various types of MF’s available in the Indian market and how does one select that particular MF where you can invest in.

It obviously depends on your investment objective and broadly the objectives could be described in the following scenarios:

         Growth objective “I want to invest Rs 10,000 today and after five years take back Rs 25,000 and I want this to be tax free”. The funds that try to meet these objectives invest in equities – hence they are called Equity funds

         Income objective “I am retiring next year and would get a gratuity of Rs 30 lacs - I want to invest it such that my gratuity is preserved and I get a monthly income better than a post office deposit interest”. The funds that try to meet these objectives typically invest in debt instruments issued by government, banks, corporate and financial institutions - hence they are called Fixed income funds or debt funds.

         A combination of growth and fixed income “I have received my annual bonus of Rs 10 lacs just now – I want to invest it such that in 5 years it becomes 15-18 lacs plus I get a payoff of Rs. 60,000 per annum for my vacation out of this fund”. The funds that try to meet these objectives typically invest in both equities and debt instruments – these funds are called Balanced funds.

         Short term investments “I have Rs 100,000 with me for the next three months – it is meant for my child’s school admission in May and I need to park it somewhere till then – I would like to have a better return than a savings bank account”.The funds that try to meet these objectives typically invest in short term debt instruments like interbank money markets – hence these are called Money market funds.

         Tax saving “I want to reduce my tax out go and is there some place I can invest beyond PPF and Post office schemes?”. The funds that offer tax rebates are called Equity linked saving schemes (ELSS), - these funds invest in equities and typically have a three year lock-in period.

So you have to start with your investment objectives  and then select that particular mutual fund where you can invest and reach your objectives? 

There is a whole industry out there that makes selecting and recommending Mutual funds look very difficult and complex – but that is not really true. One can easily select which MF to invest.

My forthcoming book has more than enough content on “how to select the right MF”it is really not that difficult and anyone can do it.