Mutual Funds offer three options:
* Dividend
* Dividend Reinvestment and
* Growth
Which is the best and why?
In my experience as a financial and investment planner, I have largely found that investors tend to give a lot of time and importance to the process of selecting a mutual fund. However, once a particular fund is chosen, choosing an investment option is done on an almost arbitrary basis. Some like the idea of receiving periodic Dividend, some like recurring investments and hence choose the Dividend Reinvestment option and others choose Growth. And some even leave the entire exercise to the discretion of the agent or distributor.
However, choosing the correct option is perhaps as important to the health of the investment as choosing the particular mutual fund is. What are the various factors one should consider and why?
Background
There are two factors that are of prime importance when choosing an investment option - a. Fiscal policy b. Your investment needs and goals.
Both these factors play an important role and let us see how we can tweak each for the maximum benefit.
Choosing the Dividend Option - Drawbacks
Before considering the drawbacks, let us look at the benefit of choosing the Dividend option.
The foremost and the most obvious benefit is that the dividend is tax-free --- in the real sense of the term. Though all MF dividends are tax-free, dividends received from non equity-oriented schemes are subject to a distribution tax of 14.025%. This means that though such dividend is tax-free in your hands, you are receiving 14.025% less than what you would have otherwise received. This by inference means that it is you who is bearing the 14.025% tax, the MF only pays it on your behalf.
Dividends from equity schemes do not suffer this distribution tax and hence are truly tax-free. Then shouldn't all investors choose the Dividend option? Isn't this entire discussion a non-issue?
Not so fast. Let's consider a live example --- that of Franklin India Prima, a scheme that has been in existence since November 1993.
As on 19th June, 2006, the NAV of the Growth Option of Prima was Rs 153.86 whereas that of the Dividend Option was Rs 48.99 - almost 68% lower. Why is this?
The difference is the dividend received by the investor.
It should be understood that dividend from a mutual fund, unlike stock dividend, is your own money coming back to you. Therefore, had you invested in the Growth option of the scheme, the NAV of Rs 153.86 would apply to you. But since you have chosen the dividend option, periodically, some of your investment amount was paid back to you (by calling it dividend) and hence the market value of your units is Rs 48.99.
Now, also note that the scheme performance is calculated based on the Growth option NAV. Actually, technically, it doesn't matter, which NAV is chosen, as the dividends received are assumed to have been reinvested in the scheme at the Internal Rate of Return or the IRR. But without getting into mathematical jargon, it suffices to say that the Prima performance (which has been nothing less than spectacular) is based on the NAV of Rs 153.86 and not Rs 48.99.
So far so good. As long as you needed the dividend, all this really doesn't matter. But my next question is what one should do when the dividend comes and sits in your bank? Do you reinvest it in the same scheme or for that matter into another scheme? If so, do realize that you are reinvesting the money in the same asset class --- Equity. It needn't have come out of the asset class (in this case Prima) in the first place! Plus you may have to bear a load for the fresh investment. Of course, your distributor is happy since this means extra commission.
The second problem is agility. You may forget that the scheme has paid dividend and the money is lying in your bank. It happens. Or even if you are well aware of the fact, the market is behaving in a whimsical manner and this volatility is delaying your decision to enter. The money again sits in your bank.
All this time, when the money relaxes in your SB account, the rate of return of your investment is falling. The reason is simple arithmetic. The capital that is invested in Prima is growing at the IRR as discussed above (44% for the last year, 69% over 3 years and almost 26% since inception). However, the dividend that is lounging in the bank is growing at just 3.5% p.a, which is the SB interest rate. Over time, this substantial difference in the two rates dilutes the net return on the investment. More the time spent in the bank, more the dilution.
Other Reasons for choosing Dividend
Of course there are a couple of excellent reasons given to me by investors for choosing the dividend option. One is of course, needing the funds for day to day life. The second one was that getting dividend in a rising market is like partial profit booking, which is good form. The funds representing dividend can be invested into fixed income avenues or even fixed maturity plans thereby rebalancing the asset allocation.
Excellent arguments that cannot be argued with, per se. Only one hitch. Unlike fixed income avenues (such as PPF, RBI Bonds etc.) when the interest is fixed, not only in terms of the amount but also the timing thereof, dividends from mutual funds are at the discretion of the mutual funds. One never knows how much would one receive and when. In other words, the fund manager may decide not to distribute dividend. Or he may decide to distribute much less than what you need. Or much more than what your intended shift of the asset allocation dictates. What do you do?
There is a simple solution. Ask for the dividend yourself.
Yes, you read that right. You can ask for the dividend. To put it differently ---
'When the MF pays you money, it is called dividend. When you yourself withdraw an equivalent amount, it is called capital gain!
We all know that after one year, withdrawals (capital gains) from a mutual fund are tax-free. Therefore, for your annual dividend requirement, do not depend upon the whims of the mutual fund concerned, instead withdraw the funds as per your requirement.
This way, you can earn dividend not at the whim of the Mutual Fund, but at your fancy! The value of your investment remains the same, whether dividend is paid to you by the MF or whether you redeem units of an equivalent amount.
To Sum Up
The psychology of investing, fiscal policy and your requirements from your investments, all go hand in hand in deciding the optimal option to choose from. As fiscal policy stands today, the dividend option doesn't stack up against the alternatives. However, if tomorrow, long-term capital gains tax is imposed, this strategy wouldn't work and the dividend option would once again come to the fore.
www.shashidharkumar.com
Tuesday, February 5, 2008
New Fund Offer: Things to note before you invest
Most of us like to try out new things whether its dining at restaurants, buying mobile phones and cars to name a few. Some go to the extent of changing mobile phones every 1 year and a car every 3 years. Well this is a matter of personal preference and lifestyle and might give you some kind of emotional happiness which is good in some sense.
But when it comes to most new funds, there is hardly anything different, unique or really NEW about it. It's just that the name gets more exotic, dressing gets much better or a new marketing ploy such as Invest in India's Growth potential as if other options available are not investing in India's growth potential. (Also read - Have a Dravid and a Dhoni in your portfolio)
To put it simply most of the new fund offers are Old Wine in a New Bottle. They are packaged very smartly with fancy marketing ideas to entice the client to buy. There was a deluge of New Fund Offers in 2005 and early part of 2006.
SEBI on its part took a series of steps. Firstly, SEBI objected against the use of the word IPO and instead had every fund house use NFO (New Fund Offer), to confuse with Stock IPOs, to curb rampant mis-selling of new funds.
Secondly, SEBI had Mutual Funds launching open-ended New Funds charge the initial issue expenses within the entry load itself whereas close ended funds could still charge 6% initial issue expense. (Also read - Invest, but choose the right mutual fund)
This is precisely one of the reasons why most of the mutual funds have been launching closed ended New Fund Offers so they could pay a higher brokerage of around 5 to 6% to distributors.
