I am 30 years old. I want to start investing Rs 10,000 per month in mutual funds via SIP. To start with, my time horizon is 3 years. I have chosen the following for an SIP of Rs 2,000 each: HDFC Equity, Sundaram Capex, SBI Magnum Contra, Reliance Equity and BSL Top 100.
- Rohan
From your suggested list, we would go with HDFC Equity and Magnum Contra. The objective of Magnum Contra is to primarily invest in undervalued scrips which could be out of favour at the time of investing but are likely to show attractive growth over the long term. Please look at the answer given to Amit Mehra in this section, concerning this very fund.
Instead of BSL Top 100, a better option would be DSPBR Top 100 Equity.
Instead of Reliance Equity, consider Canara Robeco Equity Diversified or Quantum Long Term Equity. Sundaram Capex is a thematic fund. We suggest you avoid it.
We have assumed that you have debt investments elsewhere and you are seeking advice solely on your equity portfolio. If not, do have some exposure to debt. In that case, drop a fund from the 'Large & Mid-Cap' category and pick a debt fund (Canara Robeco Income).
(source: valueresearchonline.com)
Mutual Fund News update from Nishit Doshi (9824021680) a leading MF Advisor based in Ahmedabad. Gujarat.
Thursday, August 12, 2010
Increase Equity Exposure
I am 34, married with a 4-year old daughter. My monthly salary is Rs 60,000, post tax and deductions. After meeting all my expenses, I have a surplus of Rs 5,000, which I plan to invest for wealth accumulation. I am servicing two loans and would like to close my home loan by the time I retire. The home loan EMI is Rs 10,000, which I have to pay for next 15 years. The personal loan EMI is Rs 3,000. I have a few long-term goals concerning my retirement and daughter's wedding
Life Insurance
A term insurance policy of Rs 15 lakh till the age of 60.
Medical Insurance
Provided by the employer up to Rs 2 lakh.
Goals
Retirement
Rs 1 crore
11 years
Daughter's wedding
Rs 7.50 lakh
20 years
Gold for the wedding
250 gms
20 years
Investments
The Problem
Equity allocation is insufficient
The Solution
Since your goals are far off, increase your equity allocation from the current 70 per cent to 80 per cent. As you near the goals, gradually lower it and increase debt allocation.
The Problem
Exposure to fixed return instruments is too high
The Solution
There is a constant contribution to the EPF. So don't concern yourself with recurring deposits. Instead, focus on equity. For the debt exposure, consider a debt fund. Your ongoing investments in debt (EPF, recurring deposits) account for 85 per cent of total monthly investments. A low equity exposure reduces the overall returns on your portfolio. Do not renew your 1-year deposit. Exit your 5-year deposit too if there is no cost involved or it is not too high.
The Problem
Tax allocation is overdone
The Solution
Since Section 80C has a limit of Rs 1 lakh, consider a tax saving fund only if you have not reached that amount after you pay your insurance premium, home loan EMI and contribution to EPF.
The Problem
Stock exposure with a significant mid cap tilt could backfire
The Solution
Your exposure to stocks is approximately 50 per cent of your equity portfolio. Investing in stocks requires adequate knowledge to buy as well as the capability to track individual companies and industries to decide when to sell them. Also, your focus is more on mid caps, which will result in a volatile portfolio. If you are capable of making such decisions, then increase exposure to large caps. If not, stick to mutual funds.
Goals
The Problem
The task of wealth accumulation is all the more difficult since you plan to retire by the time you are 45. You have just 11 years in hand and a daughter's wedding post retirement. If we assume an inflation rate of 6.5 per cent per annum, Rs 1 crore today, which is your retirement target, will be valued at about Rs 2 crore in 11 years.
Daughter's Wedding
As for the wedding, you have put that target amount as Rs 7.5 lakh, at today's prices. But 20 years down the road, it will amount to around Rs 26.42 lakh.
Post retirement, you will not be availing of a monthly salary and no fresh investments will be made. Hence, you need to accumulate the money required for the wedding by the time you retire. If you can accumulate Rs 16 lakh in 11 years, it will grow to around 26 lakh in the balance 9 years.
Loan repayment
You have not stated the tenure of the personal loan but we assume that it should close quickly. However, you aim to repay your loan amount three years prior to the scheduled 2021. Do check with your home loan provider if the EMI can be increased. But going by your current expenses/investments, it does not appear that you have the capacity to service a higher monthly installment, especially since you need to up your savings to achieve the other two goals mentioned above.
The Solution
Looking at your current investment portfolio, you contribute Rs 17,000/month towards your investments. To fulfill the retirement and marriage goal of Rs 2.16 crore by the time you retire, you need to hike that to around Rs 28,700 and keep increasing it at a rate of 15 per cent every year. For this we have assumed that your EPF contribution grows at the rate of 10 per cent per annum, earning an average return of 7.5 per cent per annum.
If you cannot manage that, here are some alternatives.
1. Mellow down your retirement corpus to Rs 75 lakh, which will be equivalent to about Rs 1.5 crore 11 years down the road. You can reach this target by investing approx Rs 19,800/month and keep increasing it by 15 per cent every year.
2. Alternately, stay with your targeted amount but extend the retirement age by another 5 years and keep investing on the same lines till then.
The Fund Portfolio
Redirect your ongoing SIP in HDFC Taxsaver and HDFC LT Advantage to other diversified equity funds, such as HDFC Top 200, DSPBR Equity, Magnum Contra or BSL Frontline Equity. You have not invested in any of the fixed income schemes. Consider Fortis Flexi Debt or Canara Robeco Income. This will give some balance to your portfolio and help in rebalancing it annually.
Term insurance
A cover of Rs 15 lakh is insufficient, keeping in view your future needs. The cover should be bought for an amount that is sufficient to cover outstanding loans, provide for the future goals and the regular need for expenses of your dependents. Increase your coverage.
Medical Insurance
Does the medical insurance cover your wife and daughter too? If you leave your job for another, during that transition phase you will not be covered. Or, if you retire by the time you are 45, you will have no cover and have to take a fresh policy then.
Emergency Planning
Don't forget to create a contingency fund to meet immediate cash requirements in case of an emergency. You may use the amount lying in your savings bank account if any need arises in the future as it gives you accessibility 24x7.
Purchasing Gold
You can keep purchasing small amounts of gold as and when you have surplus money. Alternatively, you could periodically buy units of a Gold Exchange Traded Fund (Gold ETF). These are funds that invest in physical gold but investors need to buy units which are sold on the stock exchange. Each unit represents a certain quantity of physical gold, usually 1 gm. As you approach the wedding, you can sell these units and with that money buy physical gold.
The returns are based on the assumption that the equity investments will earn 10% p.a.
(source: valueresearchonline.com)
Life Insurance
A term insurance policy of Rs 15 lakh till the age of 60.
Medical Insurance
Provided by the employer up to Rs 2 lakh.
Goals
Retirement
Rs 1 crore
11 years
Daughter's wedding
Rs 7.50 lakh
20 years
Gold for the wedding
250 gms
20 years
Investments
The Problem
Equity allocation is insufficient
The Solution
Since your goals are far off, increase your equity allocation from the current 70 per cent to 80 per cent. As you near the goals, gradually lower it and increase debt allocation.
The Problem
Exposure to fixed return instruments is too high
The Solution
There is a constant contribution to the EPF. So don't concern yourself with recurring deposits. Instead, focus on equity. For the debt exposure, consider a debt fund. Your ongoing investments in debt (EPF, recurring deposits) account for 85 per cent of total monthly investments. A low equity exposure reduces the overall returns on your portfolio. Do not renew your 1-year deposit. Exit your 5-year deposit too if there is no cost involved or it is not too high.
The Problem
Tax allocation is overdone
The Solution
Since Section 80C has a limit of Rs 1 lakh, consider a tax saving fund only if you have not reached that amount after you pay your insurance premium, home loan EMI and contribution to EPF.
The Problem
Stock exposure with a significant mid cap tilt could backfire
The Solution
Your exposure to stocks is approximately 50 per cent of your equity portfolio. Investing in stocks requires adequate knowledge to buy as well as the capability to track individual companies and industries to decide when to sell them. Also, your focus is more on mid caps, which will result in a volatile portfolio. If you are capable of making such decisions, then increase exposure to large caps. If not, stick to mutual funds.
Goals
The Problem
The task of wealth accumulation is all the more difficult since you plan to retire by the time you are 45. You have just 11 years in hand and a daughter's wedding post retirement. If we assume an inflation rate of 6.5 per cent per annum, Rs 1 crore today, which is your retirement target, will be valued at about Rs 2 crore in 11 years.
