The Telegraph
Since 1st March, 1999
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In search of a perfect mix

mutual funds seem to have a string of products geared to just about every possible investment need. It is important for investors to realise that an ideal investment portfolio should be a combination of all these products in different proportions, depending on the financial needs and goals of the investor.

Money-market and liquid funds are the most conservative mutual funds and invest primarily in government (or equally safe) securities. These funds target to earn little more than what savings accounts would fetch and are safe. Investors can use these funds as short-term investment avenues for surplus cash. The entry and exit procedures for these funds are very simple.

Fixed income funds invest in government securities and debentures. The aim is to provide high, regular income with the possibility of some capital gains. These have become very popular investment vehicles during the last three-four years. This is because the economy has witnessed a significant decline in interest rates over the last few years, allowing these funds to earn a very high proportion of their return through capital appreciation. Higher returns with lesser volatility have attracted investors to these funds and they would continue to provide a return in excess of inflation and superior to fixed maturity avenues with similar risk profiles.

Equity funds invest in shares of companies, and are recommended for investors seeking long-term growth through capital gains. An investment time-frame of at least five years is generally recommended. With the economy expected to register high growth and the stock market on the rise, equity funds are likely to provide a steady and sustainable return.

Investors also have the opportunity of investing in broad market indices through index funds or through exchange traded funds. These funds allow investors to have an exposure to their desired equity market index at a significantly reduced transaction cost. The exchange traded funds, which are a recent innovation in the Indian financial markets, give the investors the advantage of entering or exiting their choice of index at live on-line prices, and at a much lower investment than that required for investing in the securities which comprise the index.

Balanced funds provide a combination of income and growth by investing in a mixed portfolio of common stock, debentures, and cash. These funds provide a return which is the mean achieved by investing in the two asset classes, and are ideal investment avenues for people willing to take a slightly higher risk compared to pure debt investors.

An investment portfolio should be suited to the individual investor's profile and monetary needs. A combination of mutual funds within one’s portfolio is essential in the current financial environment, as one has to balance steady income with investment appreciation. It is crucial, therefore, not to concentrate one’s investments in mutual funds geared to a particular asset class.

(The author is chief investment officer, UTI Mutual Fund. The views expressed in this article are his own)

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