Thirdly, SEBI has taken note of this deluge of similar funds being launched and made it mandatory for the trustees of Mutual Funds to personally certify that their new schemes are different from the old ones. Despite this some of the fund houses have been launching me too schemes.
Some fund houses such as DSP Merrill Lynch have not launched any new offering in the last 12-15 months, except for the Super SIP (which was a genuine attempt to offer something new that was relevant), whereas others such as Tata Mutual Fund and SBI Mutual Fund have been strong contenders for the Top Slot in the New Fund Euphoria.
So the question boils down to “How does then one decide if the New Fund Offer of the so many being launched every other month is suitable for me”.
Before answering this question, first 3 Common Mistakes all investor should be aware of:
(a) Too less or Too many aren’t good enough
I have seen many investors having anywhere between 16-85 funds or some who have just one or two. Having too many in the name of diversification is no good and in fact defeats the very purpose of diversification.
After all the one of the reasons you opt for a mutual fund is to diversify your investments but having all large cap funds in your portfolio is unlikely to do any good.
At best based on the size of your portfolio, spread your investments across in 4-9 different funds spread across different Mutual Funds, fund managers, investing styles, expense ratios, portfolio turnover, market capitalization and whether its an all equity, balanced, or tax planning fund. Give Sectoral funds a complete miss unless you are very bullish on the sector and understand the risks well.
(b) Rs. 10 NAV is not cheaper than Rs.100 NAV
What you should be concerned about is the% fall or% rise. A Re. 1 fall in a NAV 10 fund is the equivalent of Rs.10 fall in a NAV 100 fund. In fact Rs.100 means proven competence and a long track record of capital appreciation. (Also read - Demystifying NAV myths)
(c) Don’t fall for fancy terms
Don’t fall for fancy and general terms such as Investing in India‘s growth potential, Options and Derivatives to diversify your portfolio. See if there are any existing funds with longer track records with similar investment objectives & strategies.
If there are, opt for the tried and tested ones rather than going from newer exotic ones.
How to decide if the New Fund is an appropriate one for you?
1. Take a look at your Financial Plan if you have one or at your existing portfolio. What kind of funds do I have in my existing portfolio? Are they large cap funds, mid cap funds, flexi cap funds, balanced funds, tax planning funds?
2. The next to see is how does this new fund really add value to my existing portfolio? How does this New Fund fit into my portfolio, my asset allocation, and help achieve my goals? This is a million-dollar question.
3. Is this really a New Fund with an interesting theme that might fit well within my portfolio? Understand the investment objective, strategy and asset allocation of the fund.
4. What has been the fund manager’s track record of managing other schemes? Which are the other schemes managed by this fund manager? How have they performed in the past? Especially what has been his previous funds performance during tough times like the May 2006 mayhem, 2000 crash etc.
5. How stable is the investment team of the fund house and how many schemes are they managing? What is their track record of launching new funds? If the fund house is notorious for launching new schemes once every 2-3 months, you will be better off skipping such schemes or fund houses altogether. (Also read - 7 investment tips to improve your returns)
6. If after doing this, you still cannot figure out if you should opt for the new scheme, seek the advice of your financial adviser.
www.shashidharkumar.com
But when it comes to most new funds, there is hardly anything different, unique or really NEW about it. It's just that the name gets more exotic, dressing gets much better or a new marketing ploy such as Invest in India's Growth potential as if other options available are not investing in India's growth potential. (Also read - Have a Dravid and a Dhoni in your portfolio)
To put it simply most of the new fund offers are Old Wine in a New Bottle. They are packaged very smartly with fancy marketing ideas to entice the client to buy. There was a deluge of New Fund Offers in 2005 and early part of 2006.
SEBI on its part took a series of steps. Firstly, SEBI objected against the use of the word IPO and instead had every fund house use NFO (New Fund Offer), to confuse with Stock IPOs, to curb rampant mis-selling of new funds.
Secondly, SEBI had Mutual Funds launching open-ended New Funds charge the initial issue expenses within the entry load itself whereas close ended funds could still charge 6% initial issue expense. (Also read - Invest, but choose the right mutual fund)
This is precisely one of the reasons why most of the mutual funds have been launching closed ended New Fund Offers so they could pay a higher brokerage of around 5 to 6% to distributors.
Thirdly, SEBI has taken note of this deluge of similar funds being launched and made it mandatory for the trustees of Mutual Funds to personally certify that their new schemes are different from the old ones. Despite this some of the fund houses have been launching me too schemes.
Some fund houses such as DSP Merrill Lynch have not launched any new offering in the last 12-15 months, except for the Super SIP (which was a genuine attempt to offer something new that was relevant), whereas others such as Tata Mutual Fund and SBI Mutual Fund have been strong contenders for the Top Slot in the New Fund Euphoria.
So the question boils down to “How does then one decide if the New Fund Offer of the so many being launched every other month is suitable for me”.
Before answering this question, first 3 Common Mistakes all investor should be aware of:
(a) Too less or Too many aren’t good enough
I have seen many investors having anywhere between 16-85 funds or some who have just one or two. Having too many in the name of diversification is no good and in fact defeats the very purpose of diversification.
After all the one of the reasons you opt for a mutual fund is to diversify your investments but having all large cap funds in your portfolio is unlikely to do any good.
At best based on the size of your portfolio, spread your investments across in 4-9 different funds spread across different Mutual Funds, fund managers, investing styles, expense ratios, portfolio turnover, market capitalization and whether its an all equity, balanced, or tax planning fund. Give Sectoral funds a complete miss unless you are very bullish on the sector and understand the risks well.
(b) Rs. 10 NAV is not cheaper than Rs.100 NAV
What you should be concerned about is the% fall or% rise. A Re. 1 fall in a NAV 10 fund is the equivalent of Rs.10 fall in a NAV 100 fund. In fact Rs.100 means proven competence and a long track record of capital appreciation. (Also read - Demystifying NAV myths)
(c) Don’t fall for fancy terms
Don’t fall for fancy and general terms such as Investing in India‘s growth potential, Options and Derivatives to diversify your portfolio. See if there are any existing funds with longer track records with similar investment objectives & strategies.
If there are, opt for the tried and tested ones rather than going from newer exotic ones.
How to decide if the New Fund is an appropriate one for you?
1. Take a look at your Financial Plan if you have one or at your existing portfolio. What kind of funds do I have in my existing portfolio? Are they large cap funds, mid cap funds, flexi cap funds, balanced funds, tax planning funds?
2. The next to see is how does this new fund really add value to my existing portfolio? How does this New Fund fit into my portfolio, my asset allocation, and help achieve my goals? This is a million-dollar question.
3. Is this really a New Fund with an interesting theme that might fit well within my portfolio? Understand the investment objective, strategy and asset allocation of the fund.
4. What has been the fund manager’s track record of managing other schemes? Which are the other schemes managed by this fund manager? How have they performed in the past? Especially what has been his previous funds performance during tough times like the May 2006 mayhem, 2000 crash etc.
