What do you need? Work it out

These days, investing in a single mutual fund scheme may not exactly meet your specific requirements.

This is specially true when market conditions, both in equity as well as debt, are changing so drastically that meeting particular long-term goals becomes extremely difficult. This is because one has to constantly evaluate the impact of a changed scenario, over a period of time.

In such a case, the new mantra of mutual funds and their distributors is to try and provide options and strategies for investors in such a way that, without too much of an effort, investment goals are met.

This is achieved by asking or making investors shift between schemes in a certain pre-determined manner, so as to be able to arrive at a situation which will be in tune with the overall plan.

Here, we shall concentrate on a couple of routes that several mutual funds are suggesting to their investors for investment.

There is one major complication that will arise in this process and that is the tax issue, but, for the moment, we shall just examine the different plans and the way in which they work, so as to be able to see how they meet specific needs.

These kind of strategies or products are for a particular kind of investor who, faced with a certain situation, would make use of it to achieve their investment objective. The first variation consists of an investment in a debt route and then the gains from the first investment are moved to an equity-oriented fund.

Say, for example, that a person has Rs 5 lakh at their disposal at the present moment. There are several choices available for investors. For those who would like the less risky route, the amount can be invested in debt mutual funds.

Increasingly, investors are realising that a simple debt scheme or even a slightly hybrid scheme might not meet their needs and exposure to an equity fund is essential. A simple way of achieving this with the existing funds is to distribute the Rs 5 lakh in the intended ratio and invest in debt and equity.

However, this leaves the investor open to the risk that if the equity market falls from this stage, the investment can take a severe hit, impacting the overall portfolio.

The best way out in such a situation is to go for a
systematic investment plan where a certain sum is invested each month in equities, which will average out the cost for the investor.

At the same time, many investors would like to ensure that there is some element of capital protection too in their investment, since the primary investment is in debt.

This factor has gained prominence among investors after the recent turbulence in the debt market. Now, distributors and mutual funds are offering their investors such an investment.

The way it works is that the money is invested in a liquid fund, where, after every month, a part of the amount invested is transferred to an equity-oriented fund.

In this way, there is a regular amount invested in the equity route like the systematic investment plan.

At the same time, the basic value of the investment is protected as the liquid scheme will grow at a certain rate and there is no erosion in the value of the investment here. What can happen is that an amount more than the gain is transferred to the equity fund, in which case, the overall calculation would differ slightly.

However, the investor can ensure that the whole thing is structured in such a way that only the gains are transferred out of the fund, due to which the original capital remains protected.

Investors can check with their distributors or the mutual fund itself whether they allow such a facility.

Actually, an investor on their own could undertake the entire exercise by following this investment strategy, but the problem that would arise would be that the process could become slightly tedious on the monitoring part.

Another advantage of this approach is that since there is a systematic investment, there is the absence of an entry load, which would have to be paid for a one-time entry and has now risen to around 2.25% for many equity-oriented mutual fund schemes.

At the same time, the benefits of rupee cost averaging is also available to the investors. What this means is that when the prices are high, the number of units bought with the same amount of funds is less and when the prices are low, the number of units purchased is more.

For those who do not want any capital protection but still have a lumpsum amount with them, there is another variation that can be adopted. The basic process followed is actually the same.

The entire sum available at point one is kept with a debt-oriented fund once again, preferably, a liquid fund and then, a specific amount is transferred each month to the equity-oriented fund.

The end purpose here is that there is a specific amount which goes into the equity scheme each month.

With this kind of choice available to investors, they need to first consider whether these routes actually make sense for them at all. It should meet a particular need of the investor and some investors might want to undertake a slight variation on their own to suit their needs better.