Fund Talk

Is Magnum Emerging Business good enough to be part of a core portfolio for a holding period of 10-20 years?

Also, which funds perform poorly when markets go down? I would like to buy these funds when markets go down in 2012-2013 and sell out when markets bounce back.

Rasesh Choksi

Magnum Emerging Business has a high-risk profile as it is a theme fund that invests in emerging businesses, especially in outsourcing or export industries. The theme, together with its exposure to mid and small-cap stocks, makes the fund susceptible to volatility.

Hence, while its returns are impressive during rallies, it falls sharply during market corrections. That its NAV fell as much as 69 per cent in the 2008 correction may give you a perspective. Besides, the fund needs monitoring.

We do not prefer a volatile fund in a core portfolio. Instead, a fund with steady returns than flashy performance would be ideal for a core portfolio, especially when you work towards a goal. But if you can stomach the risk, you can hold the fund as a diversifier.

Moving to your question about poor performers, we reckon that you are seeking trading opportunity in a mutual fund. Please remember that you cannot make money trading in funds.

On a daily basis, NAVs do not swing like stock prices. Also, there is no such thing as a ‘cheap NAV'. A fund does not become cheap if, say, its NAV falls below Rs 10. A sharp fall in a down market only points to the fund's inability to withstand a market rout and speaks of poor performance.

There is no guarantee that such a fund will perform well when markets bounce back. For example, Taurus Discovery and Magnum Midcap were among the funds that fell the most in the 2008 correction but their returns in the 2009 bounce-back were far from being top notch.

***

I am 23 years old. I am going to start my career in a couple of months. I am interested in mutual funds and stocks and want to invest so that I can fulfil my own dreams as well as those of my family.

I have no clear idea about these investments. Please explain how I can invest.

N Ganapati

It is really nice to know that you want to begin to invest as soon as you take up a job. This will give you a head start in building long-term wealth. First, set your goals. It could be saving to buy a car or a house or even for retirement. Then start investments that will address these.

Ensure that you have a simple term insurance on your life to begin with. Try to invest a fixed sum every month towards your goals. There are calculators available online to compute how much you need to invest every month, at a given return, to reach a specific sum.

Your monthly investment may be as low as Rs 1,000 a month or much higher. Whatever be the sum, remember, it must be money that you can afford to put away for the long term. Any goal that is less than 4-5 years away is short-term in nature and not easy to achieve with equities.

Mutual funds and stocks

You need to track the markets regularly to invest directly in stocks. Selecting investment opportunities can, otherwise, be an overwhelming affair.

Simply put, investing in stocks means you own a bit of those businesses. So it is best that you understand the business before you choose to own a bit of it.

Hence begin by first reading and following news on markets in financial dailies or on the Internet.

For now, you can start with mutual funds. Mutual funds will invest your money in a pool of stocks and actively manage them for you. They may be better placed to identify opportunities in the market.

You can approach mutual fund distributors such as Bajaj Capital or Bluechip India or Funds India (online) to invest in funds.

You can also invest through the stock exchanges if you open a demat account and have a brokerage account. Most funds also allow you to transact through their web sites. However, since you are new, go through an agent.

Start investing in funds such as Quantum Long Term Equity and HDFC Equity through a monthly systematic investment plan, where you invest a fixed sum every month in these funds. Do not be lured by new fund offers or dividends that funds pay. Ensure that the fund has had a stable performance over at least three years.

You can expect an annual return of 12-15 per cent on diversified returns over the next 5-10 years.

Do read up on Web sites of mutual funds and understand how they work and how they invest for you. There is enough material online and in newspapers about mutual funds. Follow it regularly.

Meanwhile, do not ignore debt options. Invest in traditional options such as PPF and bank deposits. If you can take some risks, go for an asset allocation of 75 per cent in equities and 25 per cent in debt. Otherwise stick to 60:40 in equities and debt.

If you buy a house in a few years, ensure that your EMI does not eat into your monthly savings.

Queries may be >e-mailed to mf@thehindu.co.in , or sent by post to Business Line, 859- 860, Anna Salai, Chennai 600002.

COMMENT NOW