5. How stable is the investment team of the fund house and how many schemes are they managing? What is their track record of launching new funds? If the fund house is notorious for launching new schemes once every 2-3 months, you will be better off skipping such schemes or fund houses altogether. (Also read - 7 investment tips to improve your returns)
6. If after doing this, you still cannot figure out if you should opt for the new scheme, seek the advice of your financial adviser.
www.shashidharkumar.com
10 must-reads in an MF offer document
You would have come across this line in all Mutual Fund advertisements, “Mutual Fund investments are subject to market risks. Please read the offer document carefully before investing.” It’s an open secret that this 80 to 100 page bulky document is not simple to read and the legal information it contains is not easy to understand for most investors.
However, Sebi has made the investor’s job easier by evolving an abridged form, the Key Information Memorandum. Also, Sebi has served the cause of investors by stipulating standard sections and standard disclosures in all Offer Documents. Hence, the Offer Document can be the friend and guide of an enlightened investor. Here is a guide to what an Offer Document is, why it is important and what are the 10 Most Important Things to Read in an Offer Document for investors.
What is a Mutual Fund Offer Document?
It is a prospectus that details the investment objectives and strategies of a particular fund or group of funds, as well as the finer points of the fund's past performance, managers and financial information. You can obtain these documents from fund companies directly, through mail, e-mail or phone. You can also get them from a financial planner or advisor. All fund companies also provide copies of their ODs on their websites.
10 Most Important Things to Read in an Offer Document:
Date of issue
First, verify that you have received an up-to-date edition of the OD. An OD must be updated at least annually.
Minimum investments
Mutual funds differ both in the minimum initial investment required, and the minimum for subsequent investments. For example, equity funds may stipulate Rs 5000 while Institutional Premium Liquid Plans may stipulate Rs 10 crore as the minimum balance. (Also read - How to reduce risk while investing?)
Investment objectives
The goal of each fund should be clearly defined — from income, to long -term capital appreciation. The investors need to be sure the fund's objective matches their objective.
Investment policies
An OD will outline the general strategies the fund managers will implement. You'll learn what types of investments will be included, such as government bonds or common stock. The prospectus may also include information on minimum bond ratings and types of companies considered appropriate for a fund. Be sure to consider whether the fund offers adequate diversification.
Risk factors
Every investment involves some level of risk. In an OD, investors will find descriptions of the risks associated with investments in the fund. These help investors to refer to their own objectives and decide if the risk associated with the fund's investments matches their own risk appetite and tolerance. Since investors have varying degrees of risk tolerance, understanding the various types of risks in this section( eg credit risk, market risk, interest-rate risk etc.) is crucial. Investors must raw be familiar with what distinguishes the different kinds of risk, why they are associated with particular funds, and how they fit into the balance of risk in their overall portfolio. For example, a Post Office Monthly income plan assures an 8% monthly income payment for its 6 years tenure. A Mutual Fund MIP invests in a portfolio of 80% to 90% bonds and gilts and 10% to 20% of equities, to generate capital appreciation, which is passed on to customers as monthly income, subject to availability of distributable surplus. In 2004, a lot of mutual fund customers underestimated this market risk and were caught by surprise when the MIPs gave low/negative returns. (Also read - Fear interest rate risk? Here is the solution)
Past Performance data
ODs contain selected per-share data, including net asset value and total return for different time periods since the fund's inception. Performance data listed in an OD are based on standard formulas established by Sebi and enable investors to make comparisons with other funds. Investors should keep in mind the common disclaimer, "past performance is not an indication of future performance". They must read the historical performance of the fund critically, looking at both the long and short-term performance. When evaluating performance, investors must look at the track record of a fund over a time period that matches their own investment goals.
They must check that the benchmark chosen by the fund to compare its relative performance is appropriate. Sebi is doing a fine job of ensuring this as well. In addition, investors should keep in mind that many of the returns presented in historical data don't account for tax. They must look at any fine print in these sections, as they should say whether or not taxes have been taken into account.
Fees and expenses
“Mutual funds have two goals: to make money for themselves and for you, usually in that order.”- Quote from Fool.com. Entry loads, exit loads, switching charges, annual recurring expenses, management fees, investor servicing costs…these all add up over time. The OD lists the limits on these fees and also shows the impact these have had on the fund investment historically. (Also read - How to build your MF portfolio?)
Key Personnel esp Fund Managers
This section details the education and work experience of the key management of the fund company, including the CEO and the Fund Managers. Investors get an idea of the pedigree and vintage of the management team. For example, investors need to watch out for the fund that has been in operation significantly longer than the fund manager has been managing it. The performance of such a fund can be credited not to the present manager, but to the previous ones. If the current manager has been managing the fund for only a short period of time, investors need to look into his or her past performance with other funds with similar investment goals and strategies. Only then can they get a better gauge of his or her talent and investment style.
Tax benefits information
Mutual funds enjoy significant tax benefits under Sec 23 D and Sec 115 .For example, Equity funds enjoy nil long terms capital gains and nil dividend distribution tax benefits. A close reading of the tax benefits available to the fund investors will enable them to plan their taxes better and to enhance their post tax returns. (Also read - How to ride the rising interest rate tide?)
Investor services
Shareholders may have access to certain services, such as automatic reinvestment of dividends and systematic investment/withdrawal plans. This section of the OD, usually near the back of the publication, will describe these services and how one can take advantage of them.
Conclusion
After reading the sections of the OD outlined above, investors will have a good idea of how the fund functions and what risks it may pose. Most importantly, they will be able to determine if it is right for their portfolio. If investors need more information beyond what the prospectus provides, they can consult the fund's annual report, which is available directly from the fund company or through a financial planner.
This investment of time and effort would prove very beneficial to investors.
www.shashidharkumar.com
However, Sebi has made the investor’s job easier by evolving an abridged form, the Key Information Memorandum. Also, Sebi has served the cause of investors by stipulating standard sections and standard disclosures in all Offer Documents. Hence, the Offer Document can be the friend and guide of an enlightened investor. Here is a guide to what an Offer Document is, why it is important and what are the 10 Most Important Things to Read in an Offer Document for investors.
What is a Mutual Fund Offer Document?
It is a prospectus that details the investment objectives and strategies of a particular fund or group of funds, as well as the finer points of the fund's past performance, managers and financial information. You can obtain these documents from fund companies directly, through mail, e-mail or phone. You can also get them from a financial planner or advisor. All fund companies also provide copies of their ODs on their websites.
10 Most Important Things to Read in an Offer Document:
Date of issue
First, verify that you have received an up-to-date edition of the OD. An OD must be updated at least annually.
Minimum investments
Mutual funds differ both in the minimum initial investment required, and the minimum for subsequent investments. For example, equity funds may stipulate Rs 5000 while Institutional Premium Liquid Plans may stipulate Rs 10 crore as the minimum balance. (Also read - How to reduce risk while investing?)
Investment objectives
The goal of each fund should be clearly defined — from income, to long -term capital appreciation. The investors need to be sure the fund's objective matches their objective.
