Investing secrets: Labels don't matter
Based on the queries from investors, we found three kinds of products/plans you can safely ignore
By Aarati Krishnan | Nov 21, 2018
After giving some serious thought to what we have learnt from studying, analysing and writing on mutual funds over the last two decades, we found some insights on mutual fund investing that seem to hold good for all times. Here's the fifth one.
At its core, mutual fund investing is very simple. However, to reduce the 'yawn factor', the fund industry often comes up with new plans and products to woo investors.
But if you aspire to be a smart investor, you should learn to look beyond the fancy packaging and focus simply on whether the asset class you're investing in is in sync with your risk appetite and return targets. Based on the queries from investors writing in, there are three kinds of products/plans you can safely ignore.
One, for your regular-income needs from both equity and debt funds, growth plans are a far better vehicle than dividend plans. In the bad old days when investors simply didn't know the difference between shares and mutual fund units, many folk thought that dividend plans from mutual funds earned them extra returns. But as the dividend payout comes straight out of your NAV gains, that's a wrong notion. Expecting equity funds which have wildly gyrating returns from year to year to pay out a 'regular' dividend is a wrong expectation. Even in debt funds, given the high rates of distribution tax on dividends, a systematic withdrawal plan on a growth option is a far better way to set up a regular cash flow.
Two, if you're looking for good mutual funds to build a child's education portfolio or retirement portfolio, don't restrict yourself to the so-called 'solution-oriented' schemes specially targeted at these goals. If you scratch the surface, such schemes offer no real benefit over plain vanilla multi-cap funds or hybrid funds. In fact, they may actually carry handicaps such as high exit loads and lock-in periods that prevent you from switching if their performance is mediocre. Plain multi-cap funds and aggressive hybrid funds are far better bets for your child's education or retirement needs.
Three, don't make the mistake of thinking that an ELSS fund exists only to earn you 80C benefits each year. As multi-cap equity products, ELSS can double up as a very effective retirement savings vehicle, too.
To read the other stories in this series, click on the links below.