Can minors can invest in a mutual fund? My son's maternal grandfather wants to give him a sizeable sum of money. He is a minor. I would like to invest it in an equity-based mutual fund for over 10 years. And I want to be the guardian for future transactions on behalf of my son.
- Sudhindra Chatterjee
Yes, minors can invest in a mutual fund, but only through a guardian. An adult, being a parent or a lawful guardian of the minor, can hold units of a mutual fund and deal with them on behalf of the minor. You need to furnish the asset management company (AMC) with a proof of age of your son and your capacity to hold and deal with the units.
I have come across a statement in a financial daily, which said: “If you are an astute investor, consider investing small sums on every 5 per cent or more declines in the ‘broad market’. Otherwise, use the systematic investment plan (SIP).” Does this make sense? Please elaborate on the term ‘broad market’.
- Jojo Jacob
It would be great if one could be astute enough to consistently buy at dips and sell at highs. But it is very difficult to define a dip. Since January 2008, the market has dipped and dipped further. Most professional and individual investors are unable to successfully time the market.
The way to make money from equities is to build a portfolio of good stocks and patiently hold on to them. By good stocks, we mean stocks of businesses with sound management and the potential to increase their earnings. But this requires an investor’s time and inclination. The alternative is to buy a ready portfolio by way of a mutual fund and invest regularly. An SIP ensures discipline and helps manage investment anxiety caused by dips. This is the next best way to profit from equities.
A ‘broad market’ is generally referred to the direction of the leading indices.
How do I rebalance my portfolio? Of my monthly investible amount, I invest 60 per cent in debt and 40 per cent in equity. Both investments are made through an SIP. At one point, the value of my equity investments almost equalled my debt investment. But after the recent slump, my equity investment accounts for 30 per cent of my portfolio. How do I rebalance my portfolio so that it reflects the original allocation? Should I move a lump-sum amount from my debt (which is doing fine) to equity? Or should I rejig the monthly investment in equity and debt to arrive at the desired allocation?
- Nisar Shaikh
If you want to ensure a 60:40 allocation to debt and equity, you will have to move your money from debt to equity gradually to maintain the allocation. By doing this periodically, you will methodically realise gains from equity when it goes up and its allocation increases. This will ensure a method of buying low and selling high, which is crucial to making money from equities.
There are many ways to approach rebalancing. Tax on gains from an equity or a debt fund is a constraint while rebalancing. So, the broad rebalancing principle should be to avoid frequent rebalancing unless the allocation gets completely wacky. Annual rebalancing can be tax-efficient as long-term equity gains are tax-free.
I normally maintain a cash reserve to cover three months of my expenses (in case of an emergency). Is it a good idea to park a part of this cash reserve in some good debt liquid funds? Please suggest some good funds.
- Manikandan Chellappan
If you are seeking instant access to your money in an emergency, it is then desirable to have your money in a deposit linked to a bank or else you can go for a liquid fund. While you can immediately withdraw your money from a savings bank account, redemption in a liquid fund takes T+1 days that is, 24 hours. If there are any holidays or non-trading days, then the redemption will be delayed by that many days. Therefore, your selection will depend on the urgency of access you are looking for.
In case you opt for liquid funds, go for well-rated ones like Canara Robeco Liquid, Escorts Liquid or HDFC Cash Management Savings.
How can one know if a company belongs to a large, mid or small market-cap category based on its market capitalisation? Is there any limit for each category, such as Rs 1,000 crore for mid-cap and others?
- Bala Pitchuka
We classify stocks into large, mid and small market capitalisations, which are revised every month. This is done by sorting all the listed stocks of Bombay Stock Exchange (BSE) in the descending order of market capitalisation. The stocks that account for the top 70 per cent of the total market capitalisation are classified as large-caps, those between 70 and 10 per cent are classified as mid-caps and those accounting for the last 10 per cent are classified as small-caps. As on November 30, 2008, 58 stocks were classified as large-caps, whose capitalisation ranged between
Rs 1,78,089.80 crore to Rs 8,777.32 crore, 177 stocks were mid-caps with their capitalisation ranging from
Rs 8,521.03 crore to Rs 9.41 crore and 2,791 stocks were small-caps with a capitalisation of less than Rs 8.54 crore.
What is your opinion of the future prospects of gilt funds? Is it the right time to invest in gilt funds?
- Kapil Chourasia
Gilts will benefit if there is a further cut in the Cash Reserve Ratio (CRR) and the repo rate as this will cause the yield of the 10-year GOI securities to decline. Their prices would increase as yields and prices of bonds are inversely related. But the interest rates have been softening for quite some time now. No one can accurately predict whether they would continue to fall. In such a scenario, income funds would be a better investment vehicle than gilt funds as they have the flexibility to switch between corporate bonds and gilts. Not only would they benefit from lower interest rate, but would also gain from the shrinking spread between corporate bonds and gilts.
Value Research