Daughter's Wedding
As for the wedding, you have put that target amount as Rs 7.5 lakh, at today's prices. But 20 years down the road, it will amount to around Rs 26.42 lakh.
Post retirement, you will not be availing of a monthly salary and no fresh investments will be made. Hence, you need to accumulate the money required for the wedding by the time you retire. If you can accumulate Rs 16 lakh in 11 years, it will grow to around 26 lakh in the balance 9 years.
Loan repayment
You have not stated the tenure of the personal loan but we assume that it should close quickly. However, you aim to repay your loan amount three years prior to the scheduled 2021. Do check with your home loan provider if the EMI can be increased. But going by your current expenses/investments, it does not appear that you have the capacity to service a higher monthly installment, especially since you need to up your savings to achieve the other two goals mentioned above.
The Solution
Looking at your current investment portfolio, you contribute Rs 17,000/month towards your investments. To fulfill the retirement and marriage goal of Rs 2.16 crore by the time you retire, you need to hike that to around Rs 28,700 and keep increasing it at a rate of 15 per cent every year. For this we have assumed that your EPF contribution grows at the rate of 10 per cent per annum, earning an average return of 7.5 per cent per annum.
If you cannot manage that, here are some alternatives.
1. Mellow down your retirement corpus to Rs 75 lakh, which will be equivalent to about Rs 1.5 crore 11 years down the road. You can reach this target by investing approx Rs 19,800/month and keep increasing it by 15 per cent every year.
2. Alternately, stay with your targeted amount but extend the retirement age by another 5 years and keep investing on the same lines till then.
The Fund Portfolio
Redirect your ongoing SIP in HDFC Taxsaver and HDFC LT Advantage to other diversified equity funds, such as HDFC Top 200, DSPBR Equity, Magnum Contra or BSL Frontline Equity. You have not invested in any of the fixed income schemes. Consider Fortis Flexi Debt or Canara Robeco Income. This will give some balance to your portfolio and help in rebalancing it annually.
Term insurance
A cover of Rs 15 lakh is insufficient, keeping in view your future needs. The cover should be bought for an amount that is sufficient to cover outstanding loans, provide for the future goals and the regular need for expenses of your dependents. Increase your coverage.
Medical Insurance
Does the medical insurance cover your wife and daughter too? If you leave your job for another, during that transition phase you will not be covered. Or, if you retire by the time you are 45, you will have no cover and have to take a fresh policy then.
Emergency Planning
Don't forget to create a contingency fund to meet immediate cash requirements in case of an emergency. You may use the amount lying in your savings bank account if any need arises in the future as it gives you accessibility 24x7.
Purchasing Gold
You can keep purchasing small amounts of gold as and when you have surplus money. Alternatively, you could periodically buy units of a Gold Exchange Traded Fund (Gold ETF). These are funds that invest in physical gold but investors need to buy units which are sold on the stock exchange. Each unit represents a certain quantity of physical gold, usually 1 gm. As you approach the wedding, you can sell these units and with that money buy physical gold.
The returns are based on the assumption that the equity investments will earn 10% p.a.
(source: valueresearchonline.com)
Reduce Number of Funds
I am 31 years old. I live with my wife and a 17-month old son. I am the sole breadwinner with a take-home monthly salary of Rs 70,000. My monthly expenses are around Rs 25,000. After meeting my other liabilities, I invest Rs 34,000 per month in mutual funds via systematic investment plans (SIPs).
Currently, I have three insurance policies which provide a total life cover of Rs 22 lakh. The premium I pay towards them exhausts my exemption limit of Rs 1 lakh under Section 80C. I intend to buy a term insurance policy worth Rs 1.5 crore, a child plan to cover my child's education and a pension plan.
Please help me revamp my portfolio so that I am able to achieve my goals.
-Raghvendra Sharma
Current Investments
FDs - Rs 1.65 lakh
NSC - Rs 20,000
MFs - Rs 8.53 lakh
We are impressed by your consistent investment philosophy and how well you have articulated your goals. However, we are not totally clear about your entire portfolio. You have mentioned three insurance policies but have not provided adequate details on whether they are Ulips, money back policies or term insurance policies. While you have mentioned National Saving Certificate (NSC) and fixed deposits (FDs), you have not mentioned the details of the Employees Provident Fund (EPF) or Public Provident Fund (PPF).
In our view, your current investments (Rs 10.4 lakh) and the monthly commitment to ongoing investments (Rs 34,000) will definitely help you achieve your goals. However, we are making that statement based on three assumptions:
1) Your investment allocation will increase by 10 per cent every year till the time you retire.
2) All your investments earn a return of 10 per cent per annum.
3) Inflation @ 6.5 per cent per annum has been taken into account.
Buying a house
When you take a home loan, you will be required to put up around 15 per cent of the total cost as a margin payment. Your current ongoing investments and the total value of your present investments (Rs 10.4 lakh) will be worth around Rs 20 lakh in two years. This should help you take care of that amount.
Retirement
After meeting your other goals, you will be able to accumulate a corpus of Rs 3.4 crore by the age of 60, which will take care of your monthly requirement of Rs 1.65 lakh post-retirement. Any amount that you receive from your insurance policies or provident fund will be additional income for you.
Term Insurance
A life cover of Rs 1.5 crore, along with your present insurance policies, should be sufficient to meet all your liabilities and monthly expenses of your dependants in the case of your demise.
Child Plan/ Pension Plan
Are you referring to insurance products? You already have three policies and are taking out one more. To build up a corpus, stick to investments by way of mutual funds; it is cost efficient, transparent and gives a higher return than any other avenue.
Contingency planning
Have you planned for any emergency? Some money in a savings bank account or a flexi deposit in your bank would help.
Trimming the mutual fund portfolio
Your fund portfolio has an exposure of around 75 per cent to equities; increase it to 90 per cent. Your goals are far off and a higher equity exposure will help in wealth accumulation.
Your current portfolio holds 24 funds which add up to a total of more than 350 stocks. This is a clear case of over-diversification. Moreover, it becomes difficult to manage so many funds. A fall-out of such diversification is that each of them has a negligible share in your portfolio. So even if they display great performance, it will not have a significant impact on your overall portfolio.
Our advice: Continue with an SIP but stick to around 7 funds.
Core Holdings (70%)
From your existing funds, stick to 4 or 5 as your core holdings.
Continue with your SIP in these funds.
Take your pick from these but ensure that your selection is across fund houses: DSPBR Top 100 Equity, DSPBR Equity, Franklin India Prima Plus, Templeton India Equity Income, HDFC Top 200, UTI Opportunities, Magnum Contra, Reliance Regular Savings Equity and Tata Equity PE.
Debt Exposure (10%)
Select one, either Fortis Flexi Debt or Canara Robeco Income.
Supporting Funds (20%)
When you invested in DSPBR World Gold Fund, were you aware that this fund carries a lot of risk since it invests in stocks of gold mining companies across the globe? If you want an exposure to gold, then you could try a Gold Exchange Traded Fund (Gold ETF).
You also invested in UTI Infrastructure Advantage and ICICI Prudential Infrastructure. If you want an exposure to this theme, stick with ICICI Prudential Infrastructure.
Offloading The Rest
Once you decide on your core holdings and the thematic offerings you wish to hold, start the process of offloading the rest.
Begin by terminating all your other SIPs.
To avoid short-term capital gains, start by selling those funds which you have held for more than a year. Since you have been investing via SIP, the investments have been ongoing and continuous so it would take a while. If possible, try and avoid paying any exit load.
From your 4 close ended funds: UTI Infrastructure Advantage- Series 1, HDFC Mid-Cap Opportunities, UTI Wealth Builder and Franklin Templeton Capital Safety, the latter is the only one that does not allow premature redemptions. You, therefore, have no choice but to hold on to it till maturity.
(source: valueresearchonline.com)
Currently, I have three insurance policies which provide a total life cover of Rs 22 lakh. The premium I pay towards them exhausts my exemption limit of Rs 1 lakh under Section 80C. I intend to buy a term insurance policy worth Rs 1.5 crore, a child plan to cover my child's education and a pension plan.
Please help me revamp my portfolio so that I am able to achieve my goals.
-Raghvendra Sharma
Current Investments
FDs - Rs 1.65 lakh
NSC - Rs 20,000
MFs - Rs 8.53 lakh
We are impressed by your consistent investment philosophy and how well you have articulated your goals. However, we are not totally clear about your entire portfolio. You have mentioned three insurance policies but have not provided adequate details on whether they are Ulips, money back policies or term insurance policies. While you have mentioned National Saving Certificate (NSC) and fixed deposits (FDs), you have not mentioned the details of the Employees Provident Fund (EPF) or Public Provident Fund (PPF).