Investment policies
An OD will outline the general strategies the fund managers will implement. You'll learn what types of investments will be included, such as government bonds or common stock. The prospectus may also include information on minimum bond ratings and types of companies considered appropriate for a fund. Be sure to consider whether the fund offers adequate diversification.
Risk factors
Every investment involves some level of risk. In an OD, investors will find descriptions of the risks associated with investments in the fund. These help investors to refer to their own objectives and decide if the risk associated with the fund's investments matches their own risk appetite and tolerance. Since investors have varying degrees of risk tolerance, understanding the various types of risks in this section( eg credit risk, market risk, interest-rate risk etc.) is crucial. Investors must raw be familiar with what distinguishes the different kinds of risk, why they are associated with particular funds, and how they fit into the balance of risk in their overall portfolio. For example, a Post Office Monthly income plan assures an 8% monthly income payment for its 6 years tenure. A Mutual Fund MIP invests in a portfolio of 80% to 90% bonds and gilts and 10% to 20% of equities, to generate capital appreciation, which is passed on to customers as monthly income, subject to availability of distributable surplus. In 2004, a lot of mutual fund customers underestimated this market risk and were caught by surprise when the MIPs gave low/negative returns. (Also read - Fear interest rate risk? Here is the solution)
Past Performance data
ODs contain selected per-share data, including net asset value and total return for different time periods since the fund's inception. Performance data listed in an OD are based on standard formulas established by Sebi and enable investors to make comparisons with other funds. Investors should keep in mind the common disclaimer, "past performance is not an indication of future performance". They must read the historical performance of the fund critically, looking at both the long and short-term performance. When evaluating performance, investors must look at the track record of a fund over a time period that matches their own investment goals.
They must check that the benchmark chosen by the fund to compare its relative performance is appropriate. Sebi is doing a fine job of ensuring this as well. In addition, investors should keep in mind that many of the returns presented in historical data don't account for tax. They must look at any fine print in these sections, as they should say whether or not taxes have been taken into account.
Fees and expenses
“Mutual funds have two goals: to make money for themselves and for you, usually in that order.”- Quote from Fool.com. Entry loads, exit loads, switching charges, annual recurring expenses, management fees, investor servicing costs…these all add up over time. The OD lists the limits on these fees and also shows the impact these have had on the fund investment historically. (Also read - How to build your MF portfolio?)
Key Personnel esp Fund Managers
This section details the education and work experience of the key management of the fund company, including the CEO and the Fund Managers. Investors get an idea of the pedigree and vintage of the management team. For example, investors need to watch out for the fund that has been in operation significantly longer than the fund manager has been managing it. The performance of such a fund can be credited not to the present manager, but to the previous ones. If the current manager has been managing the fund for only a short period of time, investors need to look into his or her past performance with other funds with similar investment goals and strategies. Only then can they get a better gauge of his or her talent and investment style.
Tax benefits information
Mutual funds enjoy significant tax benefits under Sec 23 D and Sec 115 .For example, Equity funds enjoy nil long terms capital gains and nil dividend distribution tax benefits. A close reading of the tax benefits available to the fund investors will enable them to plan their taxes better and to enhance their post tax returns. (Also read - How to ride the rising interest rate tide?)
Investor services
Shareholders may have access to certain services, such as automatic reinvestment of dividends and systematic investment/withdrawal plans. This section of the OD, usually near the back of the publication, will describe these services and how one can take advantage of them.
Conclusion
After reading the sections of the OD outlined above, investors will have a good idea of how the fund functions and what risks it may pose. Most importantly, they will be able to determine if it is right for their portfolio. If investors need more information beyond what the prospectus provides, they can consult the fund's annual report, which is available directly from the fund company or through a financial planner.
This investment of time and effort would prove very beneficial to investors.
www.shashidharkumar.com
Is it time to say Goodbye to your fund?
Many investors are still to fully understand the concept of a mutual fund. They continue to treat it similar to investing in shares. Therefore, they tend to buy mutual funds for wrong reasons - low NAV of a fund; dividend announced by a MF; New Fund Offer etc.
The same misconception is seen in selling too. One of the most common instances of selling a mutual fund has been to invest in a New Fund Offer. This is under the false impression that a fund at Rs.10/- is cheap and an excellent opportunity to invest. Many investors have been misled by distributors into this kind of switching. (Also read - Invest wisely and get rich with equity MFs)
Further, the profit booking strategy for stocks may not strictly be applicable to mutual funds. It is the job of the fund manager to keep buying under-valued or fairly-valued stocks, while booking profits by selling overvalued stocks Therefore, by selling a MF from a profit booking perspective, we may actually be selling off a fairly valued portfolio - with a good long-term potential.
Therefore, what could be the possible situations for selling a MF?
Financing a need
A very obvious reason to sell would be when you need money. We all invest money with a view to finance some need or a desire in the future.
Say, you planned to buy a car or a house; or need to pay your child's fees; or maybe you want to take a vacation abroad. All this would require you to liquidate some of your investment. (Also read - Trading tricks that've stood the test of time)
However, proper choice is essential in deciding which fund(s) to sell. You could either sell those funds, whose performance has not been encouraging; or those where the tax impact is minimal; or those where the amounts are not very significant; etc. Or sometimes, possibly it may be better to borrow rather than sell a good investment.
Poor performance
There are more than 200 equity funds and their number is growing. The returns from practically all funds have been comparatively quite good, given the current bull-run. Even the worst performing funds have given 30-35% returns in last 1 year. In absolute terms these are excellent returns. But when compared to the top performers with 110-115% returns, these look extremely poor.
However, the key here is to look at long-term returns - 1-yr, 3-yr & 5-yr - and compare it with both the benchmark index and other funds in the peer group. In the short term there could be a genuine reason for under-performance. Some of the investments may be from a long-term perspective; certain sectors may have been under-performers; contrarian investments take time to catch market fancy, etc. (Also read - The Investors biggest Dilemma)
But if the performance of the fund continues to be consistently below par over long periods of time, then it may be worthwhile considering switching over a better performing fund. If possible, one should also try and assess the reasons for poor performance. This will give a good insight into the market.
Rebalancing the portfolio
We all have a certain asset allocation across various investment options such as debt, equity, real-estate, gold etc.
A change in your financial position may require you to rebalance your portfolio. Suppose you are presently having a well-paid job and are unmarried with no liabilities. You can, therefore, take much higher exposure in equity MFs. But with marriage and kids your responsibilities may increase, which would require you to reduce you equity risk to more manageable levels.
