Wednesday, April 5, 2017

Which Mutual Fund to Invest When Market is High?

Picture shows a confused young investor in black suite at cross-roads
Young investor at cross-roads, confused which type of mutual fund to choose.

Actual Question:

Which Category of Mutual Funds Should be Invested lumpsum when Market Is At High Level; Debt Funds or Liquid Funds?

Answer:

Dear Friend!

A very good question indeed! Thank you.

If a person is talking of mutual funds, it generally means that person does not the time or knowledge or interest in making own in vestments. For the person who makes self investments in stock will find a few good stocks available at attractive valuations even when the market is high. I bought ‘six stocks yesterday when the BSE Sensex reclaimed 30000!

Therefore, if agree that the individual is considering mutual funds as she or he does not the time or knowledge or interest in making self investments, then it does not matter whether the market is at a high or low. Such individuals must invest at all times in stocks through ‘dollar cost averaging.

Now let us examine which type funds to invest. Before we delve into details, kindly understand that each category of fund is designed for an exact and specific purpose and one can not consider the funds loosely.

Debt Fund:

A debt fund is meant for an individual or organisation which has a huge corpus or lump sum and requires regular income for the running or maintenance. For example universities like the Harvard and Oxford are endowed with huge donations by successful alumni and other philanthropic person. The universities also have huge running costs. Therefore they should invest in debt funds or any other regular income generating source.

Similarly, suppose an individual inherits a billion dollars in cash, he or she should invest the corpus in funds that give regular income. Another example for an individual with a large corpus is a retired employee. Suppose on retirement the employee got a large corpus as retirement benefits (provident fund, gratuity and so on) and the retiree requires a regular income, then the corpus should be invested in a debt fund.

Therefore a small lump sum in a different situation is not suitable for debt fund.

Liquid Fund:

A liquid fund is designed for corporations and other business organisations who come into possession of a huge sum temporarily and the money is required to be deployed for other purposes soon, and in the interim the organisation does not want the money to lie idle but earn some income.
Let us assume that a company has raised a b billion dollars by issuing shares to the public. Let us also assume that the object of the share sale is setting up a mega steel mill with a captive power plant. It is going to take many years for the project to be commissioned. What will the company do with the billion dollars? For this situation the liquid fund is designed. The fund generates some regular income and also offers the flexibility (since it is liquid) to redeem any portion depending on the company’s needs.

Equity Growth Fund

Debt and liquid funds are not meant for young or early middle-aged persons who are building their careers and have to build wealth and retirement solutions, having scope for a long, active-income generating capacity. ‘Equity Growth Fund’ is the only option for them.

I once again thank you for raising this important question and I hope I was able to clear your doubt regarding which mutual fund to choose to invest a lump sum when the market is high.

With Best Regards

Anand


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