Choodamani

Coimbatore

Investing through a diversified equity fund is definitely the right course of action if you want to make a beginning with stocks.

This way, you get to enjoy the benefits of active investing without actually having to keep track of stock price movements.

However, equities can offer quite a bumpy ride, even if you take the fund route. Therefore, we suggest that you start small, with a sum that you would not mind exposing to the risks of equity investing.

Here are our suggestions on your queries:

To start with, consider only plain equity funds (known as diversified equity funds) that can invest in a wide range of stocks and sectors.

Avoid theme-based funds, sector funds and other funds that focus on any particular set of stocks.

We believe that diversified equity funds with a good five-year performance record would be the most suitable for first-time investors.

Don't give undue weightage to a fund's performance over shorter periods of time such as a quarter or even a year.

Evaluate if the fund has managed to consistently beat market indices such as the Nifty and also stay ahead of peers over a period of four or five years.

You can use Business Line's archives (www.blonnet.com) or Web sites such as www.mutualfundsindia.com to narrow down on such funds.

Based on our analysis, we suggest that you start your SIP with funds such as HDFC Taxsaver, HDFC Top 200 Fund or HSBC Equity Fund.

When you invest in equity funds, you need to be prepared to hold your investments for at least 4-5 years and can probably expect an annualised return of about 12-15 per cent at the end of your holding period.

However, you cannot expect to earn this return in a regular stream, year after year.

The equity market usually alternates between periods of exceptionally high returns, as in 2003 and periods of insipid or negative returns, as in 2000 and 2001.

You need to remain invested through stock market ups and downs in order to earn a reasonable return at the end of a four- or five-year holding period.

When you invest in an equity fund, take exposures through the dividend option so that you can cash in on periods of good performance through dividend receipts.

The level of a fund's NAV does not materially influence its performance. Remember, whatever a fund's current NAV, it represents the prevailing market value of all the stocks held by the fund.

When you invest in a fund at a NAV of Rs 10 or Rs 100 per unit, you are buying into a portfolio that is worth Rs 10 or Rs 100, at the stock prices prevailing at the time of investment.

Whether the fund will deliver a good return from that level will depend on its choice of stocks and how it churns these stocks to deliver a reasonable return year after year.

This is why a fund whose manager has already weathered several market ups and downs successfully may be a better choice than a new one.

(Queries may be e-mailed to mf@thehindu.co.in, or sent by post to Business Line, 859/860 Anna Salai, Chennai 600002)

Aarati Krishnan

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