Mutual Fund Overview

Direct or Regular Mutual Fund plan?

In Direct plans, Mutual Fund house doesn’t pay any commission to the distributors whereas in regular plans, distributors receive 0.5% to 1.5% commission every year. This commission is deducted from NAV of the mutual fund which results in reduced returns. Direct mutual plans earn around 1% higher returns compared to the regular plan. One can buy the direct mutual fund by opening a CAN account from MF Utility website or opening a account with Paytm Money, ET Money, PhonePe, Mobikwik or COIN (Zerodha).

Should I invest in Mutual Fund now?

Equity Mutual Fund : Currently Sensex and Nifty are trading at very high valuation multiples (21-22x PE) and economy is slowing down. Indian GDP grew only by 4.5% in Q2FY20 and Industrial Production declined by 4.3% in September.  Unemployment rate is also very high at 7.5%. I believe that market will not go up from current levels and there is very high probability that it will come down if the economy continue to grow slowly and unemployement rates remains high. I will not buy any equity mutual fund till the market is corrected from the current levels and reaches the reasonable valuation of 15-16x PE.
Debt Mutual Fund : Currently bond yield is very low (10 yr govt yield at 6.4%), and I believe it will not go down much from here. When the economy recover, bond yield will increase again. As a general rule, one should buy long term debt mutual funds when the yields are high and sell them when the yields decline. In next few years, I believe that bond yield will rise again and bond prices will correct accordingly. I will avoid the Long term Debt mutual funds in the current scenario.

What should I do with my money now?

Change in bond yields does not materially impact the short term debt mutual fund returns and hence I will invest my money in short term Debt mutual fund and move the same to Equity or Debt mutual fund once the valuation reaches at reasonable valuation or yield increases for bonds.