INVESTOR QUERY

CAN YOU SUGGEST SOMEINVESTMENT PLANS FOR PERSONSWHO RETIRE, SAY AT THE AGE OF 60,FROM A PENSIONABLE JOB. FORSUSTAINING DAY TO DAY LIVINGTHEY HAVE PENSION. ALSO THEYHAVE SETTLEMENT DUES PAID TOTHEM, WHICH NEED TO BEINVESTED, FOR SHORT TERM ANDMEDIUM TERM, IN SAFE OPTIONSWHICH WOULD GIVE REASONABLERETURNS AND MAY ALSO HAVESOME LIQUIDITY TO TAKE CARE OFEMERGENCIES.

Ajay Kumar

Hasmukh R Pathak replies

Retirementplanning has

three steps:Accumulation,preservation anddistribution. Inaccumulation stageyou invest indifferent investmentproducts based on

your risk profile and time horizontowards retirement. At the secondstage the main goal is to preserve theamount accumulated and also keep ongetting some income out of it to takecare of retirement expenses. Alongwith preservation one also needs togenerate regular income, so one mayopt for a systematic withdrawal ordividend payout option.

One of the few initial steps in thefinancial planning process involvestaking care of unforeseen risks. Oneneeds to create a corpus so as tomeet any other financial risk. Unlessone has a proper emergency fund inplace, starting to invest for long-termgoals may be futile. Emergency fundis not for meeting your planned goals,but only to act as a safety net.

Although, there's no fixed rule as tohow much of emergency cash oneneeds, but as a thumb rule, three tosix months' household expenses canbe one's emergency fund. As therequirement to access the funds mayarise anytime, park the fundsearmarked for emergency needs inliquid schemes of mutual funds.

The ideal allocation to park yourretirement corpus:■ 50% in balanced fund to generate

better tax free return,■ 25% in MIP to generate better tax-

efficient return,■ 15% in accrual-based debt fund

with a horizon of more than threeyears to get indexation benefit, and

■ 10% in liquid mutual fund

Hasmukh R Pathak, Amreli, Gujarat

DEMYSTIFIER

Are you a first timemutual fund investor?

WHAT IS A SHELL COMPANY?Lately the government’s investigation agencies have been active inpursuing a large number of shell companies which are alleged to have usedthe money from their promoters and never bothered to pay back. This isbelieved to have been done to enrich the promoters only who in turndefaulted on theirs loans from banks, leaving the banks to pile up non-performing assets (NPAs). Shell companies are structures, usually wholly-

owned subsidiaries of the promotercompany, floated with some specific

purpose. Often shell companies areformed to raise funds beforestarting a new business, to takeover

another company or even with somefraudulent motive. At times thesecompanies are set up to hide the identity

of the people behind it, for whateverreason. Government agencies are trying to

track down those shell companies whichwere used for diverting funds from the

main companies which tookloans from banks but never

paid back.

INVESTING THROUGH FUNDS COULD GIVE YOUA BETTER RETURN THAN WHAT THE LEADINGBENCHMARK RETURNS OVER THE LONG RUN

Give Your Money TheEquity Fund Edge

Historical data show that if you invest in the the right mutual fund,in the long run that could accelerate the pace of wealth creation

Often our readers askus about the basicsof mutual fund in-

vesting, how they shouldselect a scheme, and howthey should invest and re-deem. Here is a beginner’sguide to mutual fund.

WHAT IS AMUTUAL FUND?

As the name suggests, amutual fund is a fund setup with the money from alarge number of people.For example, there are say10,000 people contributinganything between Rs 500and Rs 1 crore each to setup a MF with a total cor-pus of Rs 100 crore. Thena person with experiencein identifying good invest-ment opportunities ismade the fund manager.The returns he/she gener-ates on the corpus, is ei-ther distributed to all the10,000 investors on a prorata basis as dividend,or those who do not wantto take money out, theirshares of dividend remaininvested in the fund andgrow over time. These in-vestors can redeem theirfunds, fully or partially,when they require.

WHAT IS NET ASSETVALUE (NAV)?

Here, the Rs 100 crore col-lected is divided into unitsof Rs 10 each and every in-vestor gets units on a pro-rata basis. One investingRs 500 gets 50 units whilethe one investing Rs 1crore will get 10 lakhunits. At the start NAV ofthe fund will be Rs 10 andas the value of total cor-pus rises or falls, the NAVwill also change.

WHAT ARE THEVARIOUS TYPESOF MFS?

