Investors explore long-term investments in mutual funds
Mutual funds have woken up to the need for long-term investment solutions for investors as they line up goal-based schemes.
Have you ever thought of investing in a mutual fund for the long term, say, 10-15 years? Or do you get carried away by the stellar short-term returns from your fund and see no incentive in staying invested for the long term? If the answer to the second question is yes, then you are not alone. The mutual fund industry in India had mainly focused on shortterm gains with fund houses launching one scheme after another to attract investors. The general perception is that mutual funds are used as a vehicle for short-term investments resulting in a high churn rate and low average investment periods.
After August 2009, when the regulator banned entry loads - previously 2.5% of the funds invested that is deducted mainly to pay the distributor's fee - things began to change.
The sector is now realising the need for long-term goal-based schemes. A number of such schemes have been launched and others are in the pipeline.
"Retail participation in mutual funds is very low. It is, therefore, required to increase the reach by offering solutions to the investors, based on their needs," says Akshay Gupta, chief executive officer, Peerless Mutual Fund.
While some fund houses have recently launched goal-based schemes such as Peerless Child Plan and Fidelity India Child's plan, some others have started initiatives such as Franklin Templeton Family Solution under which they promote savings for different life goals through their existing schemes.
IDFC Mutual Fund and Tata Mutual Fund have sought the Securities and Exchange Board of India's (Sebi) nod for a retirement plan, while DSP BlackRock is planning to offer goal-based solutions.
WHAT ARE GOAL-BASED SCHEMES?
The existing goal-oriented schemes are mostly based on the theme of dynamic asset allocation. In these schemes, your money would be allocated across different asset classes - equity, debt or gold - in a proportion suited to your financial objectives, risk profile and stock market conditions.
Fidelity India Children's Plan has three schemes with varying asset allocation levels. The education plan earmarks 70% of the funds invested for equities and 30% for debt instruments. The marriage plan allocates 70% to equity, 20% to gold exchange traded funds (ETFs) and 10% to debt.
Peerless Mutual Fund's child plan is a low-risk offer with 60-80% of the portfolio invested in debt and 5-35% in gold ETFs and equities. Goal-based solutions, on the other hand, are online tools. Depending on inputs collated through these tools, fund houses would suggest to investors to put money in their schemes to achieve their financial objectives.
"Goal-based funds are an attempt by fund houses to convey to investors that decisions should be governed by identifying financial goals and not by market timing exercises," says Sushmita Ghatak, executive director and chief operating officer, ICRA Online, a company that tracks mutual funds.
HOW DO I STAND TO GAIN?
Promoting Stability: According to data from the Association of Mutual Funds in India (AMFI), as on March 31, 2009, just 45% of retail investors remained invested for two years or more in equity funds, while 48% stayed invested in a particular debt fund for two or more years.
After the ban on entry load in August 2009, there was a shift in approach. September 30, 2010, data shows over 64% retail investors remained invested in equity mutual funds for over two years.
Mutual funds appeared to have seized this opportunity brought about by the change in attitudes to launch goal-based solutions. Their objective is to promote mutual funds as a tool for savings for retirement, child's education and marriage, and buying a home or a car.
"After the entry load ban, many distributors are not keen on selling mutual fund products to retail investors. In this scenario, mutual funds with goal-based products will help the retail investors to understand and align their investment objectives to these products and thereby, achieve their long-term goals without the support of any intermediary," says Renu Pothen, research manager, Fundsupermart. com India.
Some of these schemes also come with lock-ins to ensure longterm investments. For example, HDFC Mutual Fund's Children Gift Plan-Savings and HDFC Children's Gift-Investment give investors the option of a minimum lock-in period of three years.
"These schemes do not necessarily mean more lock-in products, but the endeavour would be to get investors to work towards his longterm goals," says Vikas Sachdeva, CEO, Edelweiss Mutual Fund.
More objective approach: One of the advantages of these funds is that they get you focused on your financial goals. Once you are clear why you have invested in a particular scheme you will not tamper with your savings till you have achieved your goal.
"Goal-based approach helps build the required investor confidence so that he does not get influenced by short-term market cycles," says Kalpen Parekh, deputy CEO, IDFC Mutual Fund. Ajit Menon, executive vicepresident and head of sales, DSP BlackRock Mutual Fund, says so far mutual funds were purely working as manufactures, leaving it to the advisors to decide what fund was suitable for which kind of investor.
In-built asset allocation: All existing goal-based schemes comprise a mix of different assets - equity, debt and gold. This allows diversification across different asset classes. Suraj Kaeley, director, sales and product development, Fidelity International, says, "If an investor has a more 'hands-on' approach to his finances, he may himself choose a mix of traditional funds. However, for many ordinary investors, a tailor-made approach run by an investment manager may be more appealing," he adds.
BEFORE YOU RUSH...
Are goal-based schemes the perfect solution to all your financial problems? Before you lock your money in these schemes, here are some points to ponder upon.
One size fits all: Though goalbased schemes come with inbuilt asset mix, there proportion of allocation to different assets remains same across different investors. For instance, you may want to allocate a higher proportion of your portfolio in equities but the Fidelity India Children's Plan caps it at 70% and the Peerless Child Plan provides a range of 5-35%.
