Your MF investments should meet your needs
Jan 28 2016
Investors should be able to put their money into a specific fund, which meets their requirements
Nature of fund
An investor might not be able to find the right fund due to that particular fund’s very basic nature. Here one has to distinguish between an open-ended fund and a close-ended fund. Open-ended funds are available for new investments at any point of time and hence there are no restrictions on when one can invest or the manner in which the investment should be made. On the other hand, when it comes to close-ended funds, there might be certain restrictions which could lead to a situation where the investor is unable to make an investment despite wanting to so. The basic feature of a close-ended fund is that it is open for investment only for a specific time period.
Like fixed maturity plans, choices are available with regard to the time period for which the investment is to be made. These are debt-oriented mutual funds wherein a scheme is launched for a specific time period following which it comes to an end. The fund manager buys securities that mature along with the scheme, so there is no risk regarding interest rate during the interim period. The launch of such funds is often guided by the tax benefits, which come along with them. Earlier, these funds would have their gains classified as long-term capital gains if held for a period of more than one year. But it has now been changed to a holding period of more than three years. As a result, an investor might not find schemes entering the market with a maturity period of less than three years. So this could create a problem if an investor’s investment horizon is less than three year.
Mutual funds also generate risks based on the portfolio that has been constructed. Often the portfolio might not reflect the kind of exposure that is required by an investor. This can happen with different kinds of funds, especially sector funds where the funds may have only a particular type companies — say large cap funds — while the investor may be looking for an exposure that is spread across large caps and mid caps or some other variations.
(The writer is a CA and certified financial planner)