‘First put your emergency fund in order’
MUMBAI: Did you have an urge to withdraw the mutual fund when markets turned red?
When Htmoney spoke to Sanjiv Singhal, founder and chief operating officer, Scripbox, he said it is very common to panic withdraw money from mutual funds but not the right approach.
“If you are opting for equity investment without setting up emergency fund, you are likely to withdraw investments midway,” said Singhal.
EDITED EXCERPTS:
Investors tend to withdraw money from mutual funds when the equity markets fall. Why do they not stay invested and what should they do in a bad market cycle?
It is a common thing that people withdraw money. People tend to look at investments in blocks and not as something that can serve the overall need. We have also seen that happen. Investors will come and say they have to withdraw money from equity which they have invested for two years. The important thing about equity is that you should go into it only if you don’t need the money for a short term.
If you are opting for equity investment without setting up emergency fund, you are likely to withdraw investments midway. The time when you are withdrawing the money in an emergency from an equity investment, you might take a loss. Then you are forever convinced that equity is not the right way. There is a graduated approach to investing.
First you should create an emergency fund which could be even in a savings account or FDS. We recommend liquid mutual funds for emergency funds. Once you have your emergency fund in place, you should then opt for equity-related investments. In that case what is the right time to withdraw your money from equity mutual funds ensuring that the impact of the market conditions is lower?
Say your money is in debt fund which is designed to be withdrawn at any point of time, whether you have to pay tax on it or not, if you need the money and it is meant for the purpose you should use it.
In case of equity investment which is for your long-term needs, two-three years before you reach your goal, start moving your money into debt fund.
Is there a strategy for beginners on how to pick the right mutual fund from the 36 categories and 1000s of schemes available?
You have to look at mutual funds through generic objects such as long-term goals, short-term goals, emergency fund and tax saver. Aligned to those objectives you should invest in different kinds of mutual funds. The workflow is objective, asset allocation, category of funds and funds and not the other way round.
If you are looking at long-term goal, it has to beat inflation. Hence you can’t do fixed income unless you are saving say over 60% of your income. If you know which fund to invest, you can go directly to the AMC and invest provided you are able to manage the life-cycle of the investment. Knowing which fund to buy is only 15-20% of the decision.
THE TIME WHEN YOU ARE WITHDRAWING THE MONEY IN AN EMERGENCY FROM AN EQUITY INVESTMENT, YOU MIGHT TAKE A LOSS. THEN YOU ARE FOREVER CONVINCED THAT EQUITY IS NOT THE RIGHT WAY