Single fund house concentration: In cases where fund houses offer goal-based solutions through their existing funds, all investments made would be in schemes of the same mutual fund company. This defeats the purpose of diversification to some extent.
"As some of the goal-based schemes are fund-of-funds in nature, all the money would be parked with a single fund house, exposing investors to fund house concentration risk," says Sushmita Ghatak of ICRA Online.
The recent shift towards goalbased products does add a purpose to investments in mutual funds. Though goal-based funds were in existence earlier also, the renewed interest in these schemes is likely to bring in more long-term money for the mutual fund industry and inculcate healthy investment habits among investors.
After August 2009, when the regulator banned entry loads - previously 2.5% of the funds invested that is deducted mainly to pay the distributor's fee - things began to change.
The sector is now realising the need for long-term goal-based schemes. A number of such schemes have been launched and others are in the pipeline.
"Retail participation in mutual funds is very low. It is, therefore, required to increase the reach by offering solutions to the investors, based on their needs," says Akshay Gupta, chief executive officer, Peerless Mutual Fund.
While some fund houses have recently launched goal-based schemes such as Peerless Child Plan and Fidelity India Child's plan, some others have started initiatives such as Franklin Templeton Family Solution under which they promote savings for different life goals through their existing schemes.
IDFC Mutual Fund and Tata Mutual Fund have sought the Securities and Exchange Board of India's (Sebi) nod for a retirement plan, while DSP BlackRock is planning to offer goal-based solutions.
WHAT ARE GOAL-BASED SCHEMES?
The existing goal-oriented schemes are mostly based on the theme of dynamic asset allocation. In these schemes, your money would be allocated across different asset classes - equity, debt or gold - in a proportion suited to your financial objectives, risk profile and stock market conditions.
Performance of existing goal-based mutual fund schemes over the past 3- and 5-year periods
Peerless Mutual Fund's child plan is a low-risk offer with 60-80% of the portfolio invested in debt and 5-35% in gold ETFs and equities. Goal-based solutions, on the other hand, are online tools. Depending on inputs collated through these tools, fund houses would suggest to investors to put money in their schemes to achieve their financial objectives.
"Goal-based funds are an attempt by fund houses to convey to investors that decisions should be governed by identifying financial goals and not by market timing exercises," says Sushmita Ghatak, executive director and chief operating officer, ICRA Online, a company that tracks mutual funds.
HOW DO I STAND TO GAIN?
Promoting Stability: According to data from the Association of Mutual Funds in India (AMFI), as on March 31, 2009, just 45% of retail investors remained invested for two years or more in equity funds, while 48% stayed invested in a particular debt fund for two or more years.
After the ban on entry load in August 2009, there was a shift in approach. September 30, 2010, data shows over 64% retail investors remained invested in equity mutual funds for over two years.
Annual charges on Ulip-based products
"After the entry load ban, many distributors are not keen on selling mutual fund products to retail investors. In this scenario, mutual funds with goal-based products will help the retail investors to understand and align their investment objectives to these products and thereby, achieve their long-term goals without the support of any intermediary," says Renu Pothen, research manager, Fundsupermart. com India.
Some of these schemes also come with lock-ins to ensure longterm investments. For example, HDFC Mutual Fund's Children Gift Plan-Savings and HDFC Children's Gift-Investment give investors the option of a minimum lock-in period of three years.
"These schemes do not necessarily mean more lock-in products, but the endeavour would be to get investors to work towards his longterm goals," says Vikas Sachdeva, CEO, Edelweiss Mutual Fund.
More objective approach: One of the advantages of these funds is that they get you focused on your financial goals. Once you are clear why you have invested in a particular scheme you will not tamper with your savings till you have achieved your goal.
Annual expenses of mutual fund-based schemes
In-built asset allocation: All existing goal-based schemes comprise a mix of different assets - equity, debt and gold. This allows diversification across different asset classes. Suraj Kaeley, director, sales and product development, Fidelity International, says, "If an investor has a more 'hands-on' approach to his finances, he may himself choose a mix of traditional funds. However, for many ordinary investors, a tailor-made approach run by an investment manager may be more appealing," he adds.
BEFORE YOU RUSH...
Are goal-based schemes the perfect solution to all your financial problems? Before you lock your money in these schemes, here are some points to ponder upon.
One size fits all: Though goalbased schemes come with inbuilt asset mix, there proportion of allocation to different assets remains same across different investors. For instance, you may want to allocate a higher proportion of your portfolio in equities but the Fidelity India Children's Plan caps it at 70% and the Peerless Child Plan provides a range of 5-35%.
Single fund house concentration: In cases where fund houses offer goal-based solutions through their existing funds, all investments made would be in schemes of the same mutual fund company. This defeats the purpose of diversification to some extent.
"As some of the goal-based schemes are fund-of-funds in nature, all the money would be parked with a single fund house, exposing investors to fund house concentration risk," says Sushmita Ghatak of ICRA Online.
The recent shift towards goalbased products does add a purpose to investments in mutual funds. Though goal-based funds were in existence earlier also, the renewed interest in these schemes is likely to bring in more long-term money for the mutual fund industry and inculcate healthy investment habits among investors.
