CHAPTER 12 MUTUAL FUND SCHEME SELECTION

- The investor’s risk appetite is a function of three things—the need to take risks, the ability to take risks, and the willingness to take risks.

- Scheme selection depends upon

1.) Risk profile

2.)Age

3.)Asset Allocation

4.) Investment Time Horizon

- Asset allocation generally depends on the investor’s needs.

- In Core portfolio, the investment will be done according to the long-term needs and goals of the investor.

- In Satellite portfolio, investment will be done to take advantage of expected short-term market movements.

- Investors who are more interested in the investing in equity but less incline to generate higher returns by beating the equity market benchmark, should invest in an index fund.

- Aggressive investors who want tooutperform the benchmark should invest inActive Fund.

- Investors may choose the close-ended funds only if they can keep the money locked-in such schemes.

- Anyone, who prefers liquidity option, may want to consider investing in open-ended funds. Large and mid-cap funds are riskier than large cap funds, but less risky than mid-cap funds.

- Fixed Maturity Plan is ideal when the investor’s investment horizon is in sync with the maturity of the scheme, and the investor is looking for a more predictable return than any conventional debt

scheme.

- The performance of gold sector funds is linked to the profitability of gold mining and processing companies. While the returns of Gold ETFs depend upon the price of gold.

- A scheme should be selected based on the following points

1.) Matching fund’s portfolio with its investment objective

2.) Fund Manager

3.) Fund Performance

4.) Fund Portfolio

5.) FundAge

6.) Fund Size

7.) Portfolio Turnover

8.) Scheme Running Expenses

- The dividend pay-out option seems attractive for investors wanting a regular income.

- Re-purchase transactions are treated as a sale of units by the investor. Therefore, there can be an element of capital gain (or capital loss), if the re-purchase price is higher (or lower) than the cost of acquiring those units.

- Growth option has the benefit of letting the money grow in the fund on gross basis (i.e. without annual taxation).

- Risk-Return Hierarchy of mutual funds, Liquid funds – Debt funds – Hybrid funds – Equity funds.

- Risk-Return Hierarchy of debt funds, Overnight funds – Liquid funds – Ultra short duration funds – Low duration funds – Short duration funds – Medium duration funds – Medium to long duration funds

– Long duration funds

- Hierarchy of Credit risk in debt funds, Gilt fund – Banking and PSU fund – Corporate bond fund – Credit risk fund.

- Risk-Return Hierarchy of equity mutual funds, Small cap funds – Mid-cap funds – Multi cap funds – Large and mid-cap funds – Large cap funds.

- Risk-Return Hierarchy of Diversified to Concentrated funds, Diversified funds – Focused funds – Thematic funds – Sector funds.

- Risk Return Hierarchy of hybrid funds, Arbitrage fund – Equity savings fund – Conservative hybrid fund – Dynamic asset allocation fund – Multi asset allocation fund – Balanced hybrid fund – Aggressive hybrid fund