Mutual Funds: Nimesh Shah

Nimesh Shah, managing director & chief executive officer, ICICI Prudential Asset Management Company, answers your questions

What is the best way to invest in mid-cap companies? Should I invest in mid-cap funds or in multi-cap funds? What is the difference?

The key difference between mid-cap and multi-cap funds is the universe in which your money will be invested by the fund manager. A multi-cap fund is market capitalisation agnostic and hence invests in large, mid and small-cap companies. Meanwhile, mid-cap funds, as the name suggests, invest predominantly in midcap companies, which in general tend to be more volatile than multi-cap. Invest in a midcap mutual fund only if you have the necessary risk appetite, otherwise begin with large-cap funds.

I have never invested in debt funds so far. How should I choose one? Are they comparable to bank fixed deposits?

A debt fund and a bank fixed deposit are not exactly comparable as the latter offers fixed returns while the former does not. A debt fund is a professionally managed fund that invests in government bonds, corporate deposits, money market instruments, etc. In general, debt funds offer the benefits of professional management, long-term returns, tax efficiency and liquidity.

Before deciding on which instrument to invest in ask yourself the following question: What is my investment objective and my time horizon? How much risk am I willing to take? Based on the replies to these two questions, one can come to a conclusion regarding the type of debt mutual fund one has to opt for. This should ideally be done in consultation with a financial advisor so as to select a fund that matches your needs.

I am a retired government employee and got my pension arrears recently. Now I am thinking of investing the lump sum amount in mutual funds. But I have read that systematic investments in mutual funds will give better returns. How should I invest the money?

You can consider investing lump sum in dynamic asset allocation funds or equity oriented hybrid funds which will help generate wealth over the long term while minimising the effects of volatility. Also, some of these funds have monthly dividend option which could help generate regular income. But investors must note that payment of dividend is are not assured and is subject to availability of distributable surplus and approval from the trustees.

Meanwhile, systematic investment in mutual funds is generally encouraged for the long term as it inculcates a disciplined approach towards savings.

I am looking for a regular source of income post retirement. How can I choose a good fund for dividend income? Should I look at the NAV or dividend paying history? How will the dividend be taxed?

There are several equity and debt funds which have the feature of a monthly dividend option. But investors must note that payment of such dividend is not assured and is subject to availability of distributable surplus and approval from the trustees. The ideal line of action would be to consult a financial planner who will be in a position to take a holistic view and then recommend equity or debt fund(s) to meet your needs. Before investing, it would be advisable to view the historical trend of the fund's dividend payout history to understand the payout option and frequency better. When it comes to taxation, dividend income from equity funds is tax-free in the hands of the investor.

While going through mutual fund ratings I saw that the direct plan was rated differently from the regular plan of the same scheme. Why was this? Is one better than the other?

Direct plans came into existence only in September 2012. However, many a times, while comparing direct and regular options of a fund, this fact is often overlooked. One cannot adjudge if regular is better than direct or vice-versa because the underlying portfolio is the same. If an individual is unsure of their risk profile and time horizon for investments then it would be ideal to consult a financial planner who will help align your savings and goals as required. />

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