It was another good week for mutual fund investors as equity markets inched northwards and came within striking distance of the 11,000-point mark. The BSE Sensex appreciated by 0.88% to close at 10,860 points; the S&P CNX Nifty ended the week at 3,234 points (up by 1.57%). The CNX Midcap rose by 0.28% to close at 4,637 points.
A trend (and a rather worrying one in our view) that we have noticed in recent times is investors discarding the mutual fund route in favour direct equity investments. The rationale -- equity markets are on a surge and it's easy to make money there, so why bother with mutual funds?
This rationale is fundamentally flawed. Despite being in the midst of a seemingly endless rally, mutual funds can offer investors many advantages and continue to be the retail investor's best bet.
Investing in equities is a rather complex process. It entails studying, tracking and understanding factors like the economy -- both domestic and global, interest rates, the political and legal environment among others.
Clearly, this is a full time activity that is best left to experts. A fund manager does precisely that for investors, that too at an affordable cost. Effectively, mutual funds offer the opportunity to the access the markets in a hassle-free and convenient manner.
Secondly, a mutual fund investment offers investors the benefits of diversification. Any financial planner worth his salt will vouch for the importance of holding a well-diversified portfolio.
A mutual fund portfolio can offer diversification across stocks (a diversified equity fund invests in various stocks) and asset classes (a balanced fund/monthly income plan invests in both equities and debt instruments). More on the importance of investing via the mutual funds route, later in the article.
Leading Diversified Equity Funds
| Diversified Equity Funds | NAV (Rs) | 1-Wk | 1-Mth | 6-Mth | 1-Yr | SD | SR |
| FRANKLIN OPPORTUNITIES | 20.30 | 2.27% | 8.44% | 24.62% | 78.23% | 6.70% | 0.50% |
| ING VYSYA DOMESTIC OPP. | 22.59 | 2.22% | 7.57% | 25.92% | 68.08% | 4.88% | 0.79% |
| MAGNUM EQUITY | 26.76 | 2.14% | 10.31% | 30.66% | 74.22% | 7.19% | 0.41% |
| ABN AMRO EQUITY | 23.52 | 1.77% | 10.53% | 34.55% | 73.32% | 4.51% | 0.97% |
| TEMPLETON GROWTH | 56.36 | 1.76% | 7.27% | 22.47% | 50.78% | 7.05% | 0.36% |
(The Sharpe Ratio is a measure of the returns offered by the fund vis-à-vis those offered by a risk-free instrument) (Standard deviation highlights the element of risk associated with the fund.)
Franklin India Opportunities (2.27%) emerged as the top performer in diversified equity funds segment followed by ING Vysya Domestic Opportunities (2.22%). Templeton India Growth (1.76%) which follows the value-style of investing also featured in the list.
Among the category leaders, Franklin India Bluechip (1.19%) had a good week, while HDFC Top 200 (0.86%) and HSBC Equity (0.39%) had a modest one. Mid cap majors, Sundaram Select Midcap (-0.64%) and Magnum Global (-0.18%) delivered negative returns; Franklin Prima (0.55%) had a good week.
Leading Debt Funds
| Debt Funds | NAV (Rs) | 1-Wk | 1-Mth | 6-Mth | 1-year | SD | SR |
| PRUICICI INCOME | 20.34 | 0.24% | -0.29% | 0.51% | 3.42% | 0.60% | -0.66% |
| LIC BOND | 19.05 | 0.15% | 0.04% | 2.19% | 4.71% | 0.54% | -0.59% |
| PRINCIPAL INCOME | 16.38 | 0.15% | 0.52% | 1.29% | 4.58% | 0.54% | -0.58% |
| DEUTSCHE PREM. BOND | 11.65 | 0.15% | -0.79% | -0.53% | 4.50% | 0.75% | -0.44% |
| KOTAK FLEXI DEBT | 10.78 | 0.14% | 0.54% | 2.74% | 5.88% | 0.04% | -1.82% |
The benchmark 7.38% 2015 GOI yield closed at 7.43% (March 17, 2006), 4 basis points above the previous weekly close. Bond yields and prices are inversely related with rising yields translating into lower bond prices and net asset value (NAV) for debt fund investors. PruICICI Income (0.24%) towered heads and shoulders above its peers from the debt funds segment. LIC Bond and Principal Income shared the second position with an appreciation of 0.15%.
Leading Balanced Funds
| Balanced Funds | NAV (Rs) | 1-Wk | 1-Mth | 1-year | 3-year | SD | SR |
| HDFC PRUDENCE | 93.93 | 0.94% | 5.58% | 55.70% | 57.48% | 4.89% | 0.56% |
| MAGNUM BALANCED | 22.33 | 0.72% | 7.61% | 60.61% | 63.30% | 5.63% | 0.58% |
| JM BALANCED | 19.47 | 0.67% | 6.10% | 47.84% | 37.18% | 5.04% | 0.38% |
| HDFC BALANCED | 27.94 | 0.54% | 4.84% | 36.96% | 39.46% | 4.72% | 0.39% |
| CANBALANCE | 27.08 | 0.48% | 5.00% | 26.19% | 26.37% | 4.22% | 0.25% |
Category leader HDFC Prudence (0.94%) surfaced as the top performer in the balanced funds segment. Magnum Balanced (0.72%) and JM Balanced (0.67%) occupied second and third positions respectively.
Coming back to the discussion on mutual funds, if tax implications on investments are an area of concern, rest assured, long-term capital gains on both equity investments and equity-oriented mutual funds are tax-free.
Similarly, short-term capital gains are taxed at a rate of 10% plus the surcharge (if any). Likewise, dividends from both equity investments and mutual funds are tax-free in the investors' hands.
Finally, the single most important reason why you should invest in mutual funds -- the versatility they afford. Whether you wish to plan for your retirement, children's marriage or even buy a car, mutual funds (powered by their versatile nature) can help you achieve these objectives and more.
On the other hand, equities can only serve the broad purpose of achieving capital appreciation. However, achieving financial goals would imply building a portfolio of equities and debt instruments and actively managing the same. Wouldn't you rather let a mutual fund manager do this, rather than do it on your own?
Another excuse (and a rather lame one) we have heard for preferring equities over mutual funds is that mutual fund investing is too boring. Investing is serious business and should be seen as a means for achieving one's financial objectives; it has nothing to do with excitement. If excitement is what you are looking for, visit an amusement park!
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