Is this the right time to buy mutual funds?

Is it a wise idea to put your money in mutual funds when stock markets in India are at an all-time high? If yes, then what kind of returns can investors expect from mutual funds?

Which mutual funds -- tax saving, growth-oriented -- should investors put their money in ideally? Which are the best mutual funds that you can still bet on with a time horizon of 7-10 years? Why is it important to look at mutual funds as long-term investment?

For those of you who missed the chat, here is the transcript.

tikku asked, i am 35 yrs of age and am drawing a salary of Rs 15000/- with no additional income and a family of six to take care of. I can save upto 2500/- pm currently. where should i invest so that i can make some savings by 2020? i dont mind investing in MF[equity] Pls guide.

Vetapalem Sridhar answers, Hi Tikku, It is gr8 tht u r able to manage a family of 6 in 15K and also save some money. If ur horizon till 2020 is clear, then it would definitely make sense to build funds thro investing in a Mutual Fund. U can do a SIP in HDFC Growth Fund or Reliance Vision Fund. Also an important thing is to take a TERM Insurance as there r a lot of dependants on u.

Rakesj asked, I am 30 now, and by 40 i want to have 25-30 lacs through investments. I can manage 10k per month for investment. What would be the best investment ideas provided i am ready to take calculated risk?

Vetapalem Sridhar answers, If u start investing 10K per mth for the next 10yrs, then u can accumulate around 28L if u r able to grow the money at an annualised rate of 15%. Such a return is possible if u invest into Equity oriented MFs thro a SIP.

moneymanager asked, could you please tell me the factors that affetcts the price of a stock? Is it more about the company's performance, past records or something else?

Vetapalem Sridhar answers, There can be a huge number of factors that affect the price of a Stock. In the very short term (say a few seconds to a few minutes) it is decided by demand and supply of the shares on the exchange. But in the long run, it tends to move in line with the fundamental valuations.

For a retail investor some important factors to consider are:

1. The Management Quality. Where the Management/Company is shareholder friendly or not.

2. The robustness of the business that the company is in. Is it gud in its field of business.

3. Financial Performance of the company. I'm not saying profit, because this figure can be easily manipulated. So u can look at broad parameters like increase in sales etc...

4. Future plans of the company.

5. Current price that the share is qouting at and valuation parameters like P/E ratio etc... Stock Analysis is a complex field and it takes a lot of years of dedication and effort to build gud skills in this field.

sanjay asked, Dear Sir, Happy New Year.. what would you say about the market in 2008, and the sectors which would give more growth?

Vetapalem Sridhar answers, If I knew with certainty what is going to happen in the mkt in 2008, I can easily become the richest person in the world. People can predict whatever they want, but the market always has a mind of its own. The probability that the prediction will come right would depend on how gud skills a person has. It is hence best to always maintain a diversified portfolio and invest in the market regularly with a long term focus to create wealth.

roshi asked, I want to plan my investments so as to save tax this year. Can you suggest some good tax plans? I invested in ICICI pru last year but wasn't impressed much with its performance.

Vetapalem Sridhar answers, A tax plan has a 3 yr lockin. So it makes sense to only evaluate the fund after 3 yrs are over. If u r looking at other options for a ELSS fund, Principal Tax Savings Fund and Sundaram Tax Saver are better.

bhola asked, i can invest 10k per month, and this amt can be increased by 10-20% each year, after 15 years can i expect a return of 55-60 lacs?

Vetapalem Sridhar answers, Assuming u invest 10K p.m and increase this amt by 10% each year then in 15 yrs you should be able to accumulate more than a crore, if u r able to grow the investments at an annualised rate of 15%.

sandman asked, Hi sridhar, I have currently invested 2,06,000 since Dec 2006 and on the same I have made a profit of over 1 lakh. I have invested the money for long term. however, I am a bit scared that if the market falls, it will lead to erosion of my profit. With the subprime fears and uncertain government, do u think, I should book my entire profit and continue?

Also, wanted to know that now with mutual fund entry load being free if invested directly with fund house, will it make more sense to invest through Cditibank investment AC or ICICI Direct. All my funds are through an agent? Please advise.

Vetapalem Sridhar answers, Suppose you book profits, what will u do with the money that you get? If u can remain invested for a further 3-5 yrs, it makes sense not to book profits. Citibank and ICICIDirect r intermediaries. U will be charged entry load if u invest thro them. Only those applications that are done directly will be expemt from entry load. U can apply for a direct online access with respective Mutual Funds. If u buy thro this online access there will be no entry load.

Anand asked, Is it Mutual fund returns is more compared to the Unit link policy by the private bankers?

Vetapalem Sridhar answers, There is no doubt about this. If u compare that both invest in same asset (equity or debt), then MFs will definitely outperform ULIPs sold by private bankers.