In our view, your current investments (Rs 10.4 lakh) and the monthly commitment to ongoing investments (Rs 34,000) will definitely help you achieve your goals. However, we are making that statement based on three assumptions:
1) Your investment allocation will increase by 10 per cent every year till the time you retire.
2) All your investments earn a return of 10 per cent per annum.
3) Inflation @ 6.5 per cent per annum has been taken into account.
Buying a house
When you take a home loan, you will be required to put up around 15 per cent of the total cost as a margin payment. Your current ongoing investments and the total value of your present investments (Rs 10.4 lakh) will be worth around Rs 20 lakh in two years. This should help you take care of that amount.
Retirement
After meeting your other goals, you will be able to accumulate a corpus of Rs 3.4 crore by the age of 60, which will take care of your monthly requirement of Rs 1.65 lakh post-retirement. Any amount that you receive from your insurance policies or provident fund will be additional income for you.
Term Insurance
A life cover of Rs 1.5 crore, along with your present insurance policies, should be sufficient to meet all your liabilities and monthly expenses of your dependants in the case of your demise.
Child Plan/ Pension Plan
Are you referring to insurance products? You already have three policies and are taking out one more. To build up a corpus, stick to investments by way of mutual funds; it is cost efficient, transparent and gives a higher return than any other avenue.
Contingency planning
Have you planned for any emergency? Some money in a savings bank account or a flexi deposit in your bank would help.
Trimming the mutual fund portfolio
Your fund portfolio has an exposure of around 75 per cent to equities; increase it to 90 per cent. Your goals are far off and a higher equity exposure will help in wealth accumulation.
Your current portfolio holds 24 funds which add up to a total of more than 350 stocks. This is a clear case of over-diversification. Moreover, it becomes difficult to manage so many funds. A fall-out of such diversification is that each of them has a negligible share in your portfolio. So even if they display great performance, it will not have a significant impact on your overall portfolio.
Our advice: Continue with an SIP but stick to around 7 funds.
Core Holdings (70%)
From your existing funds, stick to 4 or 5 as your core holdings.
Continue with your SIP in these funds.
Take your pick from these but ensure that your selection is across fund houses: DSPBR Top 100 Equity, DSPBR Equity, Franklin India Prima Plus, Templeton India Equity Income, HDFC Top 200, UTI Opportunities, Magnum Contra, Reliance Regular Savings Equity and Tata Equity PE.
Debt Exposure (10%)
Select one, either Fortis Flexi Debt or Canara Robeco Income.
Supporting Funds (20%)
When you invested in DSPBR World Gold Fund, were you aware that this fund carries a lot of risk since it invests in stocks of gold mining companies across the globe? If you want an exposure to gold, then you could try a Gold Exchange Traded Fund (Gold ETF).
You also invested in UTI Infrastructure Advantage and ICICI Prudential Infrastructure. If you want an exposure to this theme, stick with ICICI Prudential Infrastructure.
Offloading The Rest
Once you decide on your core holdings and the thematic offerings you wish to hold, start the process of offloading the rest.
Begin by terminating all your other SIPs.
To avoid short-term capital gains, start by selling those funds which you have held for more than a year. Since you have been investing via SIP, the investments have been ongoing and continuous so it would take a while. If possible, try and avoid paying any exit load.
From your 4 close ended funds: UTI Infrastructure Advantage- Series 1, HDFC Mid-Cap Opportunities, UTI Wealth Builder and Franklin Templeton Capital Safety, the latter is the only one that does not allow premature redemptions. You, therefore, have no choice but to hold on to it till maturity.
(source: valueresearchonline.com)
Reduce Number of Funds
I am 31 years old. I live with my wife and a 17-month old son. I am the sole breadwinner with a take-home monthly salary of Rs 70,000. My monthly expenses are around Rs 25,000. After meeting my other liabilities, I invest Rs 34,000 per month in mutual funds via systematic investment plans (SIPs).
Currently, I have three insurance policies which provide a total life cover of Rs 22 lakh. The premium I pay towards them exhausts my exemption limit of Rs 1 lakh under Section 80C. I intend to buy a term insurance policy worth Rs 1.5 crore, a child plan to cover my child's education and a pension plan.
Please help me revamp my portfolio so that I am able to achieve my goals.
-Raghvendra Sharma
Current Investments
FDs - Rs 1.65 lakh
NSC - Rs 20,000
MFs - Rs 8.53 lakh
We are impressed by your consistent investment philosophy and how well you have articulated your goals. However, we are not totally clear about your entire portfolio. You have mentioned three insurance policies but have not provided adequate details on whether they are Ulips, money back policies or term insurance policies. While you have mentioned National Saving Certificate (NSC) and fixed deposits (FDs), you have not mentioned the details of the Employees Provident Fund (EPF) or Public Provident Fund (PPF).
In our view, your current investments (Rs 10.4 lakh) and the monthly commitment to ongoing investments (Rs 34,000) will definitely help you achieve your goals. However, we are making that statement based on three assumptions:
1) Your investment allocation will increase by 10 per cent every year till the time you retire.
2) All your investments earn a return of 10 per cent per annum.
3) Inflation @ 6.5 per cent per annum has been taken into account.
Buying a house
When you take a home loan, you will be required to put up around 15 per cent of the total cost as a margin payment. Your current ongoing investments and the total value of your present investments (Rs 10.4 lakh) will be worth around Rs 20 lakh in two years. This should help you take care of that amount.
Retirement
After meeting your other goals, you will be able to accumulate a corpus of Rs 3.4 crore by the age of 60, which will take care of your monthly requirement of Rs 1.65 lakh post-retirement. Any amount that you receive from your insurance policies or provident fund will be additional income for you.
Term Insurance
A life cover of Rs 1.5 crore, along with your present insurance policies, should be sufficient to meet all your liabilities and monthly expenses of your dependants in the case of your demise.
Child Plan/ Pension Plan
Are you referring to insurance products? You already have three policies and are taking out one more. To build up a corpus, stick to investments by way of mutual funds; it is cost efficient, transparent and gives a higher return than any other avenue.
Contingency planning
Have you planned for any emergency? Some money in a savings bank account or a flexi deposit in your bank would help.
Trimming the mutual fund portfolio
Your fund portfolio has an exposure of around 75 per cent to equities; increase it to 90 per cent. Your goals are far off and a higher equity exposure will help in wealth accumulation.
Your current portfolio holds 24 funds which add up to a total of more than 350 stocks. This is a clear case of over-diversification. Moreover, it becomes difficult to manage so many funds. A fall-out of such diversification is that each of them has a negligible share in your portfolio. So even if they display great performance, it will not have a significant impact on your overall portfolio.
Our advice: Continue with an SIP but stick to around 7 funds.
Core Holdings (70%)
From your existing funds, stick to 4 or 5 as your core holdings.
Continue with your SIP in these funds.
Take your pick from these but ensure that your selection is across fund houses: DSPBR Top 100 Equity, DSPBR Equity, Franklin India Prima Plus, Templeton India Equity Income, HDFC Top 200, UTI Opportunities, Magnum Contra, Reliance Regular Savings Equity and Tata Equity PE.
Debt Exposure (10%)
Select one, either Fortis Flexi Debt or Canara Robeco Income.
Supporting Funds (20%)
When you invested in DSPBR World Gold Fund, were you aware that this fund carries a lot of risk since it invests in stocks of gold mining companies across the globe? If you want an exposure to gold, then you could try a Gold Exchange Traded Fund (Gold ETF).
You also invested in UTI Infrastructure Advantage and ICICI Prudential Infrastructure. If you want an exposure to this theme, stick with ICICI Prudential Infrastructure.
Offloading The Rest
Once you decide on your core holdings and the thematic offerings you wish to hold, start the process of offloading the rest.
Begin by terminating all your other SIPs.
To avoid short-term capital gains, start by selling those funds which you have held for more than a year. Since you have been investing via SIP, the investments have been ongoing and continuous so it would take a while. If possible, try and avoid paying any exit load.
From your 4 close ended funds: UTI Infrastructure Advantage- Series 1, HDFC Mid-Cap Opportunities, UTI Wealth Builder and Franklin Templeton Capital Safety, the latter is the only one that does not allow premature redemptions. You, therefore, have no choice but to hold on to it till maturity.
