Conventional wisdom has it that it is foolish to invest in a new fund offer (NFO). Is this applicable to index fund NFOs as well? I am planning a lump sum investment in Benchmark S&P CNX 500 Fund. Does rupee cost averaging theory apply to index funds?
-Jojo Jacob
We suggest investors keep away from NFOs because there are uncertainties about new funds. There is no existing portfolio in a new fund nor is there a history to judge its performance. In an established fund, the investments are known. There is also track record of fund manager's ability to manage the fund in turbulent times. In case of index funds, the only unknown factor is the ability of the fund to replicate the index. Here, we buy into a portfolio that is known to us. So the theory of refraining from NFOs does not hold true for index funds.
As far as investing in equity is concerned, systematic investment plan (SIP) is always the best way to go about it. Index investing comprises investing in equity only. And equity as an asset class is volatile. So the best way is to buy an index fund and keep buying it regularly over time. Rupee cost averaging is all the more relevant here.
Is it advisable to invest in two different mutual fund schemes, one equity diversified and a balanced fund, managed by the same fund manager? Will it make the entire investment prone to a similar risk profile?
-Kapil Oberoi
You are right! It is always advisable not to invest in two funds managed by the same fund manager. This rule also applies in the case of asset management companies (AMC). One should try not to invest in two funds of the same AMC as the style of investing akin to one fund house gets reflected in all of its funds. If one fund house's calls go wrong, it will have a greater affect on portfolio.
Should I invest in Kotak Flexi Debt for the long term or for a short term (less than 1 year)? Also, I have been investing in a fund through SIPs for more than five years and I want to switch now. Please suggest a strategy.
-Hemachandra Reddy
If you want to take the benefit of the falling interest rate, you may invest in Kotak Flexi Debt fund for a period of three months to one year. But when it comes to being a part of long-term portfolio, it is important to keep a debt component so as to provide stability to one's portfolio. If you are investing in the fund to keep a debt component in your portfolio, then you can invest for the long term. We prefer it this way as it is a conservative fund.
Coming to your next question regarding the strategy to be followed for transferring a long-term investment, we would suggest systematic withdrawals. Ideally, investment horizon must also include the time required to withdraw or transfer investments systematically. In your case, you have been investing through SIPs for the last five years. It is apparent that you had not accounted for the time required to withdraw your investment. If you do not want to spread the systematic transfer over another five years, then you can consider doing it over three years.
I want to invest in equity mutual funds via SIP for my child's education. My investment time horizon is about 10-15 years. I am thinking of going for ‘free life insurance’ offered by few fund houses. But is the insurance really free? Also, please suggest some schemes?
-Bhushan Khairnar
You can go for the added insurance benefit on mutual funds. Some of the fund houses that give the insurance feature add the premium charges to the scheme while some don't. The particular fund's offer document will clearly state whatever the terms and conditions are.
Reliance, Birla Sun Life and Kotak are the fund houses that do not charge the investors with any expense related to insurance. You can select a fund from these fund houses, if you do not want to incur any insurance expense.
I am investing in Franklin India Flexi Cap (dividend option) and DSPBR Equity (dividend option) through SIP. After the dividend was declared in Franklin India Flexi Cap, the net asset value (NAV) of the fund with dividend option has fallen more than the growth one from its 52-week high (in terms of percentage). But in case of DSPBR Equity there is no difference. Can you please explain why?
-Sanjeev Malhotra
The reason for this difference is that Franklin India Flexi Cap Fund has given a dividend on March 12, 2008 which is after its 52-week high date, February 15, 2008. The dividend has been factored here and so you can see that the dividend option of the fund has fallen more than the growth option in percentage terms.
On the other hand, DSP Black Rock Equity Fund had given its last dividend before its 52-week high date, which is why you cannot see any difference (in percentage terms) in the dividend and growth option here.
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