Indian MFs the finest option for wealth accumulation

It's a thumb rule in the mutual funds (MF) industry — appropriate asset allocation in the right funds can give you more returns than expected. The process of smart investment startsby identifying the investable fund. Debt funds come in handy for those looking at money management options. Butif the aim is to create a corpus, equity linked funds are the best.

After the global economic slowdown of 2008, retail investors took a cautious approach towards equity-connected investments. However, the returns from Indian mutual funds were more than those offered by other countries.

There is a high rate of money transfer from the Middle East to India. In the majority of the cases, this money either gets converted into a fixed deposit or may simply be lying in savings accounts. "Banks have an interest rate cap for NRI accounts. The interest rates for NRIs are often less than thedomestic depositors. This means it does not even cover the rupee depreciation and inflation factors. So one should look at diverting this money into MFs, which give much higher returns," says Sanjay Panse, an MF investment advisor.

"As MF products in India don't accept third-party cheques, it becomes a logistics hassle for an investor based in the Middle East and this trouble keeps him away from reaping the benefits of Indian MFs," says Krishnamurthy Vijayan, former MD of IDBI Mutual Fund.

The good news is that more Indian banks have started branches or counter operations in the region, offering a variety of financial products.

Why India?

A mid-March report from the Indian rating agency Crisil shows that the mutual fund industry's assets increased to Rs6.75 trillion (Dh481 billion) by the end of February 2012, registering an increase of Rs161 billion over January 2012. The2 per cent month-on-month rise in assets in February 2012 was largely due to mark-to-market gains notched by equity funds and inflows witnessed in money market funds. Owing to the uptick in the equity market, assets of equity funds rose by Rs61 billion, to Rs1.8 trillion.

Though India also felt the after effects of the global slowdown, the impact was less severe. Markets are yet to recover to pre-2008 levels, though they performed within a fairly decent range in the past one year. According to the latest available data, the inflow into Indian mutual funds in 2011-12 stood at Rs1 trillion against Rs494.06 billion in the same period the previous year. This asset value increase and the inflow into Indian MFs substantiate the strength of the MF sector despite the negative news floating across the globe.

The other notable point is the increase in investments in debt funds. This is primarily because of the fixed income guarantee attached to such funds and partially because of the interest rate moving to a higher trajectory. On the flip side, there is higher outflow from equity-linked schemes as last year was an year of redemption.

"The Indian MF industry is well regulated and offers a wide range of products. For any investor looking for yields from their money, Indian MFs offer the right basket of options to choose from," says Dhruv Mehta of the Foundation of Independent Financial Advisors. India and China are growth markets and the underlying financial market should do well, he says.

Fund Manager's role

A fund manager helps a person choose the right kind of product according to his ability to invest. "One can choose a product according to the track record of the fund manager and the fund's performance in the last five years," says Masarrat Fakih of Allegiance Advisors. She continues that the fund manager can also help to choose the tenure of the fund after understanding the flexibility and the holding power of the customer.

NRI investors, normally take fund managers at face value and invest their money, only to realise that their short term funds are not performing as expected. So the fund manger advises a reallocation of funds. This leads to higher churning of the portfolio. "One should take into account the star rating of the fund before making an investment. Funds that are five- and four-star rated are safer investments. The observed tendency is that High Networth Individuals (HNIs) tend to be carried away by the fund manager's convincing power. The common feedback from non-resident investors is the higher rate of portfolio churning," Panse adds. This is when the investor's ability to judge plays a crucial role.

"The safer bet is to target index funds. The positive side of an index fund is that there is no intervention from the fund manager. By avoiding the distributor or the fund manager one can be sure that there won't be any error in judgment," says Krishnamurthy.

After the abolition of the entry load by Securities and Exchange Board of India (SEBI) a year ago, the tendency of the financial advisor is to sell the product that fetches him the highest commission.

Taking all these into consideration, Krishnamurthy says investments in index funds, government securities and debtfunds will be more appropriate for an investor who is not able to regularly monitor the performance of the funds.

Tenure Matters

For a domestic investor, MFs with a three-year lock-in period offer tax benefits as well. But MF consultants say three years is a very short period to look for a decent return. The flexibility to hold the fund for a period of five years or more assures a fairer return on investments. "Let us look at the past five years. For those who entered the MF market in 2007, the returns are in negatives. But look at an investor who put in money in 2001. Now his return is close to 400 per cent." In one word, the long term pays off.

Experts believe that investors should look at a seven-year tenure or above. "One should be realistic about returns as well," says Panse. "Especially, if the market has moved by 10 per cent, one shouldn't expect a 20 per cent return!"

According to Mehta, the momentum in the Indian financial market is currently good and is expected to move on an upward curve in the coming years. n