InvTest asked, I got some shares from IPO. If I sell it on listing date then what would be the tax implication on it? Will it be STCG or LTCG or it will be treated as business income and will be clubbed to my income for tax calculation. I am an individual retail invester and not a trader.

Vetapalem Sridhar answers, If (stock market) trading is not ur profession and u take such advatages ocassionally, then the gains would be STCG (Short Term Capital Gains). It will be taxed at 10% of profits.

satishyanamadala asked, how much we need to allocate to international equities?

Vetapalem Sridhar answers, The world is coming to India to invest. At this stage India is amongst the most attractive market to invest in. So for a retail investor it make sense to first build a gud portfolio in Indian Equities and have a long term horizon of investment. International Equity as a tool for diversification makes sense only in cases where protfolio size is very high (maybe more than a crore).

gandhivikas asked, The market is at 20,500. Is this right time to put yr money in MFs?

Vetapalem Sridhar answers, Dear Vikas, Let us go back a little in time. In 2000 the mkts had reached approx 6000, an all time peak. Even if a person would have invested at that peak, and remained invested till date his money would have grown at more than 15% annualised return over the last 7 yrs. But for the initial 4 yrs i.e. till 2003 end the person would have been sitting on a loss.

So investing in equity is less about timing and more about the amount of time that u remain invested. So if u have a 5-7 yr horizon from here u can invest even at these levels. U can read thro the following link to know about long term investing http://www.rediff.com/getahead/2007/sep/14stocks.htm.

raviiii asked, I am 41 years old. Please let me know the proportionate of my investment (cash) in FD, MF, Stock, Life Insurance etc. I already hv house and apartment in one of the Metro.

Vetapalem Sridhar answers, No ideal ratio to distribute assets. It depends from a case to case basis. First is have adequte Insurance Cover that would take care of ur dependents financially in case someting happens to u. Second is to have sufficient funds in FDs to take care of any unforseen emergencies. Also always maintain 3-5 mths worth of regular living expenses in ur savings bank acount. Any money that u plan to use up with in the next 3-5 yrs time should be kept in safer assets. The remaining money which can be invested for the long term should be invested into Equities.

depti asked, Good afternoon sir, I am 28 Female Married .I am working and my take home per month is 25K. Husband 30 Years - 85K. Home loan repayment PM 33K(LOan 33 Lakhs), Expenses 40K, Rent 15K and Investment in SIP 35000 PM. (6 Schemes - HDFC Top 200, Sundaram Leadership, Select Focus, SBI - Magnum Multiplier, Birla Equity Opportu, Reliance Equity Opport, Bank RD). Investment on date 5 Lakhs. In Share Markets - Rs. 2 Lakhs. Any shuffle in investment Required? Planning for kid and living in Joint Family. Life Cover 50 Lakhs each.

Vetapalem Sridhar answers, Hi Depti, U r perfectly on track. If u continue in the same way and maintain ur current lifestyle, after estimating adjustment for ur kid u should be able to achieve financial freedom in between 10-15 years. Ur choice of fuds too seem to be reasonably gud.

sen asked, Hello Sir, A very happy new year. I am 24 yrs old, working from the past 1.5 yrs.. My current CTC is 2.95 p.a. My tax for this financial yr is 14.8k.. I have a LIC policy of 1 lakh, premium being 908 Rs per month. I have not done any investments.. But want to start investing immediately.. I am thinking of mutual funds.. I can afford to take some minimal risk since am independent. Kindly suggest me about my investments.. Also suggest whether my insurance policy i have is sufficient?

Vetapalem Sridhar answers, The current Insruance policy is definitely going to be insignificant in ur overall financial life. U would need to take an adequte Insruance cover depending on number of dependents. To save on tax, u should start investing in a ELSS Mutual Fund scheme. Some of the better funds are Principal Tax Savings Fund, HDFC Tax Saver and Sundaram Tax Saver.

rkum asked, REPEAT QUESTION - is it better to invest in ETFs or actively managed equity funds for long term goals? I would like to be in equity but am not able to decide between ETFs and actively managed equity funds.

Vetapalem Sridhar answers, ETFs too can be actively managed funds, unless there r index based ETFs. It is just that those Mutual Funds that r listed are called as Exchange Traded Funds. So if both are actively managed funds, then both would able to meet ur long term objectives.

Priyank asked, Hi! How to judge an ELSS Mutual fund for better returns? Is past performance a good measure for future?

Vetapalem Sridhar answers, Hi Priyank, have written a comprehensive writeup on Selecting gud Mutual Funds, which has been published as a Slide Show. May help u if u go thro it. http://specials.rediff.com/getahead/2007/oct/12fund1.htm

Also read: How to build an ideal mutual fund portfolio

Part II: Tomorrow

Vetapalem Sridhar is a financial planning specialist based in Pune. He can be reached at vetapalems@rediffmail.com.