Everyone says we can invest in mutual funds now. But the NAV (Net Asset Value) of many funds show a fall, and returns are in the negative. How can such issues be solved? I want to invest ₹2 lakh now for five years on a long-term basis. What is your suggestion among mutual funds, stock markets and debt funds for this sum?

Reghunatha Pillai

NAVs of mutual fund schemes are subject to fluctuations depending on the movement in the underlying units. The NAV of an equity MF rises or falls with the swings in the prices of the stocks in which the fund has invested in. Considering the bearish and choppy market conditions that have prevailed in the past 3-4 months, many equity funds could sport a decline in their NAVs.

As far as debt MFs go, the NAV movement is influenced by factors such as coupon payments on the underlying bonds, interest-rate movement in the market as well as the defaults/downgrades of the instruments in which the fund has invested in.

Since MFs are market-linked products, the fall in NAV cannot be considered as a problem that needs to be resolved. Funds that take less risk could probably see lesser falls in NAVs and vice-versa. Hence, if you don’t have a high risk appetite, you can choose funds which fall in the low-risk category. Moreover, the return experience will be better if you stay invested for the long term.

For investing ₹2 lakh for a five-year period, where you can park this sum depends on your risk appetite, your return expectation and on whether you can extend your investment horizon in case returns are not up to the mark. While five years are not too short for equity MF investments, it is not long either.

As far as investing directly in stocks go, a five-year period suits a long-term investor, but stock selection is key to generating good returns and hence, the risk quotient is high. If you have a low to moderate risk appetite, you can choose debt funds. You can invest in corporate bond funds or banking and PSU debt funds.

I am a regular reader of your strategies and your articles about investments. Here are the SIPs I have been doing for the past two years — DSP Midcap, HDFC Hybrid Equity, Nippon India Pharma and Nippon India Focused Equity. All the investments are in direct, growth plans. Can you advise on whether to continue or switch?

Vijay Kumar

Assuming you started investing in these funds in June 2018, your SIPs have earned the following returns in the past two years — DSP Midcap: -0.67 per cent, HDFC Hybrid Equity: -7.44 per cent, Nippon India Focused Equity: -11.5 per cent, Nippon India Pharma: 25.35 per cent.

The first three funds are rated five-, three- and four-star, respectively, by BusinessLine Portfolio MF Star Track Ratings . You can continue your SIPs in these funds for the present and take a call later on if the ratings fall below three-star for any of them.

Since the pharma fund is a sectoral fund, we don’t have a rating on them. This fund has posted good returns following the rally in pharma stocks since the Covid-19 outbreak. While pharma stocks may continue to be in the limelight in the near to medium term, sectoral funds are subject to concentration risk and require close monitoring and timing of entry and exit. If you are not up to it, you can book profits and move to diversified funds.

Send your queries to mf@thehindu.co.in

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