Or the portfolio balance changes with time, due to different assets growing at different rates. Your equity portion may have appreciated much faster than your debt, distorting the original balance. Hence you would need to sell equity and re-invest in debt to restore the original balance. (Also read - Mutual Funds: Your best personal Portfolio Manager)
Or maybe a new asset class has been introduced in the market - a real-estate fund or a gold fund - and you want to take advantage of it. Thus you may have to sell a part of your existing investment and re-invest in this new asset class.
www.shashidharkumar.com
The same misconception is seen in selling too. One of the most common instances of selling a mutual fund has been to invest in a New Fund Offer. This is under the false impression that a fund at Rs.10/- is cheap and an excellent opportunity to invest. Many investors have been misled by distributors into this kind of switching. (Also read - Invest wisely and get rich with equity MFs)
Further, the profit booking strategy for stocks may not strictly be applicable to mutual funds. It is the job of the fund manager to keep buying under-valued or fairly-valued stocks, while booking profits by selling overvalued stocks Therefore, by selling a MF from a profit booking perspective, we may actually be selling off a fairly valued portfolio - with a good long-term potential.
Therefore, what could be the possible situations for selling a MF?
Financing a need
A very obvious reason to sell would be when you need money. We all invest money with a view to finance some need or a desire in the future.
Say, you planned to buy a car or a house; or need to pay your child's fees; or maybe you want to take a vacation abroad. All this would require you to liquidate some of your investment. (Also read - Trading tricks that've stood the test of time)
However, proper choice is essential in deciding which fund(s) to sell. You could either sell those funds, whose performance has not been encouraging; or those where the tax impact is minimal; or those where the amounts are not very significant; etc. Or sometimes, possibly it may be better to borrow rather than sell a good investment.
Poor performance
There are more than 200 equity funds and their number is growing. The returns from practically all funds have been comparatively quite good, given the current bull-run. Even the worst performing funds have given 30-35% returns in last 1 year. In absolute terms these are excellent returns. But when compared to the top performers with 110-115% returns, these look extremely poor.
However, the key here is to look at long-term returns - 1-yr, 3-yr & 5-yr - and compare it with both the benchmark index and other funds in the peer group. In the short term there could be a genuine reason for under-performance. Some of the investments may be from a long-term perspective; certain sectors may have been under-performers; contrarian investments take time to catch market fancy, etc. (Also read - The Investors biggest Dilemma)
But if the performance of the fund continues to be consistently below par over long periods of time, then it may be worthwhile considering switching over a better performing fund. If possible, one should also try and assess the reasons for poor performance. This will give a good insight into the market.
Rebalancing the portfolio
We all have a certain asset allocation across various investment options such as debt, equity, real-estate, gold etc.
A change in your financial position may require you to rebalance your portfolio. Suppose you are presently having a well-paid job and are unmarried with no liabilities. You can, therefore, take much higher exposure in equity MFs. But with marriage and kids your responsibilities may increase, which would require you to reduce you equity risk to more manageable levels.
Or the portfolio balance changes with time, due to different assets growing at different rates. Your equity portion may have appreciated much faster than your debt, distorting the original balance. Hence you would need to sell equity and re-invest in debt to restore the original balance. (Also read - Mutual Funds: Your best personal Portfolio Manager)
Or maybe a new asset class has been introduced in the market - a real-estate fund or a gold fund - and you want to take advantage of it. Thus you may have to sell a part of your existing investment and re-invest in this new asset class.
www.shashidharkumar.com
7 good reasons to invest in SIPs
Fact No. 1: Over a long term horizon, equity investments have given returns which far exceed those from the debt based instruments. They are probably the only investment option, which can build large wealth. Fact No. 2: In short term, equities exhibit very sharp volatilities, which many of us find difficult to stomach. Fact No. 3: Equities carry lot of risk even to the extent of loosing ones entire corpus. Fact No. 4: Investment in equities require one to be in constant touch with the market. Fact No. 5: Equity investment requires a lot of research. Fact No. 6: Buying good scrips require one to invest fairly large amounts.
Systematic Investing in a Mutual Fund is the answer to preventing the pitfalls of equity investment and still enjoying the high returns. And it makes all the more sense today when the stock markets are booming. (Also Read - 5 corners of a sound Investing Strategy)
1. It’s an expert’s field – Let’s leave it to them
Management of the fund by the professionals or experts is one of the key advantages of investing through a mutual fund. They regularly carry out extensive research - on the company, the industry and the economy – thus ensuring informed investment. Secondly, they regularly track the market. Thus for many of us who do not have the desired expertise and are too busy with our vocation to devote sufficient time and effort to investing in equity, mutual funds offer an attractive alternative. (Read more - The Investors biggest Dilemma)
2. Putting eggs in different baskets
Another advantage of investing through mutual funds is that even with small amounts we are able to enjoy the benefits of diversification. Huge amounts would be required for an individual to achieve the desired diversification, which would not be possible for many of us. Diversification reduces the overall impact on the returns from a portfolio, on account of a loss in a particular company/sector.
3. It’s all transparent & well regulated
The Mutual Fund industry is well regulated both by SEBI and AMFI. They have, over the years, introduced regulations, which ensure smooth and transparent functioning of the mutual funds industry. This makes it safer and convenient for investors to invest through the mutual funds. (Check out - Foolproof strategies to maximize your profits)
4. Market timing becomes irrelevant
One of the biggest difficulties in equity investing is WHEN to invest, apart from the other big question WHERE to invest. While, investing in a mutual fund solves the issue of ‘where’ to invest, SIP helps us to overcome the problem of ‘when’. SIP is a disciplined investing irrespective of the state of the market. It thus makes the market timing totally irrelevant. And today when the markets are high, it may not be prudent to commit large sums at one go. With the next 2-3 years looking good from Indian Economy point of view, one can expect handsome returns thru’ regular investing.
5. Does not strain our day-to-day finances
Mutual Funds allow us to invest very small amounts (Rs 500 – Rs 1000) in SIP, as against larger one-time investment required, if we were to buy directly from the market. This makes investing easier as it does not strain our monthly finances. It, therefore, becomes an ideal investment option for a small-time investor, who would otherwise not be able to enjoy the benefits of investing in the equity market.
6. Reduces the average cost
In SIP we are investing a fixed amount regularly. Therefore, we end up buying more number of units when the markets are down and NAV is low and less number of units when the markets are up and the NAV is high. This is called rupee-cost averaging. Generally, we would stay away from buying when the markets are down. We generally tend to invest when the markets are rising. SIP works as a good discipline as it forces us to buy even when the markets are low, which actually is the best time to buy. (Read more - Invest wisely and get rich with equity MFs)
7. Helps to fulfill our dreams
The investments we make are ultimately for some objectives such as to buy a house, children’s education, marriage etc. And many of them require a huge one-time investment. As it would usually not be possible raise such large amounts at short notice, we need to build the corpus over a longer period of time, through small but regular investments. This is what SIP is all about. Small investments, over a period of time, result in large wealth and help fulfill our dreams & aspirations.
www.shashidharkumar.com
Systematic Investing in a Mutual Fund is the answer to preventing the pitfalls of equity investment and still enjoying the high returns. And it makes all the more sense today when the stock markets are booming. (Also Read - 5 corners of a sound Investing Strategy)
1. It’s an expert’s field – Let’s leave it to them
Management of the fund by the professionals or experts is one of the key advantages of investing through a mutual fund. They regularly carry out extensive research - on the company, the industry and the economy – thus ensuring informed investment. Secondly, they regularly track the market. Thus for many of us who do not have the desired expertise and are too busy with our vocation to devote sufficient time and effort to investing in equity, mutual funds offer an attractive alternative. (Read more - The Investors biggest Dilemma)
2. Putting eggs in different baskets
Another advantage of investing through mutual funds is that even with small amounts we are able to enjoy the benefits of diversification. Huge amounts would be required for an individual to achieve the desired diversification, which would not be possible for many of us. Diversification reduces the overall impact on the returns from a portfolio, on account of a loss in a particular company/sector.
