Using mutual funds to gamble safely

new delhi: it's like gambling. it's not for everyone. you need skill, time and perseverance. to top it all, you need a strong heart, backed by a sense of detachment to book a loss or to sell in a seemingly unending rally. of course, there are stock market analysts who do not agree. never mind them. if you are a small investor the closest you should go to the market is mutual funds.a mutual fund manager invests in a set of shares -- portfolio. the performance of a mutual fund -- equity- and debt-linked -- in circa 2002 would largely depend on the general outlook of the economy and the financial markets. even the best of the fund managers cannot guarantee returns. they may beat the market, but may still have only negative returns to offer. debt or equity? how old are you? financial market pundits offer a formula based on a person's age to decide what how his money should be divided between equity-linked and debt-linked funds. an investor who is less than 50 years old, they say, should put in 100-x per cent of his investible funds in the stock market through mutual funds, where x is the age of the person. the balance goes into debt-linked funds. the formula is based on the person's risk taking capacity, with the assumption that a younger person can take more risk. this, of course, does not hold true for investors who are over 50; especially in india, where one needs to be extremely careful and stick to debt instruments if one is approaching the retirement age. financial markets in 2002 last year saw thousands of crores flowing away from stock markets into the relatively safety of debt funds. this year, the outlook is better: interest rates are low, and the market has bottomed out. most market players feel interest rates would continue to be low, even fall lower. this would make debt-linked funds less profitable. seasoned market watchers say that one of the best times to buy stocks is when there is "blood on the street". since september 11, there has been. but it's been four months now, and the markets seem to have stabilised. given this, the january-march 2002 quarter is a good time to invest in the stock markets. equity funds family among equity funds, two categories stand out today: index funds and tax-saving funds (equity-linked saving schemes). index funds an index fund is a specialised mutual fund scheme which replicates a chosen index. in india, an index fund typically replicates the bse sensex or the nse nifty in its portfolio. then, depending on whether the index goes up or down, so does the fund's net asset value. such funds are attractive on three counts. first, the investment is in the top-of-the-line 30 or 50 stocks of the country, which reduces the chances of error by the fund manager. second, a wider portfolio of 30 or 50 quality stocks is the very antithesis of putting all the eggs in the same basket. third, it has been proved that returns from the stock market as plotted from the major indices over an extended period of time are always superior to other forms of investments, such as bonds, gold or real estate. index funds themselves can be actively or passively managed. in passively managed index funds, the fund manager replicates the entire index composition in the scheme's portfolio. each index stock is calibrated with respect to each other such that every movement in the chosen index is duly reflected in the scheme's nav with almost zero tracking error. actively managed index funds, meanwhile, follow a different philosophy. while the choice of stocks would be the same as that in passively managed funds, the weightage would differ. depending on the fund manager's bullishness, an active fund could have more of a certain stock, and maintain only a token presence in some other. compared to other actively managed equity funds where a fund manager can make or break the fund with his choice of stocks, there is no such risk in passively managed index funds. tax savings schemes there are two benefits in this type of mutual fund schemes. first, the investor gets a tax rebate under section 88 of the income tax act. second, because of the three year lock-in period of the scheme, the fund manager gets a better opportunity to invest. compared with open-ended schemes, where investments could suffer an erosion simply because some large investor abruptly chooses to make an exit, here all investments are locked up. the three-year lock-in also gives fund managers more leeway in planning their portfolio, compared with those managing open-ended equity funds. at least theoretically, a lock-in of three years can work to the scheme's advantage, especially in a market which has bottomed out, as this one appears to have. good advice do not be swayed by emotions. invest in the markets only after research. and, do not lose heart over the current turmoil in the markets. this too shall pass. you might also like to read