What is meant by variable entry load?
Ishani Banerjee asked:

Variable entry load is an arrangement where different investors get to pay different quantum of entry loads to either the mutual funds or distributors.

Earlier in India, when entry loads were fixed at 2.50 per cent across most of the mutual funds, there were concerns as to why should all investors pay a fixed charge when the level of service varied from one distributor to another. It was observed that although services of some distributors lagged far behind those of others, all of them used to earn the same commission.

The market regulator, the Securities and Exchange Board of India (Sebi), abolished entry loads effective 1 August 2009. Now, investors have to talk to their agents and jointly decide upon the charges the agents should get. If you think that your agent gives you sound advice and you are satisfied with the level of service, you pay him more. If not, you pay him less.

This is called variable entry load.

What is cost averaging? How does it provide higher returns over a period of time compared with lumpsum investing?
Birju Singh, email

Cost averaging is a technique that forms the backdrop of a systematic investment plan (SIP). In an SIP, you invest a fixed sum of money every month or quarter into an equity scheme. When the scheme’s net asset value (NAV) goes up, you end up buying fewer units. When it drops, you buy more units. As a result, your cost price of units gets balanced out.

In a rising market, lumpsum investments score over SIPs as your entire corpus starts to grow from day one, as against SIPs where your money starts to work as and when it gets invested. SIPs generally work best in volatile markets when timing the market becomes difficult.

Additionally, you shouldn’t compare the returns from SIPs and one-time returns. This is a wrong approach. You do not invest through the SIP route because you have a chance to earn higher returns; you start an SIP because it inculcates discipline. In an SIP, a fixed amount of money gets invested regularly, irrespective of whether the markets are trending up or down. More importantly, it does away with your worry of timing the market for a suitable entry point.

Are sector funds risky in the current investment climate? If I do opt for them, which funds should I look at?
Abhishek Jha, email

Sectoral funds are one of the riskiest funds, and we would not recommend you to go for them unless you already have a well-diversified portfolio. However, what is most important is that you must have the risk appetite to stomach the risks that sectoral funds are fraught with.

As these funds invest their entire corpuses in one or two sectors, their fortunes depend on these sectors alone. Many mutual funds launched technology sectoral funds in 1999 and 2000, only to burn their fingers––and investors’ money––in the subsequent technology sector bubble burst.

Typically, mutual funds have since avoided launching too many sectoral funds and instead played safe by launching thematic funds that diversify across sectors and scrips bound by a common theme, such as infrastructure, consumer spending, service industries and so on.

It is also safer to invest in these funds once you are sufficiently diversified in large-cap and mid-cap funds. Try opting for infrastructure funds if you are already well-diversified, and look at an investment horizon of at least three years.

I am beginning to invest in mutual funds and believe that I have a high risk appetite. Should I opt for index or sector funds at this stage, or should I opt for a mix?
K. Prasad, email

We would suggest trying Reliance Diversified Power Fund. This is the only sectoral fund as part of OLM 50—Outlook Money’s recommendation of 50 schemes across categories. Other than that, we wouldn’t recommend sectoral funds as there aren’t many worth recommending.

You can try a combination of mid-cap and thematic funds. Birla Sun Life Mid Cap and IDFC Premier Equity are two mid-cap funds you could buy. You can also consider DSP BlackRock Tiger and ICICI Prudential Infrastructure funds. These are thematic funds that invest in infrastructure-related sectors.

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