Every new MF investor faces a dilemma whether he should begin investing with a balanced fund or an equity fund to build wealth over time. Volatility in the stock market every now and then adds to the confusion. Another dilemma faced by investors is whether one should invest through Systematic Investment Plan (SIP) or make a lump sum investment.

For investors, who do not have a lump sum but intend to build up a capital over the longer term, investing regularly through a Systematic Investment Plan (SIP) is an ideal strategy. It is a proven fact that a steady plan both in terms of savings and investments helps pursue financial goals. It also takes care of the issue of handling volatilities in the market. In fact, investments are made at different levels of the market and that results in ensuring the average purchase price being lower than the average NAV. However, for those who have a lump sum to invest, a combination of one time investment and SIP can get the best results.

Balanced fund or Equity fund?

As regards the choice between a balanced and an equity fund for a regular long-term investor, the key point to be considered is that a balanced fund invests around 30-35% in debt instruments. It is a common knowledge that debt instruments generally find it difficult to beat inflation on a consistent basis. Therefore, investing in them may not be a prudent choice especially when one invests to achieve long-term objectives. Though equity funds are riskier than balanced funds, the risk gets minimized for an investor who invests for the long-term in a disciplined manner. Besides, equities have the potential to out perform all other asset class in the long run.

Should I sign up SIP for 10 years or one year at a time?

For a regular long-term investor, another tough decision to make is whether to sign up SIP for a longer period or for one year at a time. Though signing up SIP for 10 years may be a convenient option, it may not always be a wise one. Though there is no hard and fast rule regarding the tenure for which one can sign up for SIP at a time, it would be sensible to review the performance of the schemes every year and take a call on whether to continue in those schemes or change a scheme or two. Besides, one might like to increase the amount every year. In that case, one can do so conveniently without having to add new schemes every time one decides to increase the amount for SIP.

How to handle the urge to abandon equity funds every time the market turns volatile?

If working out the right strategy to invest is a tough job, certain situations during the tenure of the investments can make the task even tougher. One such situation is when the market turns volatile or starts falling sharply. Whenever the stock market turns volatile, many investors start questioning their strategy of investing in equity funds. In fact, many of them start seriously considering moving money to the safety of debt funds completely ignoring the principle of investing to beat inflation.

It is true that during volatile periods, short-term performance of equity funds takes a beating. However, short-term performance does not take away the ability of equities to out-perform other asset classes over the longer term. Therefore, the right way to handle short-term volatility is to ignore it and keep focus on long-term objectives.

Many investors also get perplexed to see the NAVs of some of the funds falling more than Sensex or Nifty during the turbulent times. There are certain reasons that make many funds under-perform whenever the market falls sharply.

Firstly, most diversified funds have varying degree of exposure to mid-cap and small cap stocks. Since these two segments of the stock market are generally the worst hit during periods of high volatility, the performance of diversified funds is impacted adversely. Secondly, like any industry, mutual fund industry also has players whose performances vary from “poor” to “outstanding”.

As regards realigning the portfolio, short-term trends in the equity market should not compel investors to make changes in the asset allocation made to achieve long-term investment objectives. As happens with equity funds, even debt-oriented funds get affected by changes in the interest rates. Therefore, we may see a different picture with regard to the returns offered by debt-oriented funds from time to time.

Are FMPs a good option when the stock markets turn volatile?

Though as an option, FMPs (Fixed Maturity Plan) offer a decent combination of safety and returns, including them in the portfolio at the cost of equity funds may not be a wise thing to do for the long-term health of a portfolio. However, FMPs can definitely play an important role in improving returns on that part of your portfolio, which you may have allocated to debt and debt related instruments.