3. It’s all transparent & well regulated
The Mutual Fund industry is well regulated both by SEBI and AMFI. They have, over the years, introduced regulations, which ensure smooth and transparent functioning of the mutual funds industry. This makes it safer and convenient for investors to invest through the mutual funds. (Check out - Foolproof strategies to maximize your profits)
4. Market timing becomes irrelevant
One of the biggest difficulties in equity investing is WHEN to invest, apart from the other big question WHERE to invest. While, investing in a mutual fund solves the issue of ‘where’ to invest, SIP helps us to overcome the problem of ‘when’. SIP is a disciplined investing irrespective of the state of the market. It thus makes the market timing totally irrelevant. And today when the markets are high, it may not be prudent to commit large sums at one go. With the next 2-3 years looking good from Indian Economy point of view, one can expect handsome returns thru’ regular investing.
5. Does not strain our day-to-day finances
Mutual Funds allow us to invest very small amounts (Rs 500 – Rs 1000) in SIP, as against larger one-time investment required, if we were to buy directly from the market. This makes investing easier as it does not strain our monthly finances. It, therefore, becomes an ideal investment option for a small-time investor, who would otherwise not be able to enjoy the benefits of investing in the equity market.
6. Reduces the average cost
In SIP we are investing a fixed amount regularly. Therefore, we end up buying more number of units when the markets are down and NAV is low and less number of units when the markets are up and the NAV is high. This is called rupee-cost averaging. Generally, we would stay away from buying when the markets are down. We generally tend to invest when the markets are rising. SIP works as a good discipline as it forces us to buy even when the markets are low, which actually is the best time to buy. (Read more - Invest wisely and get rich with equity MFs)
7. Helps to fulfill our dreams
The investments we make are ultimately for some objectives such as to buy a house, children’s education, marriage etc. And many of them require a huge one-time investment. As it would usually not be possible raise such large amounts at short notice, we need to build the corpus over a longer period of time, through small but regular investments. This is what SIP is all about. Small investments, over a period of time, result in large wealth and help fulfill our dreams & aspirations.
www.shashidharkumar.com
Demystifying NAV myths
The NAV of a mutual fund has not been correctly understood by a large section of the investing community.
This is quite evident from the fact that Mutual Funds had been recently collecting huge corpus in their New Fund Offers or NFOs, whereas the collections in the existing schemes were negligible. In fact, investors sold their existing investments and invested in NFOs. This switch makes no sense, unless the new fund has something different and better to offer.
Misconception about NAV
This situation arises from the perception that a fund at Rs 10 is cheaper than say Rs 15 or Rs 100. However, this perception is totally wrong and investors would be much better off once they appreciate this fact. Two funds with same portfolio are same, no matter what their NAV is. NAV is immaterial.
Why people carry this perception is because they assume that NAV of a MF is similar to the market price of an equity share. This, however, is not true.
Definition of NAV
Net Asset Value or NAV is the sum total of the market value of all the shares held in the portfolio including cash less the liabilities, divided by the total number of units outstanding. Thus, NAV of a mutual fund unit is nothing but the ‘book value’.
NAV vs Price of an equity share
In case of companies, the price of its share is ‘as quoted on the stock exchange’, which apart from the fundamentals, is also dependent on the perception of the company’s future performance and the demand-supply scenario. And hence the market price is generally different from its’ book value.
There is no concept as market value for the MF unit. Therefore, when we buy MF units at NAV, we are buying at book value. And since we are buying at book value, we are paying the right price of the assets whether it be Rs 10 or Rs.100. There is no such thing as a higher or lower price.
NAV & it’s impact on the returns
We feel that a MF with lower NAV will give better returns. This again is due to the wrong perception about NAV. An example will make it clear that returns are independent of the NAV.
Say you have Rs 10,000 to invest. You have two options, wherein the funds are same as far as the portfolio is concerned. But say one Fund X has an NAV of Rs 10 and another Fund Y has NAV of Rs 50. You will get 1000 units of Fund X or 200 units of Fund Y. After one year, both funds would have grown equally as their portfolio is same, say by 25%. Then NAV after one year would be Rs 12.50 for Fund X and Rs 62.50 for Fund Y. The value of your investment would be 1000*12.50 = Rs 12,500 for Fund X and 200*62.5 = Rs 12,500 for Fund Y. Thus your returns would be same irrespective of the NAV.
It is quality of fund, which would make a difference to your returns. In fact for equity shares also broadly this logic would apply. An IT company share at say Rs 1000 may give a better return than say a jute company share at Rs 50, since IT sector would show a much higher growth rate than jute industry (of course Rs 1000 may ‘fundamentally’ be over or under priced, which will not be the case with MF NAV).
www.shashidharkumar.com
This is quite evident from the fact that Mutual Funds had been recently collecting huge corpus in their New Fund Offers or NFOs, whereas the collections in the existing schemes were negligible. In fact, investors sold their existing investments and invested in NFOs. This switch makes no sense, unless the new fund has something different and better to offer.
Misconception about NAV
This situation arises from the perception that a fund at Rs 10 is cheaper than say Rs 15 or Rs 100. However, this perception is totally wrong and investors would be much better off once they appreciate this fact. Two funds with same portfolio are same, no matter what their NAV is. NAV is immaterial.
Why people carry this perception is because they assume that NAV of a MF is similar to the market price of an equity share. This, however, is not true.
Definition of NAV
Net Asset Value or NAV is the sum total of the market value of all the shares held in the portfolio including cash less the liabilities, divided by the total number of units outstanding. Thus, NAV of a mutual fund unit is nothing but the ‘book value’.
NAV vs Price of an equity share
In case of companies, the price of its share is ‘as quoted on the stock exchange’, which apart from the fundamentals, is also dependent on the perception of the company’s future performance and the demand-supply scenario. And hence the market price is generally different from its’ book value.
There is no concept as market value for the MF unit. Therefore, when we buy MF units at NAV, we are buying at book value. And since we are buying at book value, we are paying the right price of the assets whether it be Rs 10 or Rs.100. There is no such thing as a higher or lower price.
NAV & it’s impact on the returns
We feel that a MF with lower NAV will give better returns. This again is due to the wrong perception about NAV. An example will make it clear that returns are independent of the NAV.