MFs are categorizedthrough various parame-ters, one of them being theasset class they invest in.Funds which invest pre-dominantly in stocks arecalled equity funds, whilethose which a major partof their corpus in fixed in-come instruments likegilts, corporate bonds,

NCDs, treasury bills, com-mercial papers etc. arecalled debt funds. Likewisethere are gold exchangetraded funds (ETFs), infra-structure investment trustfunds, real estate and com-modity funds (the last twoare yet to be launched inIndia). There are fundswhich invest in a mix ofthese asset classes also.

HOW TO SELECT THEBEST SUITABLE FUND?

At first you should decideyour investment goal, thatis why you want to invest.Once you decide that, thenext thing to find out iswhen you will need themoney for your goal. Ifyou need the money saywithin the next threeyears, pure debt fund arebetter. If you would needthe money between threeand five years, a balancedfund is a better option andif you would need themoney after five years ormore, an equity fund is abetter option. The choiceof fund would also dependon your risk taking ability.To select the right fundyou should also look at theperformance track recordof the fund manager andthe fund house.

WHAT IS THE MODE OFINVESTING IN A FUND?

You could decide to investa lump sum or take thesystematic investment plan(SIP) route. The SIPmethod of investing is sim-ilar recurring deposit in abank. Through SIP, everymonth or quarter, you in-vest a pre-fixed amount ofmoney in the fund. All in-vestments are done at theprevailing NAV.

Live within yourincome and save so

that you can invest. Learnwhat you need to learn

Charlie Munger, Successful investmentmanager and deputy to Warren Buffett

GURU SPEAK

TIMES NEWS NETWORK

Investing in the stock market is thejob of an expert. So most financialplanners and advisors advise theirs

clients that if they have the risk ap-petite and long years ahead of themfor their money to grow, they shouldtake the easier route to invest in themarket: That is invest through the mu-tual fund route.

Investors enjoy several advantageswhen they invest in the stock marketthrough the mutual fund route. Forone, investments experts manage theirfunds on their behalf at a low cost. Themaximum cost that a mutual fund man-ager could charge an investor is about2.85% of his total investment per an-num. In most funds this charge is much

lower than the cap level.Investors also enjoy other benefits

like lower tax outgo in most cases, goodlong term return, freedom to invest asand when one wants to, and also rela-tively easy liquidity than in compara-ble products.

One of the more attractive proposi-tions to invest in the stock marketthrough the mutual fund route is the

better return that funds have histori-cally generated for their clients (seetable below).

Over the last 5 years, the sensexhas returned a little over 13.5%while a large cap mutual fundschemes has given a return ofabout 16.4%. For the 10-yearperiod, the returns are7.9% for the sensex to10.14% for the large capfund category. On the face of it,the outperformance looks to be mod-est, just close to 3 percentage pointsover five years and 2.25% over 10 years.However, if you calculate in terms ofcompound interest this is alarge outperformance.

Say Rs 10,000 invest-ed in the large cap fund

every month for fiveyears (that is a total of Rs 6lakh) would grow to Rs 9.33 lakh com-pared to Rs 8.60 lakh if the sameamount was invested in the sensex. Soyou would have about Rs 73,000 morein your portfolio.

The outperformance is more pro-nounced if the duration is more. If youhad invested the same amount in the

FUND CATEGORY/INDEX 5-YEAR 10-YEARRETURN RETURN

Small cap 29.4% 14.7%*Midcap 24.6% 14.7%*Tax Planning 19.9% 11.4%Large cap 16.4% 10.1%Sensex 13.6% 7.9%Nifty 14% 8.6%

*Combinedreturn ofSmall &Midcapcategories;Allreturns areannualized

Sources:Valueresearchonline.com,Morningstar India,BSE, NSE

large cap fund for 10 years, at the cat-egory average return of 10.14%, yourtotal wealth would have been Rs 20.8lakh while the same amount wouldgrow to Rs 18.3 lakh if you had invested

in the sensex. That’s again of Rs 2.5lakh more.

Please not herewe have calculated

the outperformanceusing the fund cate-

gory average. Some ofthe best funds within the

large cap funds categoryhave given much higher re-

turn during the period underconsideration. For example,

one of the oldest equity mutualfunds in India have given an av-

erage annual return of closeto 15% over 30 years of its ex-istence. Seen in another way,this fund would have doubledyour money in almost every

four and half years.Similarly, if you go on the

net, using the SIP calculatoryou can check out your out-performance if you had in-vested in small cap funds, mid-

cap funds and tax saving fundsvis a vis sensex and nifty.

Advantages of investing through the MF route

➊ Expertise advice at low cost

➋ Tax efficient than comparable products

➌ Higher level of transparency

➍ Flexible investment options

➎ Easy liquidity in most funds

➏ Options of dividend and growth

DID YOU KNOWyou could investin a variety ofEquity Funds?SCAN THE QRCODE

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THE TIMES OF INDIA, MUMBAI TUESDAY, MAY 30, 2017 21