| Look Before you Invest |
The mutual funds industry in India has also finally come of age. An
indication of this is the number and variety of funds offered by the issuers, as well as
the depth of the market in terms of the secondary trading. So today one doesn’t need
Rs 100,000 minimum to start investing in shares of sensex pivotals. One can invest in them
for as little as Rs 1000. Also diversification, sector concentration, availing of the
interest rate swings is all possible through the diversified or sector dedicated as well
as Debt funds. Mutual funds issuers have cast their nets wide by offering a plethora of
instruments which aim to maximise returns while minimising risk They offer the advantage
of professionals managing your money; and the funds are usually liquid. Additionally, you
benefit from the convenience of not having to bother about paperwork or repeated
transactions.
All this is true, but still this does not mean that investing through a mutual fund is
riskless. Investors are still reeling from the Morgan Stanley debacle. So before investing
in a mutual fund there are some simple but important check points that one should go
through.
Check out the Macros
Don’t just blindly look at every new float (new issue by a mutual fund) as an
opportunity to invest. As you would do with investing in the market directly, always keep
the background in mind. What is the current economic scenario, industrial growth,
liquidity position in the markets. Don’t be alarmed by all the economic jargon, just
a thorough read of the newspaper everyday will give you all this dope. Against a turbulent
background, where the economy is in a downtrend, the liquidity position is tightening,
inflation is up, perhaps you can wait to pick up the new float after it is listed rather
than at the time of the offer.
Sense the Sensex
One of the cardinal rules of investing is getting the price right. So, watch the sensex
(the group of 100 shares which accounts for majority of the capitalisation in the market),
has it been rising or falling, or has it been steady. In case the sensex has been
consistently on a high, then remember, the fund will invest your money into scrips at
these high prices, and then perhaps it will not be able to generate a positive momentum in
its NAV as these prices may be difficult to reach again. Remember the infotech funds which
today are quoting below par, they had all invested in the frenzy of the ICE age and have
been caught on the wrong foot in the subsequent meltdown. Infact now is the time to invest
in these below the par infotech funds.
Interest rates and Liquidity
In case you are keen on a balanced or debt fund, you must check out the interest rate
scenario. Remember the basic rule - interest rates and bond prices are inversely
proportional. When one goes up, the other comes down. So incase you are expecting a fall
in the interest rates, which normally happens when the liquidity position is loose in the
market, look for investing in Debt funds (which have a medium to long term horizon). In
case you are expecting a rise in the interest rates then look at Gilt funds (which have a
shorter time horizon) or at balanced funds.
After a recky of the Macros, it is time to check out the Micros. What is the parentage of
the Fund house proposing the issue. What has been their past in terms of good management
and reporting practices, despatch of dividends and certificates etc. Their financial
performance in terms of dividend and NAVs. Look at the track record of the mutual fund
under consideration, track record of the fund manager (if possible) and objectives of the
particular scheme. Other aspects like availability of an exit route, specific service
standards promised (like maximum time to be taken in mailing repurchase/redemption
proceed). A fund’s performance is very risky if it is a one man show. One cannot rely
on a single star performer to bale the NAV out. It has to be an organisation and the
entire systems that have to work for the performance. While checking out the fine print on
the kind of fund itself compare it to other similar funds in terms of exit options,
expenses etc.
Lastly, Time the market. As we had mentioned earlier timing the market is the essence of
success. See if the time is right to invest in equity funds, i.e-overall economic scenario
seems positive, sensex has been on the upswing but not necessarily peaking, overall
sentiment is flat to good. For balanced funds to debt funds check out the interest rate
scenario. And then decide which type of fund you want to invest in. Have a look at the NAV
performance of other funds floated in the same quarter. For example most of the pharma
funds were floated in the first to second quarter of 1999 have the similar NAVs. So a look
at the recently listed fund, which is similar to the one you are contemplating is perhaps
a good idea. Also remember, there is no hurry. Agreed you must time the market and all
that but one can even pick up a good fund after lisited. The market scenario might change
and the fund which has good portfolio as well as good parentage may get listed below par.
So have a small checklist of these parameters ready and check out the funds attributes
against these before you decide to leap.
Aru Srivastava
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