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| Home > Learning Centre >
Conversations With a MF Non-Believer |
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The story so far…
On a train to Bhubaneshwar, compartment AS3 has been abuzz with a group of people avidly discussing investments, stock markets and the apparently complex world of MFs. The train has just left Bhusaval junction and an old man has climbed onboard. His seat is right in the middle of the conversationalists….
As the train gains momentum, I see the old gentleman pull out his mobile phone and tell the person at the other end, most likely his son or daughter, that he’s boarded the train and will call them once he reaches Bhubaneshwar. I’m trying hard not to eavesdrop but like the rest of us, the old man believes that long-distance conversations have to be conducted loudly. Suddenly he starts talking about SWP s and how he’s forgotten to deposit the cheques he’s received. The bright young lad looks at me and smiles; Another mutual fund investor, his face seems to be saying. I roll my eyes heavenwards and smile back.
The old man finishes his conversation and apologises for being loud. The bright lad smiles warmly at him: ‘You seem to have chosen your compartment well, Sir. We have been having this interesting conversation on mutual funds and investing over the past few hours. I’m happy to see that we have another seasoned investor onboard now.’
OG: You embarrass me young man. I can hardly be called seasoned. I started investing after much prodding from my daughter. Initially I would berate her often when I had problems with either the process of investing or when the fund didn’t do as well as I expected it to. But now after nearly 2 years I’m glad I took her advice.
Me: But isn’t investing in MFs all too complicated? I mean everywhere I look I can see MF ads but none of them tell me what I really need to know. Where do I start from?
OG: (Smiling) You sound just like I did two years earlier, when investing in MFs was an alien concept for me. I had no clue either. I saw all these long articles about the virtues of MFs but absolutely nothing on the basics needed to get me started; Till a friend of mine guided me to our neighbourhood bank. And that’s what I would recommend to you too.
Go to your local bank branch or a neighbourhood broker if you have one. Most banks today including the nationalised ones sell MFs and many of them have investment advisers or officers who can actually help you identify which scheme is relevant to your needs, how much of your savings to put in a MF, how to split your money across various schemes to reduce your risk and even something as basic as filling out the application form.
The application form itself is very easy to fill in once you know which scheme you want to apply for. It’s a simple 2 pager which basically takes down details like your contact information, bank account particulars and which scheme you want to invest in and how much.
Me: You can get all this done through your local bank or broker? I didn’t know that. What about getting our money out? I’ve heard it can take quite a while and it involves going to the MF’s registrar. The registrar in my city is so far it could take me atleast 2 hours to get there. I don’t have that kind of time.
The old man has clearly warmed up to the idea of sharing his knowledge and gets quite animated now.
OG: Oh no. There’s no need to take so much trouble. With most of the MF companies, all it takes is a phone call. You call their toll-free number. They take down your bank account and contact details and your cheque is ready. In the case of income funds, your cheque is posted the very next day. With equity funds, SEBI has instructed that it be sent within 3 working days. It’s as simple as that.
Me: It can’t be that simple. Do all MFs have this phone service?
OG: Some MFs might not have this service. But then you can drop in your redemption slip to your local bank and the MF will courier the cheque to you within 1-3 working days.
Me: What’s a redemption slip, now? How many terms does one need to learn to understand even the very basics of MFs?
BL: (Smiling) I think MFs take the cake when it comes to jargon. They have so much of it that no wonder they scare off investors. Anyways, when you fill out the application and invest in a MF, the company sends you an account statement which gives you details of your investment. This is similar to a bank or passbook statement.
At the bottom of this account statement, there is a perforated area which is called the transaction or redemption slip. This allows you to make additional investments, transfer your money to another scheme within the MF company or withdraw your money. This is what you need to fill out if you want to ‘redeem’ your money. And then drop it off at the nearest bank/broker.
Like me, the middle aged man on the side berth is absorbing all this information eagerly. The Old Gentleman and the Bright Lad have captured everyone’s attention. The Middle-Aged Man intervenes now: Ok, that doesn’t sound so bad. But these are merely the operational bits. What about the most important thing – how does one decide where to invest?
Me: Yes. Exactly. There are so many MFs, so many schemes, so many plans within those schemes. Plus if you look at the ads, they all look and sound the same. All happy, soft-focussed pictures with no real information. How is one supposed to even know how to pick the relevant one?
OG: I was lucky; I had help in that department. My daughter picked the schemes for me. But she also explained why she was picking the ones she did.
Basically, she said, there are 3 broad categories of funds – equity, debt and balanced. Equity funds invest essentially in stock markets; Debt funds in fixed income avenues like bonds and debentures; And balanced as the name suggests is a mix of equity and debt.
Within equity, there can be different flavours. There are sector funds which invest mainly in a particular sector, say for instance in IT or Pharma or FMCG. Then there are funds which invest in only small companies. These tend to be called small cap funds. You would also find schemes which are called index funds. These invest in the stocks which make up either the Sensex or the Nifty index. Within the equity category, blue-chip diversified funds tend to carry the lowest risk. Small cap and sector funds tend to be riskier since they invest in shares of companies which can be more volatile.
The more interesting way to remember all this is to think of vanilla ice-cream. You can eat it with fruits or with hot chocolate sauce or just plain depending on what you crave for at that moment. At my age though, Ive been advised to eat less icecream (laughing). And so I have a very small proportion of my money in equity funds. I like having some of my money in equity funds though since it gives me the thrill of the watching my money appreciate when the stocks in the MF’s portfolio do well and since the amount is not too large I do not get too depressed when the market goes down and my money languishes.
But my regular diet comes from debt or income funds. Over 80 per cent of my money is in a mix of debt and liquid funds. Liquid funds are as good as having your money in the savings account and most times it earns a little more than the S/B account. Debt funds are my way of ensuring that my money is invested in good quality bonds without having to tie myself down to the bonds’ maturity periods. I can withdraw the money as and when I want it.
Plus I’ve opted for the SWP plan. SWP refers to a systematic withdrawal plan. Since I’m retired I like to have some money each month for my expenses. MFs allow you to specify how much money you’d like to withdraw each month and they pay that out on a fixed day each month.
BL: Oh yes, I overheard you say earlier about not being depositing your SWP cheques. You know, in order to avoid the bother of having to deposit the cheques each month, you can ask the MF to directly credit your account. All you need to do is tick off the ECS box in the application form or the transaction slip and give your bank details. The MF will directly credit your account with the redemption money
Me: (addressing the old gentleman) You seem to have cracked the MF code, Sir.
OG: It’s not really a difficult code to crack. Just requires a little bit of help. And if you are not fortunate enough to have family members or friends explain it to you, your bank’s officers or brokers are the next best option. All this information is too much for my small brain to handle and I get up to search for the chaiwallah. I’m sure he must be somewhere on the train. The gods seemed to have read my mind because within minutes the train slows down at ------ station. The Bright Lad gets off. It’s time to say farewell to an intelligent and interesting travelling companion, a person from whom I’ve learned much.
To be continued… |
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