Say you have Rs 10,000 to invest. You have two options, wherein the funds are same as far as the portfolio is concerned. But say one Fund X has an NAV of Rs 10 and another Fund Y has NAV of Rs 50. You will get 1000 units of Fund X or 200 units of Fund Y. After one year, both funds would have grown equally as their portfolio is same, say by 25%. Then NAV after one year would be Rs 12.50 for Fund X and Rs 62.50 for Fund Y. The value of your investment would be 1000*12.50 = Rs 12,500 for Fund X and 200*62.5 = Rs 12,500 for Fund Y. Thus your returns would be same irrespective of the NAV.
It is quality of fund, which would make a difference to your returns. In fact for equity shares also broadly this logic would apply. An IT company share at say Rs 1000 may give a better return than say a jute company share at Rs 50, since IT sector would show a much higher growth rate than jute industry (of course Rs 1000 may ‘fundamentally’ be over or under priced, which will not be the case with MF NAV).
www.shashidharkumar.com
New to Mutual Funds? Tips for a beginner
First time investors in Mutual Funds act in the face of imperfect information and often get overwhelmed by uncertainties characterizing the investment situation. But there’s more to Mutual Fund investing than market timing.
First things first..
The first thing an aspiring unit holder must do is to establish what type of portfolio he wants to build. In other words, to decide the right asset allocation. Asset allocation is a method that determines how you invest your money in different investments with the proper mix of various asset classes. Remember, the type or class of security you own i.e. equity, debt or money market, is much more important than the particular security itself.
The popular thumb rule for asset allocation says that whatever the investor’s age, he should keep that percentage of his portfolio in debt instruments. For example, if an investor is 25, he should have 25% of his investments in debt instruments and the rest in equity. However, in reality, different circumstances and financial position for each individual may require different allocation. Portfolio variable is another factor that one needs to understand to practice asset allocation. These are age, occupation, number of dependants in the family. Usually the younger you are, the more riskier the investments you can hold for getting superior returns.
How to pick the right fund/s?
Next, focus on selecting the right fund/s. The key is to select the fund/s based on their investment philosophy and consistency in terms of returns. To ensure you are selecting the right type of funds that are appropriate for your needs, consider following:
* Determine what your financial goals are.
* Are you investing for retirement? A child’s education? Or for current income?
* Consider your time frame. Do you need money in three months time or three years? The longer your time horizon, the more risk you may be able to take.
* How do you feel about risk? Are you in a position to tolerate the ups and downs of the stock market for the possibility of higher returns? It is necessary to know your own risk tolerance. It can be a guide for choosing the right schemes. Remember, regardless of the potential returns, if you are not comfortable with a particular asset class, you should consider other options.
Fund Candy
* Diversified equity funds
* Index funds
* Opportunity funds
* Mid-cap funds
* Equity-linked savings schemes
* Sector funds like Auto, Health Care, FMCG, IT, Banking etc.
* Balanced funds for those who are not comfortable with 100% exposure to equity
If selected properly, these equity and equity-oriented funds have the potential to deliver returns that could be far superior to other asset classes.
Remember, all these factors will have a direct impact on the fund you choose and the return that you can expect to get. If you are a long-term investor with some appetite for risk and are looking for returns to beat inflation, equity funds are your best bet. MFs offer a variety of equity and equity-oriented schemes (See table ‘Fund Candy’). For a beginner, it makes sense to begin with a diversified fund and gradually have some exposure to sector and specialty funds.
Investment Strategies that will help you make the best of your MF Investment and Traps that you should avoid.
Keeping track..
Filling up an application form and writing out a cheque is not the end of the story. It is equally important to keep an eye on how your investments are performing. While having a qualified and professional advisor helps both in terms of making the right decision as well as measuring performance, it makes sense to know how to do yourself with a little help from these sources:
Fact sheets and Newsletters:
MFs publish monthly fact sheets and quarterly newsletters that contain portfolio information, a report from the fund manager and performance statistics on the schemes managed by it.
Websites:
MF web sites provide performance statistics, daily NAVs, fund fact sheets, quarterly newsletters and press clippings etc. Besides, the Association of Mutual funds in India, AMFI, website, contains daily and historical NAVs, and other scheme.
Newspapers:
Newspapers have pages reporting the net asset values and the sales and redemption prices of MF schemes besides other analysis and reports.
Remember, it is very important for you to be well informed. To achieve this, you need to spend a little time to understand and analyze the information to enhance the chances of success. Even if you spend one percent of the time that you spend on earning money, it’ll be a good beginning. Above all, take help of a professional advisor to select the right fund as well as the right mix of one time investment, SIP and the STP.
www.shashidharkumar.com
First things first..
The first thing an aspiring unit holder must do is to establish what type of portfolio he wants to build. In other words, to decide the right asset allocation. Asset allocation is a method that determines how you invest your money in different investments with the proper mix of various asset classes. Remember, the type or class of security you own i.e. equity, debt or money market, is much more important than the particular security itself.
The popular thumb rule for asset allocation says that whatever the investor’s age, he should keep that percentage of his portfolio in debt instruments. For example, if an investor is 25, he should have 25% of his investments in debt instruments and the rest in equity. However, in reality, different circumstances and financial position for each individual may require different allocation. Portfolio variable is another factor that one needs to understand to practice asset allocation. These are age, occupation, number of dependants in the family. Usually the younger you are, the more riskier the investments you can hold for getting superior returns.
How to pick the right fund/s?
Next, focus on selecting the right fund/s. The key is to select the fund/s based on their investment philosophy and consistency in terms of returns. To ensure you are selecting the right type of funds that are appropriate for your needs, consider following:
* Determine what your financial goals are.
* Are you investing for retirement? A child’s education? Or for current income?
* Consider your time frame. Do you need money in three months time or three years? The longer your time horizon, the more risk you may be able to take.
* How do you feel about risk? Are you in a position to tolerate the ups and downs of the stock market for the possibility of higher returns? It is necessary to know your own risk tolerance. It can be a guide for choosing the right schemes. Remember, regardless of the potential returns, if you are not comfortable with a particular asset class, you should consider other options.
Fund Candy
* Diversified equity funds
* Index funds
* Opportunity funds
* Mid-cap funds
* Equity-linked savings schemes
* Sector funds like Auto, Health Care, FMCG, IT, Banking etc.
* Balanced funds for those who are not comfortable with 100% exposure to equity
If selected properly, these equity and equity-oriented funds have the potential to deliver returns that could be far superior to other asset classes.
Remember, all these factors will have a direct impact on the fund you choose and the return that you can expect to get. If you are a long-term investor with some appetite for risk and are looking for returns to beat inflation, equity funds are your best bet. MFs offer a variety of equity and equity-oriented schemes (See table ‘Fund Candy’). For a beginner, it makes sense to begin with a diversified fund and gradually have some exposure to sector and specialty funds.
Investment Strategies that will help you make the best of your MF Investment and Traps that you should avoid.
Keeping track..
