Are you afraid of mutual funds?

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Are you afraid of mutual funds?

Devang Shah


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February 06, 2006

Got a question about your money? What you should or should not do with it?

Our expert Devang Shah has the answers.

I got married in December 2004.

With a salary of around Rs 24,000 per month, I have managed to save Rs 5,00,000.

But, where must I invest this money? I am afraid of stocks and mutual funds.

My annual insurance premiums amount to Rs 35,500.

I plan to buy an apartment next year of around Rs 20 lakh (Rs 2 million). By then, I shall have two dependents, my wife and child.

How must I proceed?

- Ranjeet Choudhary

Dear Ranjeet,

I can understand your fear of the stock market.

However, if you stay away from mutual funds, you are likely to remain ignorant of a pretty useful mechanism available to all of us.

Here are a few steps I suggest.

1. Put aside the downpayment for your home in a safe place like a bank fixed deposit or a liquid fund like DSP Merrill Lynch Liquidity fund. Liquid funds are known as ultra short-term bond funds or cash funds that invest in money market instruments.

The money market refers to short-term debt (fixed return) instruments maturing in one year or less.
Examples of money market instruments are:

Treasury Bills (T-bills)
Short-term government securities with maturities of no more than one year.

Commercial Paper (CP)
Debt instruments issued by companies to meet short-term financing needs.

Certificate of Deposit
Debt instruments issued by a bank

The main aim of such funds is to preserve the principal and earn a modest return. So the money you invest will eventually be returned to you with a little something added.

2. When you borrow for your home, do take a suitable plain term cover to protect your family from the liability, should something happen to you. The additional sum assured can be less to the extent you are already covered by the insurance you have already purchased.

A term insurance cover is the cheapest life insurance cover available. Should you die, the person you nominate will get the money insured. Should you live, then you don't get anything.

How much must you get insured for?

3. Start investing in Floating Rate Funds like Templeton India Floating Rate Income Fund and Grindlays Floating Rate Fund, for example.

These are mutual funds that do not invest in stocks but in fixed return investments that have a floating rate of interest, not fixed rate of interest. So should interest rates begin to rise, you will benefit.

4. Learn more about the basics of mutual funds and the stock market.

It would help if you do a course on mutual funds. The training institute of the Bombay Stock Exchange regularly conducts short duration courses on mutual funds.

5. Consider a Systematic Investment Plan in a diversified equity fund.

A diversified equity mutual fund will invest in the stocks of various companies from various sectors.

A SIP will entail you investing a fixed amount every month. When the Net Asset Value (price of a unit of a fund) is high, you get fewer units and more units when it drops.

6. Talk to a professional financial planner. Get him to suggest a broad plan for your retirement, your child's education and any other goals that you might have and invest accordingly.

Illustration: Dominic Xavier

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