(source: valueresearchonline.com)
Currently, I have three insurance policies which provide a total life cover of Rs 22 lakh. The premium I pay towards them exhausts my exemption limit of Rs 1 lakh under Section 80C. I intend to buy a term insurance policy worth Rs 1.5 crore, a child plan to cover my child's education and a pension plan.
Please help me revamp my portfolio so that I am able to achieve my goals.
-Raghvendra Sharma
Current Investments
FDs - Rs 1.65 lakh
NSC - Rs 20,000
MFs - Rs 8.53 lakh
We are impressed by your consistent investment philosophy and how well you have articulated your goals. However, we are not totally clear about your entire portfolio. You have mentioned three insurance policies but have not provided adequate details on whether they are Ulips, money back policies or term insurance policies. While you have mentioned National Saving Certificate (NSC) and fixed deposits (FDs), you have not mentioned the details of the Employees Provident Fund (EPF) or Public Provident Fund (PPF).
In our view, your current investments (Rs 10.4 lakh) and the monthly commitment to ongoing investments (Rs 34,000) will definitely help you achieve your goals. However, we are making that statement based on three assumptions:
1) Your investment allocation will increase by 10 per cent every year till the time you retire.
2) All your investments earn a return of 10 per cent per annum.
3) Inflation @ 6.5 per cent per annum has been taken into account.
Buying a house
When you take a home loan, you will be required to put up around 15 per cent of the total cost as a margin payment. Your current ongoing investments and the total value of your present investments (Rs 10.4 lakh) will be worth around Rs 20 lakh in two years. This should help you take care of that amount.
Retirement
After meeting your other goals, you will be able to accumulate a corpus of Rs 3.4 crore by the age of 60, which will take care of your monthly requirement of Rs 1.65 lakh post-retirement. Any amount that you receive from your insurance policies or provident fund will be additional income for you.
Term Insurance
A life cover of Rs 1.5 crore, along with your present insurance policies, should be sufficient to meet all your liabilities and monthly expenses of your dependants in the case of your demise.
Child Plan/ Pension Plan
Are you referring to insurance products? You already have three policies and are taking out one more. To build up a corpus, stick to investments by way of mutual funds; it is cost efficient, transparent and gives a higher return than any other avenue.
Contingency planning
Have you planned for any emergency? Some money in a savings bank account or a flexi deposit in your bank would help.
Trimming the mutual fund portfolio
Your fund portfolio has an exposure of around 75 per cent to equities; increase it to 90 per cent. Your goals are far off and a higher equity exposure will help in wealth accumulation.
Your current portfolio holds 24 funds which add up to a total of more than 350 stocks. This is a clear case of over-diversification. Moreover, it becomes difficult to manage so many funds. A fall-out of such diversification is that each of them has a negligible share in your portfolio. So even if they display great performance, it will not have a significant impact on your overall portfolio.
Our advice: Continue with an SIP but stick to around 7 funds.
Core Holdings (70%)
From your existing funds, stick to 4 or 5 as your core holdings.
Continue with your SIP in these funds.
Take your pick from these but ensure that your selection is across fund houses: DSPBR Top 100 Equity, DSPBR Equity, Franklin India Prima Plus, Templeton India Equity Income, HDFC Top 200, UTI Opportunities, Magnum Contra, Reliance Regular Savings Equity and Tata Equity PE.
Debt Exposure (10%)
Select one, either Fortis Flexi Debt or Canara Robeco Income.
Supporting Funds (20%)
When you invested in DSPBR World Gold Fund, were you aware that this fund carries a lot of risk since it invests in stocks of gold mining companies across the globe? If you want an exposure to gold, then you could try a Gold Exchange Traded Fund (Gold ETF).
You also invested in UTI Infrastructure Advantage and ICICI Prudential Infrastructure. If you want an exposure to this theme, stick with ICICI Prudential Infrastructure.
Offloading The Rest
Once you decide on your core holdings and the thematic offerings you wish to hold, start the process of offloading the rest.
Begin by terminating all your other SIPs.
To avoid short-term capital gains, start by selling those funds which you have held for more than a year. Since you have been investing via SIP, the investments have been ongoing and continuous so it would take a while. If possible, try and avoid paying any exit load.
From your 4 close ended funds: UTI Infrastructure Advantage- Series 1, HDFC Mid-Cap Opportunities, UTI Wealth Builder and Franklin Templeton Capital Safety, the latter is the only one that does not allow premature redemptions. You, therefore, have no choice but to hold on to it till maturity.
(source: valueresearchonline.com)
Know-Your-Distributor Norms Soon
The Association of Mutual Funds in India (AMFI) is planning know-your-distributor (KYD) norms in line with the existing know-your-customer (KYC) details, a source close to the development told Value Research.
According to the source, who is member of an AMFI committee, the decision on the same would most likely be taken in an AMFI meeting slated later today (August 11). When contacted AMFI Chairman A P Kurian said the draft of the norms would be finalised in another couple of days. He refused to divulge further details
Under the KYD norms, details such as address, ARN (AMFI registered numbers) etc would be sought from a distributor and a data base of all these details would be maintained by an AMFI body.
As per the KYC norms, an investor has to provide the fund house proof of their identity and address, PAN card and photographs. KYC formalities are required to be completed for all unit holders for any investment (whether new or additional purchase) of Rs 50,000 or more in mutual funds. For the convenience of investors, all mutual funds have made special arrangements with CDSL Ventures Ltd (CVL), a wholly owned subsidiary of Central Depository Services (CDSL).
A mutual fund distributor told Value Research that KYD norms would improve servicing of clients by distributors. "In many cases, independent financial advisors and individual distributors would simply sell the products and never show their face again to the clients. Now, with a comprehensive data base on distributors, once can trace such distributors," he said.
(source: valueresearchonline.com)
According to the source, who is member of an AMFI committee, the decision on the same would most likely be taken in an AMFI meeting slated later today (August 11). When contacted AMFI Chairman A P Kurian said the draft of the norms would be finalised in another couple of days. He refused to divulge further details
Under the KYD norms, details such as address, ARN (AMFI registered numbers) etc would be sought from a distributor and a data base of all these details would be maintained by an AMFI body.
As per the KYC norms, an investor has to provide the fund house proof of their identity and address, PAN card and photographs. KYC formalities are required to be completed for all unit holders for any investment (whether new or additional purchase) of Rs 50,000 or more in mutual funds. For the convenience of investors, all mutual funds have made special arrangements with CDSL Ventures Ltd (CVL), a wholly owned subsidiary of Central Depository Services (CDSL).
A mutual fund distributor told Value Research that KYD norms would improve servicing of clients by distributors. "In many cases, independent financial advisors and individual distributors would simply sell the products and never show their face again to the clients. Now, with a comprehensive data base on distributors, once can trace such distributors," he said.
(source: valueresearchonline.com)
Revision of exit load for switch outs under Birla Sun Life MIP II – Saving 5
Birla Sun Life Mutual Fund has revised the exit load applicable to switch outs from Birla Sun Life MIP II – Saving 5 Plan to certain fixed income schemes, with effect from August 12, 2010.
Revised Provision:
For Switch out(s) made from Birla Sun Life MIP II – Saving 5 Plan to any other schemes of Birla Sun Life Mutual Fund, exit load as applicable to the scheme shall be charged.
Existing Provisions:
No exit load shall be charged for switch-out(s) made from various plans/options under Birla Sun Life MIP II – Saving 5 Plan to Birla Sun Life Dynamic Bond, Birla Sun Life Income Fund, Birla Sun Life GSF – Long Term Plan, Birla Sun Life Monthly Income and Birla Sun Life MIP II – Wealth 25 Plan.
(source: valueresearchonline.com)
Revised Provision:
For Switch out(s) made from Birla Sun Life MIP II – Saving 5 Plan to any other schemes of Birla Sun Life Mutual Fund, exit load as applicable to the scheme shall be charged.
Existing Provisions:
No exit load shall be charged for switch-out(s) made from various plans/options under Birla Sun Life MIP II – Saving 5 Plan to Birla Sun Life Dynamic Bond, Birla Sun Life Income Fund, Birla Sun Life GSF – Long Term Plan, Birla Sun Life Monthly Income and Birla Sun Life MIP II – Wealth 25 Plan.
(source: valueresearchonline.com)
Evaluating Fund Performance
Harish Gupta, a 35-year-old sales executive who works with a multinational firm in Delhi, holds three equity diversified funds in his portfolio.
He wants to assess the performance of these funds to decide whether he should stay invested in them or offload them. Here is how our website www.valueresearchonline.com can ease his task of making this decision.
