Sometime back, international or global funds were a rage. Many investors were heavily seduced by these funds. This is because they could get international exposure at a nominal sum. They did not have to get RBI permission to invest abroad. They did not have to face the hassle of foreign currency conversion as the fund house took care of all these formalities.

However it was observed that these funds underperformed local mutual funds. In fact, in many instances, investors have seen the value of their investment eroding. Why is that? Why did these funds fail to deliver?

Well, here are some of the of the reasons while global funds failed to deliver.

• As global funds invest their corpus abroad, effect of economic crisis in the country in which they have invested, will end up eroding the value of the investment.
• Foreign currency exchange will affect the value of the investment. If the foreign currency is stronger than Indian rupee, the value of your investment will increase and vice versa.
• Taxation will differ from country to country. Taxes will affect the value of your investment. Besides you’ll end up paying taxes in India as well, since unlike normal mutual funds, these funds are taxable.

So what should you do? Well, as far as possible, avoid these funds. However if you choose to do so, just invest a small portion (not more than 5%) in such funds. But this should be done only after building up a robust portfolio of domestic funds. This will help you withstand the shocks in the international markets

Recently ULIPs were in the news when SEBI had directed 14 insurance companies not to issue any new ULIPs. SEBI contended that despite being an insurance product, ULIP had a high proportion of investment and thus should be regulated by SEBI. However in reality IRDA regulates the insurance products including ULIPs.

The case went to the court and the government had to step in and hand over the jurisdiction of ULIPs to IRDA. But in this war, it is ultimately you the customer has lost. Wondering why? Here is why.

This is because mutual funds and ULIPs do not have level playing field. While mutual funds are not allowed o pay upfront commission to its agents, ULIP agents can pay commission as high as 40% to its agents. As a result, many financial advisors tend to push ULIPs on their unsuspecting clients. Now remember, this commission comes from your investment.

The drawback of ULIP is that you need to keep your investment for at least 10 years to recover this upfront commission. This despite what many insurance agents tell you that you can keep on investing only for 3 years. Also the insurance cover is very low than what you would get for half the investment had you opted for term plan.

Moreover returns from ULIPs are not guaranteed as it is a market-linked product. Thus looking at drawbacks of ULIPs it is advisable to stay away from ULIPs. But with IRDA winning the battle against SEBI, it is the customer who has lost.

Manish was advised by his mutual fund advisor to invest in a mutual fund that had just announced a dividend of 10%. Accordingly, Manish invested in the fund only to find that the value of the fund had decreased. Manish was shocked with this development as he considered the dividend from the mutual fund same as that of the dividend from the stock.

Manish is not alone. There are many such gullible investors who are taken for a ride by unscrupulous financial advisors. Also sheer ignorance makes people think dividends from mutual funds are the same as the dividends from stocks. But this is not true. Here are the differences between both of them.

When a company declares a dividend, it does so from its income. But when a mutual fund declares a dividend, it does so from the capital appreciation of its NAV. Now the money with the mutual fund is your money as the fund’s job is to collect money from multiple investors and invest in different companies on your behalf. When the share prices of the underlying companies go up, it will push up the NAV of the find, which the fund will then give as a dividend.

The share price of the company is decided by the market and not by the dividend. But in case of a mutual fund, the NAV of the fund decreases by the value of the dividend declared. E.g if the NAV of the fund is Rs. 20 and the fund declares a dividend of Rs 4, the NAV of the fund after the dividend would be Rs. 16.

Also unlike shares, opting for dividend will help in growth of your investment. Hence if you are looking to save for any long-term goal like retirement or children’s education, go for the growth option. So next time your mutual fund broker advises you to invest in a mutual fund just because it is giving a dividend, ignore it.

Want to invest for high returns but also want to reduce risk? Then opt for ETFs. While ETFs are not popular in India, they are very much in demand in the US.

Now you may be wondering, what are ETFs and why have I not heard about them before. For one, they are a new entry in India and another is that you can invest in them through brokers who are more interested in making money though trading than marketing the ETFs.

