Building Your Mutual Fund Portfolio

The investment in various schemes floated by various fund houses, provides a lucrative avenue but it is not an unmixed blessing. The investors who are unwilling to be exposed to the vagaries of fluctuations of stock markets on daily basis prefer this mode of investment. But experience shows that the investors are not absolutely protected from the risks as are common in the case of direct investment in equity. And timing of buying and selling of units, the choice of sectors and their potential growth and above all tax implication all go into making your investment decision a success or failure.

There are certain relevant aspects of mutual fund which call for careful and systematic study. For instance, the apparent lure of low offer price should not catch one on the wrong foot. There are quite a substantial number of schemes which attracted a lot of investments because of the low offer price but these were left to rot for months together with their NAV far below the offer price. Thus it is quite essential on your part to be well-informed while exercising your choice of schemes. Similarly there is a broad spectrum of schemes viz., Index Fund, Thematic Fund, Exchange Traded Fund, Gold Fund , Contra Fund, Currency Fund etc. Each of these has its own merits and demerits. For instance , the Gold Fund whose underlying is gold will have its NAV exposed to the price of it in the international market which in turn may be influenced by the appreciation or depreciation of dollars. The same is the case with Currency Funds. A Contra Fund invests its funds in stocks with low price earning ratio with the hope of making a big kill when the time comes. But the market may continue to ignore these stocks and thereby your investments in contra fund schemes may continue to remain inefficient in terms of return.

It is always advisable to have a well-diversified portfolio which can make good use of a high return in a particular sector while taking care of a laggard in another sector.

Another important aspect in mutual fund investment is in the area of Income Tax. As you might be aware that under the current dispensation in the Income Tax Act, the return from mutual funds are exempted excepting the cases where the holding period is less than 12 months which attract short-term capital gains tax. Thus it would depend upon the tax liability of an individual in a financial year to take appropriate decision in this regard and some measure of tax planning is involved.