Fund compare. On the home page of the website go to the tool named Fund Compare. Go down the list of funds and select the fund that you own. Then click on the 'Add' tab. Repeat this to add all the funds that you hold. Thereafter click on the 'Get Data' tab. The basic details of all the funds in your portfolio appear. These include the risk grade, rating, 1-year return, and expense ratio of the funds.
Now if you wish to examine each fund in greater detail, click on the name of each.
Snapshot. This is the default tab that opens when you click on the name of a fund. Here further details such as the latest net asset value (NAV), net assets, and trailing returns of the fund over various investment horizons are provided. Category average returns over the same time horizons are also given in the next column to enable you to make quick and easy comparisons.
Performance. Here you get to see the rating and the return grade of the fund. You can also look up statistics such as R-square, Alpha and Beta. Measures of volatility and risk adjusted return are also provided.
Lower down on this page, you can also look up the periods when the fund turned in its best and worst performance. Next, trailing returns of the fund over different time horizons ranging from 1 week to 5 years are given.
Annual returns from the fund are juxtaposed against the category-average returns and returns from the major benchmark indices such as Nifty and Sensex (again to facilitate comparison). Quarterly returns over the last 5-6 years are also available.
Portfolio. On this page data on the fund's asset allocation and portfolio concentration are provided. Savvy investors can look up valuation-related numbers such as portfolio P/B ratio and portfolio P/E ratio, and also top stock and sectoral holdings.
Analysis. In this section you can read an informed analysis on the fund written by a Value Research analyst. You can also read a brief biodata of the fund manager on this
With this amount of statistics, data and information displayed in a user-friendly format, evaluating the quality of the fund becomes a cakewalk for investors like Gupta page of the website.
.(source: valueresearchonline.com)
He wants to assess the performance of these funds to decide whether he should stay invested in them or offload them. Here is how our website www.valueresearchonline.com can ease his task of making this decision.
Fund compare. On the home page of the website go to the tool named Fund Compare. Go down the list of funds and select the fund that you own. Then click on the 'Add' tab. Repeat this to add all the funds that you hold. Thereafter click on the 'Get Data' tab. The basic details of all the funds in your portfolio appear. These include the risk grade, rating, 1-year return, and expense ratio of the funds.
Now if you wish to examine each fund in greater detail, click on the name of each.
Snapshot. This is the default tab that opens when you click on the name of a fund. Here further details such as the latest net asset value (NAV), net assets, and trailing returns of the fund over various investment horizons are provided. Category average returns over the same time horizons are also given in the next column to enable you to make quick and easy comparisons.
Performance. Here you get to see the rating and the return grade of the fund. You can also look up statistics such as R-square, Alpha and Beta. Measures of volatility and risk adjusted return are also provided.
Lower down on this page, you can also look up the periods when the fund turned in its best and worst performance. Next, trailing returns of the fund over different time horizons ranging from 1 week to 5 years are given.
Annual returns from the fund are juxtaposed against the category-average returns and returns from the major benchmark indices such as Nifty and Sensex (again to facilitate comparison). Quarterly returns over the last 5-6 years are also available.
Portfolio. On this page data on the fund's asset allocation and portfolio concentration are provided. Savvy investors can look up valuation-related numbers such as portfolio P/B ratio and portfolio P/E ratio, and also top stock and sectoral holdings.
Analysis. In this section you can read an informed analysis on the fund written by a Value Research analyst. You can also read a brief biodata of the fund manager on this
With this amount of statistics, data and information displayed in a user-friendly format, evaluating the quality of the fund becomes a cakewalk for investors like Gupta page of the website.
.(source: valueresearchonline.com)
Tuesday, August 10, 2010
Can You Lose Money in Debt Funds?
An article in the U.S-based business magazine Forbes earlier this year stated that net $35 billion was pulled out from U.S. equity funds in 2009, whereas $421 billion went into bond funds. The columnist had an interesting comment to make on what she called such “unsophisticated money in bonds”. She wondered if “investors understood how miserable things could get when the low interest rate party ended”. Thanks to what is happening in Europe, the party does not look like it is going to end soon, something even the columnist could not predict. However the point is interesting. The stampede into bonds funds was not just about low short-term interest rates but about individuals who could not handle the volatility of the stock market. Which brings us to our next issue: Before you plunge into a debt fund, ask yourself why you are putting money there in the first place.
Debt, like equity, is an asset class. And for the purpose of diversification, some amount of your investments must be in this asset class. Having said that, you definitely would have some amount of savings in fixed-return instruments like fixed deposits (FDs) or Public Provident Fund (PPF) or National Savings Certificate (NSC). So if you put money in debt funds, you should do it for specific reasons: either because the tenure of the instrument matches your need, the tax incidence is lower when compared to other fixed returns instruments or the return, in comparison, is higher. But don't view any mutual fund debt product as a quasi fixed return instrument. Debt funds do carry a fair amount of risk, some more than others. You could lose money here too.
Intrinsically, debt instruments imply a fixed tenure and a fixed return. In that sense, they are assured. However, once you invest in a mutual fund, other factors like interest rate movements, the fund manager's call on their direction, his trading skills and also the intrinsic quality of the portfolio play an important role. The last factor is especially crucial. The greater the magnitude of low quality paper in the portfolio, the higher the returns that the fund manager is in a position to generate. For instance, one could broadly say that the difference between AAA and AA rated paper could vary from 25 to 50bps (100 bps = 1%). Unfortunately, it's not that simple. Let's talk about paper from companies in different industries. The difference in AAA Manufacturing and AA Manufacturing would be 25bps (the lower rated paper giving the slightly higher return despite both being from the same industry). If the industries change to AAA Manufacturing and AA NBFC, the difference could be 1-1.5 per cent. On the other hand, if it was AAA NBFC but AA Manufacturing, the latter would still offer a lower return and the difference could be around -75bps.
In extreme scenarios, the difference between a AAA Manufacturing and AA Real Estate would be around 5-6 percentage points. But if the paper was BBB Real Estate (theoretically speaking), it would give around 12-15 percentage points higher than what a AAA Manufacturing paper would offer. So if a fund is offering fabulous returns, there could be a compromise here. And compromises always leave you vulnerable.
Even if fund managers pack their portfolios with high rated paper, there is the interest rate risk if they get their call wrong. This is all the more prevalent in funds of longer tenure. For instance, let's assume that Bond A has a coupon rate of 8 per cent. Now let's say there is an increase in interest rates and Bond B has been issued with a coupon rate of 9 per cent. Now the price of Bond A will fall (since it is offering a lower interest rate) as the yield of Bond A will adjust higher (since bond yields and prices are inversely related). Consequently, debt funds that hold Bond A will be impacted. If there are many such bonds in the portfolio, the cumulative impact on the NAV would be negative.
While at any given point of time, all these risks exist (see: What risks does your fund manager take?), there are different phases in the interest rate cycle and in the debt market history where different risks have been played out more prominently. During the period from 1997 right through 2003, huge money was made on interest rates because during this period rates came down from 14 per cent to 5 per cent (10-year yields). From then on till 2008, money was made by taking credit risks when BBB rated companies were borrowing at 14-15 per cent. In 2008, it was liquidity risk that took centre stage, though credit risk was also prominent.
Mid-2009, credit opportunities (crop) funds began to catch the fancy of investors when yield spreads (difference in yields between benchmark sovereign paper and corporate bonds) widened to up to 200-300bps. The credit market presented an attractive risk-return profile as even good companies found it difficult to raise debt. Such funds are designed for risk-taking investors since they invest in high-return, low-rated paper. In such funds, the credit risk and liquidity risk run high. Right now there are a few options in the market: DWS Cash Opportunities, Religare Credit Opportunities and Kotak Credit Opportunities. While their profile could be riskier than that of other funds of similar duration, none of them take very high risks. They tend not to go below A-rated paper, stretching it to probably AA-. Says a fund manager from one of the fund houses which runs a crop fund: “If you look at the credit rating history of CRISIL over the past 15 years, there has been no default from any AA-rated entity over a 1-year period.” In fact, a number of measures are put in place to ensure that these funds are not taking undue amounts of risk. Not going for paper rated below A, being cautious on the reputation of the paper issuer, lower investment ticket sizes and portfolios with shorter average maturity duration. If you are willing to take a slightly higher risk with your debt portfolio, consider such funds.
What risks does your fund manager take?
Interest Rate Risk: When interest rates rise, bond prices fall. So if the fund manager has his portfolio stacked with lower interest rate paper, the prices of his holdings will fall resulting in a lower NAV. On the other hand, if interest rates fall then the price of his holdings rise and so does his NAV.