Here let us take a look at what is an ETF and how does it work

What is an ETF?

ETF is also called as an exchange traded fund and is a type mutual fund. However it differs from a traditional mutual fund in that it simply tracks the underlying index. This means unlike a normal mutual fund, an ETF is passively managed. There is no frequent buying and selling of securities as it normally occurs with a traditional mutual fund. This reduces the chances of fund manager making mistake  while selecting securities. Moreover an ETF can invest in shares , gold silver or even debt. It can also invest in a certain sector.

When an ETF is first launched, it is offered by the fund house. But after the ETF opens for subscription, it is listed on the stock exchange just like shares of a company. You then have to approach a broker to trade in the ETF. Just like shares, units of an ETF can be traded during the market hours, thus letting you benefit from market movement.

An ETF invests in the stocks of the companies included in the underlying index in the same proportion as is present in the benchmark index. E.g. if RIL, ICICI Bank and ONGC constitute 8%, 5% and 3% of the benchmark index, then the ETF will invest in these stocks in the same proportion. In this respect, it is similar to an index fund. However unlike index funds, ETFs don’t need a lot of investment and have a lower expense ratio.

How to benefit from ETF?

Go to a broker and open a demat account. Then start buying units of an ETF with an amount as small as Rs. 1000. However as they are mutual fund, do watch out for expense ratio, as expenses can erode the returns of the fund. Keep on investing by taking benefit of the market movements. With low expense ratio, low chance of error and superior performance, ETFs are the winner all the way.

There are numerous mutual funds available in the Indian market. All this can be very confusing to an ordinary investor. So if you are looking to invest in a mutual fund but are confused as to how to go about selecting them, here are some tips that will help you in choosing a good mutual fund.

• Long-term consistent performance: Has the fund been a consistent performer over a long term? By long-term I mean we are looking at a time horizon of 10-15 years. Has it managed to deliver good returns during good and bad times consistently? If yes, then this fund should be considered. HDFC Top 200, Franklin Taxshield are some such funds.
• Fund management: Is the fund management headed by a reputed company? Has the company been in business for a long time? AMCs like Reliance, Franklin Templeton, HDFC and SBI have been in business for a long time. They have the necessary expertise to run the mutual fund business. So you know you are in safe hands.
• Portfolio allocation: Does the fund have a higher mid-cap and small-cap bias? If yes, then these funds have higher risk than the funds with large cap bias. Funds like Reliance Growth and Franklin Prima have mid-cap bias and so are riskier than funds like Reliance Vision and Franklin Prima Plus.
• Your risk profile: Can you withstand the risk associated with imid-cap and small-cap funds? If no, then stay away from such funds. If you cannot bear any type of risk then avoid equity fundgs completely.

Rahul decided to invest in a mutual fund to fund his planned foreign holiday trip. His broker asked him if would like to opt for dividend or growth plan. Rahul was confused. He didn’t know what to do. So if you are in this position, then read on to find out more about these options.

When you invest in a mutual fund, your money is invested by the fund in buying assets like stocks, debt or gold. In turn, you get units in the fund. When the value of the underlying asset goes up, the value of the unit (NAV or Net Asset Value) also goes up, thus helping you earn profit. You can opt to withdraw this profit or keep on holding on to it and 10 per unit, then the value of each unit will now become Rs 40, once the dividend has continue to earn more profit.

If you need cash, then opt for the dividend option. This will enable you to withdraw the appreciation in the value of your units. However remember, the value of the units will fall by the amount of dividend declared. E.g. if you the NAV of the fund is Rs 50 and the dividend declared is Rs been paid out.

On he other hand, if you are looking to build a corpus for a long-term goal like retirement or your child’s education, then growth option is right for you. Here you can benefit from the compounded growth, thus helping you achieve your goal.

As Rahul did not actually need money, but was building corpus for his foreign holiday, growth option was suitable for him. Always find out the reason for investing before actually investing in a fund.