What is the best Mutual Fund to invest?

There is no single best fund to invest. There are different types of funds that can be chosen for different types of requirements.

The fund that is most appropriate for most Indians is the Equity Large and Mid Cap fund, which invests in shares of Indian companies listed on the National Stock Exchange or the Bombay Stock Exchange. The reason why this type of fund is most appropriate is because most Indians do not invest in equities in a systematic long term manner to build wealth. The absence of this fund in your portfolio will cause large and lasting damage to your financial well being. These funds are best used for investments of 10, 20 even 30 years. An investor can choose to supplement these funds with Small and Mid Cap funds to boost risk and return. For a young person investing for a long time, this is the fund that matters.

For those who wish to place large sums of money for a short period of time, it is better to go with short term debt funds. These funds are easily replaced by bank fixed deposits, but they are usually better than bank FDs. In any case, even if you do not have these funds in your portfolio, it will not cause much harm unless you are placing very very large sums of money idle in a bank account. This is a 'nice to have' fund for most Indians, and a 'must have' fund for cash rich Indians.

Other funds are useful if you have a specific view on the share market. For example, infrastructure funds, pharma funds, technology funds, etc. are useful only if you believe that these sectors will do better than the economy as a whole. Similarly, long term debt funds are useful if you believe interest rates will fall.

From here on complexity in Mutual Funds increases. There are many funds for many different requirements. There is, however, NO single best fund.

Invest based on what you need, not what you like

Often a person’s investment is driven by his risk appetite. Conservative persons cannot stand to lose money and so prefer safe investments like bank deposits. Risk loving persons, on the other hand, avoid safe investments because they like the feeling of risking money to make stupendous returns.

Actually, it is probably a bad idea to choose an investment based on how much risk you like. It is far more intelligent to consider what you want to achieve through the investment. I am sure you would agree that it is intelligent to use a hammer to drive a nail and to use scissors to cut paper. In the world of investments, however, there are many persons who would use a hammer to cut paper because they ‘like’ a hammer.

The safest, simplest instrument is a Bank Fixed Deposit. You put money for a fixed duration of time and get a fixed amount of money at the end of that period. It is useful for short term requirements such as putting aside money for kids’ school fees or even buying that expensive iPhone for Diwali. These deposits provide anywhere from 5% to 9% return depending on interest rates and duration of investment.

The Short Term Debt Mutual Fund offers 5% to 9% returns and is a little riskier than the Bank Fixed Deposit. It is the preferred choice of sophisticated investors such as companies and rich individuals because it is ‘liquid’, which means you can invest and withdraw money from a Short Term Debt Mutual Fund easily at any time, and because these Funds attract lower tax rates if held for three years or more.

So the Fixed Deposit and Short Term Debt Mutual Fund is useful to keep money parked for a year. They are products investors 'like.' Both the Bank Fixed Deposit and the Short Term Debt Mutual Fund are harmful, however, if you want to save for retirement, or for your Children’s college education, or their marriage.

When dealing with investments that have to last for twenty or thirty or forty years, you need to look at Equity Mutual Funds. These are risky but offer great long term returns and they are essential if you want to build wealth for the long term. The Bank Fixed Deposit or Short Term Debt fund are worse than useless for these durations.

A person investing his January Bonus in Equity Mutual Funds so as to buy a Car at Diwali in October is like a person using a hammer to cut paper. Similarly, a person saving in a Bank Fixed Deposit for his retirement is like a person using scissors to drive a nail. Yet, investors often invest only in Bank Fixed Deposits for ALL purposes because they believe that these instruments are safe. Some others put all their savings into share trading in the vain hope that it would mushroom into a massive sum that would make them rich overnight.

A good investor studies all instruments and astutely uses the one that best suits his purpose. The correct application of an investment to a purpose is financial wisdom.

Should you still invest in a fixed deposit?

There is nothing called as investing in a fixed deposit, because those who keep their money in a fixed deposit are not investing it, they are merely parking it. And to park money, Liquid Debt Mutual Funds are much better than Fixed Deposits.

Here are some comparisons between fixed deposits and Liquid Debt Mutual Funds:

1. You cannot withdraw money in a fixed deposit without severe penalties. A Mutual Fund allows you to invest and withdraw at any time without penalties.

2. A fixed deposit return is guaranteed. A Liquid Debt Mutual fund gives you better returns almost all the time, though returns are not guaranteed. There is no TDS on a Liquid Mutual Fund.

3. A Fixed deposit is taxed at your income tax rate. A Liquid Debt Mutual fund is taxed at the same rate, but the tax reduces after three years of holding.

4. In a fixed deposit you are taxed on ALL the money you invest. In a Liquid Debt Mutual Fund you are taxed only on the part you withdraw at any given time.

So would you like to:

1. Pay more taxes,

2. Lock your money,

3. Pay penalties on withdrawing your own money, and

4. Get less interest?

If you do, Fixed deposits are for you. If, on the other hand, you want to make your money work harder, Liquid Debt Mutual Funds are a better option. You can know more here: click here

Write to us to invest better.

What is an Arbitrage Mutual Fund?

An arbitrage mutual fund is a very specialized Equity Fund that makes money by exploiting tiny differences in the prices of shares in different exchanges or the differences in prices between shares and their derivatives.

These funds are not very risky provided they are managed professionally under a good risk management system and they adhere to rules. Which is why it is critical to be invested with a good fund house in these funds. Overall returns are around the rate of an FD, but, and this is what makes arbitrage funds attractive, capital gains on these funds are tax free after a year of holding. On the other hand, taxes on debt funds comparable to arbitrage funds reduce only after three years of holding to 20% with indexation, and gains from FDs are usually added to your income.

The best use of an arbitrage fund is to park large sums of money for the short term. You can write to us to invest at SphereGreen.Investments@gmail.com, or you can contact us through this blog, or simply call us to invest.

Are there any secure Mutual Funds?

Most certainly.

Debt funds are safer than Equity funds, and the safest Mutual fund would be a Liquid Debt Fund. Other debt funds such as Government Bond Funds, Income funds can be risky because they are extremely sensitive to changes in interest rates.

A Liquid Debt Fund is a great place to park money:

1. It provides slightly above the 6 month Bank Fixed Deposit Rate of return

2. You can invest or withdraw money at any time

3. After three years of holding taxation is very low

4. Interest is NOT taxed until you withdraw

5. Tax is charged only on the money withdrawn

6. There are certain specialized Equity Mutual Funds that give returns similar to a Liquid Fund called the Arbitrage Funds, but these are much more complex.

So a Liquid fund is quite safe, but there are no guaranteed returns in ANY mutual funds.

And then safety is a relative concept. With a Liquid fund you can be around 90% certain of positive returns above an FD rate in a year. So it is safe only for a short duration.

Over a period of ten years, the Liquid fund is very dangerous because you can lose a lot of money due to low returns. If you had put in Rs. 100 in a Liquid fund 10 years ago, you would have about Rs. 200 now. If you had put money ten years ago in some of the 'risky funds', such as diversified equity, the money would have grown to Rs. 900 by now. This is how you can lose Rs. 700 in trying to protect Rs. 100.