The longer a bond's maturity, the greater the interest rate risk. A bond fund with a longer average maturity will see its net asset value (NAV) react more dramatically to changes in interest rates as the prices of the underlying bonds in the portfolio increase or decline.
Credit Risk: Bonds carry the risk of default, meaning that the issuer is unable to make further interest or principal payments. They are rated by individual credit rating agencies to help describe the credit worthiness of the issuer. Higher the credit rating, lower the risk and lower the returns. Lower the credit rating, higher the risk and higher the return.
Liquidity Risk: If the credit rating gets downgraded or the current interest rates are much higher than the coupon rate, then the bond would face liquidity issues because finding a buyer would no longer be easy. Liquidity risk describes the danger when one has to sell a bond in the secondary market but is unable to find a buyer.
This article appeared in the June 15 - July 14, 2010 issue of Mutual Fund Insight
(source: valueresearchonline.com)
Debt, like equity, is an asset class. And for the purpose of diversification, some amount of your investments must be in this asset class. Having said that, you definitely would have some amount of savings in fixed-return instruments like fixed deposits (FDs) or Public Provident Fund (PPF) or National Savings Certificate (NSC). So if you put money in debt funds, you should do it for specific reasons: either because the tenure of the instrument matches your need, the tax incidence is lower when compared to other fixed returns instruments or the return, in comparison, is higher. But don't view any mutual fund debt product as a quasi fixed return instrument. Debt funds do carry a fair amount of risk, some more than others. You could lose money here too.
Intrinsically, debt instruments imply a fixed tenure and a fixed return. In that sense, they are assured. However, once you invest in a mutual fund, other factors like interest rate movements, the fund manager's call on their direction, his trading skills and also the intrinsic quality of the portfolio play an important role. The last factor is especially crucial. The greater the magnitude of low quality paper in the portfolio, the higher the returns that the fund manager is in a position to generate. For instance, one could broadly say that the difference between AAA and AA rated paper could vary from 25 to 50bps (100 bps = 1%). Unfortunately, it's not that simple. Let's talk about paper from companies in different industries. The difference in AAA Manufacturing and AA Manufacturing would be 25bps (the lower rated paper giving the slightly higher return despite both being from the same industry). If the industries change to AAA Manufacturing and AA NBFC, the difference could be 1-1.5 per cent. On the other hand, if it was AAA NBFC but AA Manufacturing, the latter would still offer a lower return and the difference could be around -75bps.
In extreme scenarios, the difference between a AAA Manufacturing and AA Real Estate would be around 5-6 percentage points. But if the paper was BBB Real Estate (theoretically speaking), it would give around 12-15 percentage points higher than what a AAA Manufacturing paper would offer. So if a fund is offering fabulous returns, there could be a compromise here. And compromises always leave you vulnerable.
Even if fund managers pack their portfolios with high rated paper, there is the interest rate risk if they get their call wrong. This is all the more prevalent in funds of longer tenure. For instance, let's assume that Bond A has a coupon rate of 8 per cent. Now let's say there is an increase in interest rates and Bond B has been issued with a coupon rate of 9 per cent. Now the price of Bond A will fall (since it is offering a lower interest rate) as the yield of Bond A will adjust higher (since bond yields and prices are inversely related). Consequently, debt funds that hold Bond A will be impacted. If there are many such bonds in the portfolio, the cumulative impact on the NAV would be negative.
While at any given point of time, all these risks exist (see: What risks does your fund manager take?), there are different phases in the interest rate cycle and in the debt market history where different risks have been played out more prominently. During the period from 1997 right through 2003, huge money was made on interest rates because during this period rates came down from 14 per cent to 5 per cent (10-year yields). From then on till 2008, money was made by taking credit risks when BBB rated companies were borrowing at 14-15 per cent. In 2008, it was liquidity risk that took centre stage, though credit risk was also prominent.
Mid-2009, credit opportunities (crop) funds began to catch the fancy of investors when yield spreads (difference in yields between benchmark sovereign paper and corporate bonds) widened to up to 200-300bps. The credit market presented an attractive risk-return profile as even good companies found it difficult to raise debt. Such funds are designed for risk-taking investors since they invest in high-return, low-rated paper. In such funds, the credit risk and liquidity risk run high. Right now there are a few options in the market: DWS Cash Opportunities, Religare Credit Opportunities and Kotak Credit Opportunities. While their profile could be riskier than that of other funds of similar duration, none of them take very high risks. They tend not to go below A-rated paper, stretching it to probably AA-. Says a fund manager from one of the fund houses which runs a crop fund: “If you look at the credit rating history of CRISIL over the past 15 years, there has been no default from any AA-rated entity over a 1-year period.” In fact, a number of measures are put in place to ensure that these funds are not taking undue amounts of risk. Not going for paper rated below A, being cautious on the reputation of the paper issuer, lower investment ticket sizes and portfolios with shorter average maturity duration. If you are willing to take a slightly higher risk with your debt portfolio, consider such funds.
What risks does your fund manager take?
Interest Rate Risk: When interest rates rise, bond prices fall. So if the fund manager has his portfolio stacked with lower interest rate paper, the prices of his holdings will fall resulting in a lower NAV. On the other hand, if interest rates fall then the price of his holdings rise and so does his NAV.
The longer a bond's maturity, the greater the interest rate risk. A bond fund with a longer average maturity will see its net asset value (NAV) react more dramatically to changes in interest rates as the prices of the underlying bonds in the portfolio increase or decline.
Credit Risk: Bonds carry the risk of default, meaning that the issuer is unable to make further interest or principal payments. They are rated by individual credit rating agencies to help describe the credit worthiness of the issuer. Higher the credit rating, lower the risk and lower the returns. Lower the credit rating, higher the risk and higher the return.
Liquidity Risk: If the credit rating gets downgraded or the current interest rates are much higher than the coupon rate, then the bond would face liquidity issues because finding a buyer would no longer be easy. Liquidity risk describes the danger when one has to sell a bond in the secondary market but is unable to find a buyer.
This article appeared in the June 15 - July 14, 2010 issue of Mutual Fund Insight
(source: valueresearchonline.com)
Dependence on NFOs Must Go
When Paul Vrancken, COO, Canara Robeco Mutual Fund, visited India in 2005, it was his first trip to the subcontinent. The then Vice President and Head-Corporate Development, Robeco Group, had the task of scouting the land for a mutual fund partner.
He narrowed in on Canbank Mutual Fund, amid a fair amount of scepticism. The joint venture between Robeco and Canbank Mutual Fund took place in less than two years and in August 2007 he shifted base to India and stayed on as the Chief Operating Officer.
Now, three years down the road, after Canara Robeco has left behind its dreary past, he is moving on to a more senior position in Hong Kong. Here he speaks of his experience of the fund industry in India and what made him narrow down on such an unusual candidate.
Canbank Mutual Fund was virtually written off by many. What made you narrow down on it?
It was certainly the potential, not the company per se. The company was not in very good shape, performance of schemes left much to be desired, net sales were limited and market share was shrinking. There were issues related to brand, investment process, systems, infotech, etc. It was not a platform for growth.
We looked through the problems and the seemingly lack of potential but yet saw a future with Canbank Mutual Fund. We visited the branches and spoke to the branch managers of Canara Bank about the potential of such a distribution network. We felt we could turn it around eventually.
Actually, Robeco was not that interested in the company itself. We believed we could change it. The key to success is looking at the potential of two joint venture partners coming together.
What were the aspects that stacked the odds in favour of Canbank Mutual Fund?
We looked at the other players that came in on their own and realised that it took a while for them to obtain the licence, so our main focus was on picking up an asset management company (AMC) that had a licence.
In addition, the sponsor company - Canara Bank - has a huge network across the country. It is one of the largest banks in India. That was the potential we were going after - the immense distribution network.
Canara Bank also fit the profile that we were on the lookout for. Rabo Bank, the parent company of Robeco, is an AAA conservative player. Ditto for Canara Bank. Look at the crisis the banking industry went through in 2008. In such moments of stress, Rabo Bank had adequate liquidity as clients added to their Rabo deposits, instead of withdrawals, which was the mainstream picture in the industry. And public sector banks like Canara Bank too received inflows from clients. Both these brands convey the value of trust and such intrinsic value of the brand is a great asset.
At the time when we were surveying the market, Sundaram Mutual Fund was in the process of tying up with BNP Paribas. The other standalones were not interested in a joint venture partnership. And neither were we interested in a much smaller AMC.
We wanted to get into India, we wanted a player with a licence, a certain amount of assets and funds to begin with, and we wanted a reliable partner who shared a similar vision of where we both wanted to end up. And Canbank Mutual Fund fit the bill.
