First Steps in Investing.

“Try selecting a Mutual Fund to invest in India,” challenged Lakshmi Narayanan, “Maybe it’s easier to select a bride!” Yes, with around 35 Mutual Funds (MF) offering over 700 schemes in India, it is difficult. So some serious homework is required before you put your money into a MF. But even before this, you need to sort out a few basic issues for your investment. First of all, you need to identify your financial goals: Why are you investing? How much money can you invest? And for how long? How much risk can you tolerate?

Answer these questions carefully and you have devised your investment strategy. Let’s start with ‘Why are you investing?’ If you want a monthly income, you should invest in ‘ debt’ funds that are re-invested in company debentures or government bonds. If you want income after you retire, you are looking for security and steady returns; then go for funds with a lower risk but with a strong track record. However, you can spread your risk by investing in both ‘equity’ funds (that re-invest in stocks) and also in debt funds. If you are looking for higher returns on your investments, then diversified equity funds are the answer.

Second, ‘How much can you invest?’ depends on what you can earmark from your current income or savings. You can add to your investment by regular instalments to increase your total investment by post-dated cheques or bank standing orders. For how long can you invest? The world's greatest stock market investor, Warren Buffet, said “For ever!” But you should not be in a hurry to cash in your investments as mature markets usually rise in the long run.

Finally, how much risk can you tolerate? This determines your ‘risk profile’. Your ‘risk profile’ is your capacity to tolerate losses on your investments and to what extent. The aim is to get the right risk return ratio. In other words, in what proportion should your money be invested in equity and debt funds. You have to find how much risk can you handle. Suppose your investment of $20,000 slips to $15,000, and you get upset although you know that the market will bounce back, then aggressive funds are not for you. If you want to multiply $20,000 into $100,000 in two years, a medium term bond fund may not be the right answer. It is essential to determine your minimum acceptable risk to meet your financial goals.

Now comes the task of selecting a fund. Every MF has a set of objectives detailing its investment philosophy, strategy and the industries and sectors in which it is going to invest. Diversified funds invest across all industries and sectors while others focus on a specific industry or a sector. Yet other funds invest in ‘a basket’ of securities that make up an index and hence are called Index Funds. Your fund selection and their percentage in your portfolio will depend on your ‘risk profile’ and financial goals.

NRIs can invest in the Indian MFs by sending money from abroad or from their bank accounts, provided the purchase is arranged through the banks maintaining your account. Before you invest, you should determine if you want to get your returns abroad where you live (Repatriable) or keep them in India (Non-Repatriable). Under the Non-Repatriable investments, you can purchase MF units with money in your Non Resident Ordinary (NRO) account that does not allow you to send your money abroad. Upon redemption, the funds will be credited back to your NRO account but cannot be remitted abroad. But the interest/dividend earned on such investments is fully repatriable, by providing a Chartered Accountant's certificate and an undertaking/certificate regarding payment of tax from the Income Tax Authorities. Under the repatriable investments, you can purchase fund units from your credit in your Non Resident External (NRE) account or Foreign Current Non-Resident (FCNR) account that allows you to send your money abroad.

No Income Tax is payable if you hold on to your equity MF for over a year. This means that no Long Term Capital Gains Tax is payable. Great! If the investment is less than a year, then a ten per cent Short Term Capital Gains Tax (STCG) is payable. On other MF schemes, NRIs pay ten per cent (20 per cent with indexation) Long Term Capital Gains Tax and STCG of 30 per cent.

If you are not keen on doing all this homework, it’s best to contact an investment consultant you trust or your bank in India dealing in foreign exchange that has your account. After determining your financial goals, risk profile, tenure of your investments, the investment consultant can recommend the right MF for you. Quipped Lakshmi, “Maybe selecting a fund is not all this difficult but how can I find a trustworthy investment consultant?.”

Top