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Most of the investors in India, who invest in Mutual Funds, do it so blindly that they fail to capitalize the edge provided to them by Mutual Funds. A typical mutual fund investor chooses his/her fund based on the annualized return the fund has given fro the last couple of years. But they do not have any idea of the influence of the market on mutual fund. For example, an Equity Fund in a bear market is bound to give a negative return than a debt fund, however Equity Funds will give you enormous returns in a bull market.
Say, for example a person invested Rs.500, 000 in Equity Schemes in the fag end of 2000. He would have made a loss of 50% by 2002 as the markets were in a subdued state during this period. However had he invested the same amount in debt fund, he would have made an annualized return of around 9-10%. If that person had invested the same amount in Equity Funds in Mid 2003, the value would have probably tripled by now.
This article embarks on how to make money from Mutual Fund in any kind of a market, be it a bull or a bear!
First Step:
Be fully aware of the portfolio structure of the fund you are investing in. It would give you a fair idea of where your money is going in and what kind of returns you can expect from the fund. Get to know about the basics of markets by reading business daily like economic times, to get an idea of the market and its direction and what sectors are doing well and what sectors are not. This could help you to direct your investment in the right type of funds. So develop a habit of reading business dailies, after all it is your money and you would love to see it grow.
Second Step:
Track your fund performance at least in every fortnight. Get to know about the returns they are generating and identify the performers and non performers of your portfolio. This helps you to manage your investments by switching to performing funds from non performing ones. Almost all mutual funds have websites today that allow managing your portfolio online. Avail this facility offered to you to reduce paper works and for easy switching of funds and tracking their performance.
Step Three:
Make switches based on market direction. For example, if all your Mutual Fund Investments are in Equity Schemes, with the Sensex hovering around the 11, 500 mark and market analysts expecting a correction of at least 1000 1200 points, then the failure to restructure your mutual fund portfolio at this stage, will lead to the erosion of your fund value along with the market. Say if the current market value of your investment is Rs.5 Lakhs it may get eroded to an extent of 50,000 (in line with an expected fall of 10% in the market).
But if you are smart enough, you can prevent this erosion in value and at the same time make a meager profit in a falling market. How could you do this
Well, you can switch all your investment from your equity-based portfolio to debt portfolios that do not have any exposure in the market. These portfolios will not have any impact even if the market falls and at the same time they would generate a return of around 5-6% per annum, through investments in money market and debt instruments. By doing so you are protecting your investment value and at the same time creating an opportunity to re enter in to equity-based portfolio at lower levels of the market (say at 9500 levels) to get more returns.
So by switching the Rs.5 lakhs worth of investments (as stated in the example above), to debt schemes, you are getting a return of 5-6% on this value and at the same time by re-entering the equity schemes at a lower price you can increase your investment value by another 10%. i.e., if you leave your investment in its current mixture of equity portfolio, its value would remain the same for another six months period. But if you can act smartly by following the above advice the same investments would increase by 15-17% in value during the same period.
Note: Many Financial Institutions including Morgan & Stanley, have predicted a flat or negative return from Indian Equity Markets for the year 2006 and almost all financial institutions have reduced their rating to under / average performer on Indian Markets in 2006 from their previous rating of Out Performer among the emerging markets.
Step Four:
Dont go by the word of your financial consultants every time. There is a lot more information on these sites and many great features have been added to these sites off late. So, please make use of these features are utilized for your betterment.
In this article I have tried to explain how you could protect and increase the value of your investments in Mutual Funds in a stagnant market. This strategy is apt in todays situation where the Indian stock markets are expected to be range bound through out the year and is expected to settle at around the 10, 250 mark at the end of the year (Target given for Sensex by many Foreign Institutional Investors for the year 2006).
Remember you can be your own investment manager and all it takes is a bit of interest from your part to know more. After all it is your money and you would love to see it grow and would it not be wonderful if you could influence its growth.
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