In the end, I think our choices have been right.
Did you ever entertain the thought that this joint venture may fail?
No. It never came up. It's impossible to succeed when you are entertaining the thought that you might fail.
What was the market perception when you were closing the deal?
I remember at that time people were quite sceptical. Actually, there were two broad opinions when we spoke to people in the market. On the one hand, we were told that it would not take us anywhere and it was more or less a hopeless cause. On the other hand, we were told that it would require a lot of work but in the long run its potential could be realised. No one in-between, it was very black and white.
What of this business has left you disappointed? Something that did not move as you would have liked it to?
I feel retail equity distribution could have moved faster.
When I look at the overall fund scenario in India, a lot of money has come in through new fund offerings (NFOs). But the ongoing schemes do not really attract fresh investments. At most it is churning within the existing unit holders - moving from one scheme to another. So one AMC will face a redemption to the benefit of another AMC where the same investor will move to. So all existing schemes take money from each other, so to speak.
Over the past 10 years, all new money that has come in has been via NFOs. The fund industry has to find ways to get fresh retail money come into the existing schemes - a task that is far from easy. From a business plan perspective, this has been a setback.
If I look at the bank per se, it has taken a while but we have things in place now. Canara Bank has 500 investment officers dedicated to selling mutual funds and insurance products. They are placed in bank branches across the country. Now they have plans to double this figure. So it has taken time, but the potential to employ the bank as a distribution network is immense.
What do you find difficult about working in India, especially since you are not in a standalone venture? When you took over, was there a lot of resistance?
A difficult moment was at the beginning when the joint venture took place. We went through major changes in the organisation. Half the staff opted for a voluntary retirement scheme (VRS). The half that stayed back was mainly on the operations side. This has been a key success factor for us. Our operations staff has been the backbone which the company could depend on in times of need.
When one works in India as an expatriate, one aspect that stands out is the particular way of coming to execution, in terms of preparation, decision making process and execution itself. For an outsider, it may look like this process is somewhat ad-hoc, with a single person responsible for decisions, while the execution can sometimes wait till a late moment. But I do know that when there is a problem, it gets fixed. Not necessarily through a process or a system, but it gets fixed, and there is complete alignment in the organisation at those moments. However, one cannot rely on such a system for everything and all the time.
One of the things we have done is put committees in place because we wanted more involvement from everyone and we want them to be aware of the consequences and repercussions of a decision. So we now have a products committee, an investment committee, a risk management committee, an IT committee and a Canara committee. This way there is consensus and no confusion on decisions taken. If we did not have it then we would have to rely on a more obscure decision making process.
My impression of Indians has been that they are very entrepreneurial, open and wanting to connect. Moreover, they are very business minded, a great combination to grow and succeed globally.
What do you see as an area of concern in the Indian mutual fund industry?
When I came to Mumbai in August 2005, it was just after the flood and the consequences of the flood were clearly visible during my trip from the airport to the hotel. But what caught my eye was the billboards across the city with NFO hoardings. And I wondered how it could be that the mutual fund industry could be so in-your-face, so thriving and vibrant? Of course, AMCs were launching NFOs and the costs of up to 6 per cent of expenses could be charged to investors as fund raising expenses. But now that has stopped because the regulator stepped in. I think the direction that the regulator has taken is very good. A lot has changed since my first visit.
The first issue I am concerned about is how retail money is going to come into this industry. Investor education has to increase and eventually the investor must be made aware that he can, and should, pay a price for the value he receives from the distributor's advice.
The other issue is that new retail flows are not being channelised into the industry but find their way into another industry. This is putting a strain on the fund industry.
How different is it in Holland?
In Holland mutual funds are popular amongst retail investors. Over there the bank will evaluate your risk profile and suggest products accordingly. The concept of churning is not really there and distributors earn mainly through trail commission. There is no NFO mania, so to speak. Investors prefer a tried-and-tested product.
Is Canara Robeco now in the AUM race? Any plans to be in the Top 10?
I am not sure if we can call it chasing AUM but every business will have ambitions of growth. We would like to be in the Top 15 by March 2011. When the joint venture was signed, Canara Robeco was No. 26, today we are No. 16. But do note that when we were at the 26th spot, there were just 32 players. Now there are around 40 players and we have managed to inch our way upwards. Now that we have our risk management measures in place and performance has picked up across the board, we want to grow continuously without too many ups and downs.
Robeco has a strong presence in Europe. With that in mind, what plans do you have for Canara Robeco?
We want to expand domestically by penetrating the Canara Bank network and increasing retail sales. But we also want to grow internationally. From August we will start Robeco India dedicated funds and function on an advisory basis. Our first institutional mandate came from Taiwan. Another mandate from a European pension fund is due to go live in July. What our potential investors in Europe like is that we have the local India expertise as well as the international brand and global infrastructure. We have sales offices across the globe. These offices are already servicing institutional pension funds, insurance firms and sovereign wealth funds. So all the processes and mandates are done via our European offices and we provide advisory services in India
(source: valueresearchonline.com)
He narrowed in on Canbank Mutual Fund, amid a fair amount of scepticism. The joint venture between Robeco and Canbank Mutual Fund took place in less than two years and in August 2007 he shifted base to India and stayed on as the Chief Operating Officer.
Now, three years down the road, after Canara Robeco has left behind its dreary past, he is moving on to a more senior position in Hong Kong. Here he speaks of his experience of the fund industry in India and what made him narrow down on such an unusual candidate.
Canbank Mutual Fund was virtually written off by many. What made you narrow down on it?
It was certainly the potential, not the company per se. The company was not in very good shape, performance of schemes left much to be desired, net sales were limited and market share was shrinking. There were issues related to brand, investment process, systems, infotech, etc. It was not a platform for growth.
We looked through the problems and the seemingly lack of potential but yet saw a future with Canbank Mutual Fund. We visited the branches and spoke to the branch managers of Canara Bank about the potential of such a distribution network. We felt we could turn it around eventually.
Actually, Robeco was not that interested in the company itself. We believed we could change it. The key to success is looking at the potential of two joint venture partners coming together.
What were the aspects that stacked the odds in favour of Canbank Mutual Fund?
We looked at the other players that came in on their own and realised that it took a while for them to obtain the licence, so our main focus was on picking up an asset management company (AMC) that had a licence.
In addition, the sponsor company - Canara Bank - has a huge network across the country. It is one of the largest banks in India. That was the potential we were going after - the immense distribution network.
Canara Bank also fit the profile that we were on the lookout for. Rabo Bank, the parent company of Robeco, is an AAA conservative player. Ditto for Canara Bank. Look at the crisis the banking industry went through in 2008. In such moments of stress, Rabo Bank had adequate liquidity as clients added to their Rabo deposits, instead of withdrawals, which was the mainstream picture in the industry. And public sector banks like Canara Bank too received inflows from clients. Both these brands convey the value of trust and such intrinsic value of the brand is a great asset.
At the time when we were surveying the market, Sundaram Mutual Fund was in the process of tying up with BNP Paribas. The other standalones were not interested in a joint venture partnership. And neither were we interested in a much smaller AMC.
We wanted to get into India, we wanted a player with a licence, a certain amount of assets and funds to begin with, and we wanted a reliable partner who shared a similar vision of where we both wanted to end up. And Canbank Mutual Fund fit the bill.
In the end, I think our choices have been right.
Did you ever entertain the thought that this joint venture may fail?
No. It never came up. It's impossible to succeed when you are entertaining the thought that you might fail.
What was the market perception when you were closing the deal?
I remember at that time people were quite sceptical. Actually, there were two broad opinions when we spoke to people in the market. On the one hand, we were told that it would not take us anywhere and it was more or less a hopeless cause. On the other hand, we were told that it would require a lot of work but in the long run its potential could be realised. No one in-between, it was very black and white.
What of this business has left you disappointed? Something that did not move as you would have liked it to?
I feel retail equity distribution could have moved faster.
When I look at the overall fund scenario in India, a lot of money has come in through new fund offerings (NFOs). But the ongoing schemes do not really attract fresh investments. At most it is churning within the existing unit holders - moving from one scheme to another. So one AMC will face a redemption to the benefit of another AMC where the same investor will move to. So all existing schemes take money from each other, so to speak.
Over the past 10 years, all new money that has come in has been via NFOs. The fund industry has to find ways to get fresh retail money come into the existing schemes - a task that is far from easy. From a business plan perspective, this has been a setback.
