Monday, October 6, 2008

how to buy a mutual fund and how to tell when to sell

If you need to know what you are putting your head into, you must have read Parts 1 and 2 of this 3-part series on investing in Indian Mutual funds. This is Part 3, and quite consolingly, the last part.

How to buy ?

There are 3 ways to do this :

1. Download the application form online, take a print out, attach a draft as specified and courier it across to the address mentioned.

(Note: You are going to have an advantage in this option. Mutual funds usually have something called an Entry Load, usually 2.25%. Means, if you invest Rs.5000/- you may get units worth only Rs.4887/- the rest goes as some kind of "handling charges/commission". If you send your application directly to the company and not through a broker/distributor, you will be exempted from this and you will get units for all of Rs.5000/-). Many agents do not, naturally, mention this to their customers. Also, don't think that a downloaded applicable is not good enough, because it does not have a pre-printed application no. like the one from the broker. Application no. is good, but not mandatory. Broker is good too :), but not mandatory.

2. You can approach the nearest mutual fund distributor and ask for a form, attach a draft and submit it to him. No Cash. Ensure you fill the form yourself or is filled in your presence and verified by you.

3. If you have an online account in which mutual fund investments are enabled (like ICICI Bank 3-in-1 account or HDFC bank), you can invest online. This is the easiest and hassle-free method, involving little paperwork and felling fewer trees. :) :) But, note that, in methods 2 and 3, you are not exempt from entry loads.

I have tried all three a bit, and of late, settled for the third option. You call it laziness, I call it concern for the environment.

SIP : Systematic Investment Plan : This is similar to the Recurring Deposits in banks. You can opt to invest a smaller amount every month on a given date. Works for small-time salaried guys whom the FM regularly targets, you know. You have to issue post-dated cheques for the specified amount and it will be collected from your bank account and the units will be bought in the scheme. Monthly instalments mostly start from Rs.1000/- per month, there are couple of funds where the monthly instalment is Rs.500/- . This is considered, an easier and a healthy option to invest. While you should also know that a SIP does not mean better returns, it may sometimes have some merits like Cost Averaging. Also, it brings some discipline to your investing and puts it on autopilot. Someone has even come up with a Daily SIP !!

How long should I stay invested in a scheme ?

No one knows, actually. But they say (who?), a minimum 3-5 years is a good period to leave your investments untouched. If your fund is doing reasonably well and is well-placed among its peers, one should leave it at that, even if it's not right on top. It's good to review your schemes once in 6 months, and if they are dismally lagging, then probably consider a switch to another fund. No, I won't go on more on this, I don't know how the machine works. I will get back on this after 7 years :) :) . I do hope this blog will be around, and you, the loyal reader will be around too, but I can't assure whether your money will still be around.

How to Sell :

Why to sell ? :) :) Okay, you've decided to sell or redeem. If you've invested online, click-click-click. If you polluted the environment by investing in paper form, then you would have received your account statement with a portfolio number on it. Somewhat like an account number. That statement copy will also have a tearable portion below where you can place instructions of sale or change of address or whatever and sign. If you haven't stayed with the same bank account, you can specify the new bank account. And send it across to the MF company or give it to the broker. Your money should reach in less than a couple of weeks, since there is a nice stipulation that mutual fund service requests be fulfilled within a few business days of receipt. Also, know that dividends from all mutual fund investments are exempt from tax in the hands of the investor. Only because they are already sufficienty (t)axed. Sale within one year will attract short-term capital gains tax.

Also, contrary to insistence by some dealers, the form is not sacrosanct. Photocopy will do. Or even a signed letter on plain paper giving all information will do. If they are denying your request (for example, a nomination request), they will also send you the appropriate form.

What if you are disorganized like me and lost the account statement ? I hope you will also be partially organised like me and noted the folio number and scheme name somewhere. That should do. Also, remember to enter your email address while applying. There will be "Save Trees" checkbox, by which you can opt to receive account statements by email. :) If you do that, and if the scheme is one of those serviced by, then you don't even need to remember the folio no. (Why am I giving tips to become more disorganized ?). If you just mention your email, they can send you statements for all your investments in MF companies on their service list. The site doesn't require registration, yes it's all legit, they are the guys servicing many mutual fund companies on paper work, and, of course, you will be asked to specify a password of your choice, with which they will encrypt the PDF and send it to your mailbox. Cool !!

My picks ? :

Oh, why should it always lead to this ? I have just advocated data impersonalisation and now, this ? Okay, here it goes, but only if you promise me that you won't listen to me:
HDFC Equity, SBI Magnum Contra, SBI Magnum Balanced, Sundaram Select Midcap, Sundaram India Leadership, Reliance Vision, Franklin India Prima Plus and Birla Sunlife Index.

You must have guessed it right by now, a beginner's guide often means, that the writer is a beginner, not the reader. And if you haven't figured that out, you are probably a beginner in figuring out things for what they are worth.

Happy interesting investing.


  1. How did you go about choosing those MFs that you have mentioned here? Did you do any analysis between them?

    The reason I ask is that I can see very clearly that you are passionate about investing in MFs but have you given thought to your Asset Allocation, age of the investor, tax implications, market timing and so on? Keep in mind that the numbers shown in the fund prospectus can be misleading.

    Perhaps, these are what you should cover in your forthcoming posts. Also, I would strongly recommend you highlight the concept of Index funds, which is what most beginners in the market should start with.



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Disclaimer: Views expressed in this blog are the blogger's personal opinions and made in his individual capacity, sometimes have a story-type approach, mixing facts with imagination and should not be construed as arising from a professional position or a counselling intention.