Filling up an application form and writing out a cheque is not the end of the story. It is equally important to keep an eye on how your investments are performing. While having a qualified and professional advisor helps both in terms of making the right decision as well as measuring performance, it makes sense to know how to do yourself with a little help from these sources:
Fact sheets and Newsletters:
MFs publish monthly fact sheets and quarterly newsletters that contain portfolio information, a report from the fund manager and performance statistics on the schemes managed by it.
Websites:
MF web sites provide performance statistics, daily NAVs, fund fact sheets, quarterly newsletters and press clippings etc. Besides, the Association of Mutual funds in India, AMFI, website, contains daily and historical NAVs, and other scheme.
Newspapers:
Newspapers have pages reporting the net asset values and the sales and redemption prices of MF schemes besides other analysis and reports.
Remember, it is very important for you to be well informed. To achieve this, you need to spend a little time to understand and analyze the information to enhance the chances of success. Even if you spend one percent of the time that you spend on earning money, it’ll be a good beginning. Above all, take help of a professional advisor to select the right fund as well as the right mix of one time investment, SIP and the STP.
www.shashidharkumar.com
Understanding Mutual Funds in Five Minutes
Everybody talks about mutual funds, but what exactly are they? Are they like shares in a company, or are they like bonds and fixed deposits? Will I lose all my money in funds or will I become an overnight millionaire? Big questions that get answered in just five minutes. Read on.
What is a mutual fund?
A mutual fund is a pool of money that is invested according to a common investment objective by an asset management company (AMC). The AMC offers to invest the money of hundreds of investors according to a certain objective - to keep money liquid or give a regular income or grow the money long term. Investors buy a scheme if it fits in with their investment goals, like getting a regular income now or letting the money accumulate over the long term. Investors pay a small fraction of their total funds to the AMC each year as investment management fees.
How many categories of mutual funds are there in the market?
There are three broad categories of funds in the Indian market - money market, debt and equity. A money market fund invests in short-term government debt paper and is good for parking money for the short term since the principal is safe, returns better than a bank deposit and liquidity high. Debt funds invest mainly in debt instruments like government securities, corporate and institutional debt paper. They are also called income funds since people buy them for their income needs. Equity funds invest in the stock market and suit long term investors who want capital appreciation. Commodity, property and gold funds are yet to come into India.
Why should I invest in a mutual fund?
Investors with small portfolios may not have the necessary expertise nor get the required diversification across debt and equity products. For example, equity-seeking investors may find their money insufficient to buy enough companies to spread their risk. Or they may find funds insufficient to spread between cash, debt and equity products. Mutual funds offer a way out, for as little as Rs 1,000, an investor can approach most schemes and get well-diversified portfolios, across product classes and instruments. The money is invested by market experts. As markets mature, funds begin to customise products according to need. It is possible to match a unique need to a specific scheme from a fund house.
How do I make money?
There are two ways of making money from a mutual fund - through dividend or through capital appreciation. Suppose a mutual fund scheme collects Rs 500 crore by selling units priced at Rs 10 each. The fund invests this in stocks and debt paper. After a year the corpus grows to Rs 600 crore. This Rs 100 crore can now be distribted amongst the unit holders as dividend. Or it can remain in the fund, taking the net asset value (NAV) or the price of the unit, higher, to say Rs 12. Investors can now sell and realise a gain of Rs 2 per unit or can hold on for future appreciation. (We are ignoring costs in this simplification) But mutual funds do not guarantee performance or returns. Risk depends on the type of fund bought and its performance. So, a debt fund is less risky than an equity fund. But within equity, an index fund is less risky than a sector fund.
Is investing in Mutual Funds safe?
The mutual fund industry is well regulated in India. The market regulator, the Securities and Exchange Board of India (SEBI) has ensured that a repeat of the vanishing companies does not happen here. Therefore, mutual funds in India are in the form of a Trust. This means that the money belongs to the investors and is only held in the name of the Trust. The investment arm, the AMC, acts as a fee-for investment manager and does not own the money. This does not mean that the investments are risk-free. Investors need to take the risk of volatility or bad management and money can grow or lose value depending on the market and investment decisions. However, sensible mutual fund investing is a good way to include equity and debt in individual portfolios to see realistic growth.
www.shashidharkumar.com
What is a mutual fund?
A mutual fund is a pool of money that is invested according to a common investment objective by an asset management company (AMC). The AMC offers to invest the money of hundreds of investors according to a certain objective - to keep money liquid or give a regular income or grow the money long term. Investors buy a scheme if it fits in with their investment goals, like getting a regular income now or letting the money accumulate over the long term. Investors pay a small fraction of their total funds to the AMC each year as investment management fees.
How many categories of mutual funds are there in the market?
There are three broad categories of funds in the Indian market - money market, debt and equity. A money market fund invests in short-term government debt paper and is good for parking money for the short term since the principal is safe, returns better than a bank deposit and liquidity high. Debt funds invest mainly in debt instruments like government securities, corporate and institutional debt paper. They are also called income funds since people buy them for their income needs. Equity funds invest in the stock market and suit long term investors who want capital appreciation. Commodity, property and gold funds are yet to come into India.
Why should I invest in a mutual fund?
Investors with small portfolios may not have the necessary expertise nor get the required diversification across debt and equity products. For example, equity-seeking investors may find their money insufficient to buy enough companies to spread their risk. Or they may find funds insufficient to spread between cash, debt and equity products. Mutual funds offer a way out, for as little as Rs 1,000, an investor can approach most schemes and get well-diversified portfolios, across product classes and instruments. The money is invested by market experts. As markets mature, funds begin to customise products according to need. It is possible to match a unique need to a specific scheme from a fund house.
How do I make money?
There are two ways of making money from a mutual fund - through dividend or through capital appreciation. Suppose a mutual fund scheme collects Rs 500 crore by selling units priced at Rs 10 each. The fund invests this in stocks and debt paper. After a year the corpus grows to Rs 600 crore. This Rs 100 crore can now be distribted amongst the unit holders as dividend. Or it can remain in the fund, taking the net asset value (NAV) or the price of the unit, higher, to say Rs 12. Investors can now sell and realise a gain of Rs 2 per unit or can hold on for future appreciation. (We are ignoring costs in this simplification) But mutual funds do not guarantee performance or returns. Risk depends on the type of fund bought and its performance. So, a debt fund is less risky than an equity fund. But within equity, an index fund is less risky than a sector fund.
Is investing in Mutual Funds safe?
The mutual fund industry is well regulated in India. The market regulator, the Securities and Exchange Board of India (SEBI) has ensured that a repeat of the vanishing companies does not happen here. Therefore, mutual funds in India are in the form of a Trust. This means that the money belongs to the investors and is only held in the name of the Trust. The investment arm, the AMC, acts as a fee-for investment manager and does not own the money. This does not mean that the investments are risk-free. Investors need to take the risk of volatility or bad management and money can grow or lose value depending on the market and investment decisions. However, sensible mutual fund investing is a good way to include equity and debt in individual portfolios to see realistic growth.
www.shashidharkumar.com
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