If I look at the bank per se, it has taken a while but we have things in place now. Canara Bank has 500 investment officers dedicated to selling mutual funds and insurance products. They are placed in bank branches across the country. Now they have plans to double this figure. So it has taken time, but the potential to employ the bank as a distribution network is immense.
What do you find difficult about working in India, especially since you are not in a standalone venture? When you took over, was there a lot of resistance?
A difficult moment was at the beginning when the joint venture took place. We went through major changes in the organisation. Half the staff opted for a voluntary retirement scheme (VRS). The half that stayed back was mainly on the operations side. This has been a key success factor for us. Our operations staff has been the backbone which the company could depend on in times of need.
When one works in India as an expatriate, one aspect that stands out is the particular way of coming to execution, in terms of preparation, decision making process and execution itself. For an outsider, it may look like this process is somewhat ad-hoc, with a single person responsible for decisions, while the execution can sometimes wait till a late moment. But I do know that when there is a problem, it gets fixed. Not necessarily through a process or a system, but it gets fixed, and there is complete alignment in the organisation at those moments. However, one cannot rely on such a system for everything and all the time.
One of the things we have done is put committees in place because we wanted more involvement from everyone and we want them to be aware of the consequences and repercussions of a decision. So we now have a products committee, an investment committee, a risk management committee, an IT committee and a Canara committee. This way there is consensus and no confusion on decisions taken. If we did not have it then we would have to rely on a more obscure decision making process.
My impression of Indians has been that they are very entrepreneurial, open and wanting to connect. Moreover, they are very business minded, a great combination to grow and succeed globally.
What do you see as an area of concern in the Indian mutual fund industry?
When I came to Mumbai in August 2005, it was just after the flood and the consequences of the flood were clearly visible during my trip from the airport to the hotel. But what caught my eye was the billboards across the city with NFO hoardings. And I wondered how it could be that the mutual fund industry could be so in-your-face, so thriving and vibrant? Of course, AMCs were launching NFOs and the costs of up to 6 per cent of expenses could be charged to investors as fund raising expenses. But now that has stopped because the regulator stepped in. I think the direction that the regulator has taken is very good. A lot has changed since my first visit.
The first issue I am concerned about is how retail money is going to come into this industry. Investor education has to increase and eventually the investor must be made aware that he can, and should, pay a price for the value he receives from the distributor's advice.
The other issue is that new retail flows are not being channelised into the industry but find their way into another industry. This is putting a strain on the fund industry.
How different is it in Holland?
In Holland mutual funds are popular amongst retail investors. Over there the bank will evaluate your risk profile and suggest products accordingly. The concept of churning is not really there and distributors earn mainly through trail commission. There is no NFO mania, so to speak. Investors prefer a tried-and-tested product.
Is Canara Robeco now in the AUM race? Any plans to be in the Top 10?
I am not sure if we can call it chasing AUM but every business will have ambitions of growth. We would like to be in the Top 15 by March 2011. When the joint venture was signed, Canara Robeco was No. 26, today we are No. 16. But do note that when we were at the 26th spot, there were just 32 players. Now there are around 40 players and we have managed to inch our way upwards. Now that we have our risk management measures in place and performance has picked up across the board, we want to grow continuously without too many ups and downs.
Robeco has a strong presence in Europe. With that in mind, what plans do you have for Canara Robeco?
We want to expand domestically by penetrating the Canara Bank network and increasing retail sales. But we also want to grow internationally. From August we will start Robeco India dedicated funds and function on an advisory basis. Our first institutional mandate came from Taiwan. Another mandate from a European pension fund is due to go live in July. What our potential investors in Europe like is that we have the local India expertise as well as the international brand and global infrastructure. We have sales offices across the globe. These offices are already servicing institutional pension funds, insurance firms and sovereign wealth funds. So all the processes and mandates are done via our European offices and we provide advisory services in India
(source: valueresearchonline.com)
Rs 3,500 cr net outflow from equity funds
Diversified equity schemes of mutual funds witnessed net outflows for second month in a row as redemptions exceeded fresh inflows by Rs 3,539 crore (including tax saving schemes) in July.
In June, net outflows from equity funds were Rs 1,531crore. Industry experts said equity funds saw redemptions as stock markets regained February 2008 levels. “Many investors, who were stuck with their investments since 2007, have been redeeming their money as the Sensex touched February 2008 levels during the month,” Waqar Naqvi, chief executive officer, Taurus Mutual Fund, said.
However, overall the industry saw net inflows of Rs 31,654 crore in July compared with net redemptions of Rs 1,19,449 crore in June, according to the Association of Mutual Funds in India (AMFI) data. Liquid and money market funds witnessed net inflows of Rs 34,303 crore, while income funds saw fresh inflows exceeding redemptions by Rs 475 crore.
In other categories, gold and other exchange-traded funds saw net inflows of Rs 530 crore, gilt funds witnessed net inflows of Rs 40 crore, while balanced funds saw net outflows of Rs 43 crore.
Meanwhile, the month-end asset under management (AUM) of the mutual fund industry jumped by 6 per cent to Rs 6,68,605 crore as on July 31, 2010 compared with Rs 6,30,185 crore on June 30.
Income funds accounted for 50 per cent of total AUM on July 31, while liquid and money market funds accounted for 16 per cent. Diversified equity funds (including tax saving funds) constituted 31 per cent of the total AUM
(source: valueresearchonline.com)
In June, net outflows from equity funds were Rs 1,531crore. Industry experts said equity funds saw redemptions as stock markets regained February 2008 levels. “Many investors, who were stuck with their investments since 2007, have been redeeming their money as the Sensex touched February 2008 levels during the month,” Waqar Naqvi, chief executive officer, Taurus Mutual Fund, said.
However, overall the industry saw net inflows of Rs 31,654 crore in July compared with net redemptions of Rs 1,19,449 crore in June, according to the Association of Mutual Funds in India (AMFI) data. Liquid and money market funds witnessed net inflows of Rs 34,303 crore, while income funds saw fresh inflows exceeding redemptions by Rs 475 crore.
In other categories, gold and other exchange-traded funds saw net inflows of Rs 530 crore, gilt funds witnessed net inflows of Rs 40 crore, while balanced funds saw net outflows of Rs 43 crore.
Meanwhile, the month-end asset under management (AUM) of the mutual fund industry jumped by 6 per cent to Rs 6,68,605 crore as on July 31, 2010 compared with Rs 6,30,185 crore on June 30.
Income funds accounted for 50 per cent of total AUM on July 31, while liquid and money market funds accounted for 16 per cent. Diversified equity funds (including tax saving funds) constituted 31 per cent of the total AUM
(source: valueresearchonline.com)
Monday, August 9, 2010
35% dividend in Magnum Contra
SBI Mutual Fund has approved the declaration of dividend under the dividend option of Magnum Contra.
The quantum of declaration is 35 per cent. The record date is August 13, 2010.
(source:valueresearchonline.com)
The quantum of declaration is 35 per cent. The record date is August 13, 2010.
(source:valueresearchonline.com)
Cut Down Exposure to Mid-cap Funds
I am 38. Below is my portfolio. I have surplus cash of around Rs 50,000 which I plan to invest in Reliance Growth through SIP route and stay invested for more than three years. Is it advisable to invest in one of the existing funds or should I instead go for a new fund?
- Raghu
At Value Research we do not advise investors to park their money in equity funds for short term. Ideally, you should invest in equity funds for a longer term - at least five years.
Although the funds that you have chosen are of good quality, there is a flaw in your allocation to these funds.
Currently, your portfolio has an exposure of around 60 per cent to mid-cap funds - Reliance Growth, Sundaram BNP Paribas Select Midcap and Franklin India Prima. If you choose to invest an additional Rs 50,000 in Reliance Growth, you will increase your exposure to mid-cap funds even further. These mid-cap funds may push the returns from your portfolio up in a rising market, but they will also fall harder during a downturn.
On the other hand, large-cap funds like DSPBR Top 100 Equity and BSL Frontline Equity may not give chart-topping returns in rising markets but they will provide downside protection when markets tumble.
Therefore, a conservative investor should make up the core of his portfolio with large or multi-cap funds that provide stable returns over the long run.
For a less volatile portfolio, do not have more than 20 per cent exposure to mid-cap funds. Hence, reduce your exposure to mid-cap funds to this level and invest your proceeds in the large-cap funds that you have in your portfolio.
(source:valueresearchonline.com)
- Raghu
At Value Research we do not advise investors to park their money in equity funds for short term. Ideally, you should invest in equity funds for a longer term - at least five years.
Although the funds that you have chosen are of good quality, there is a flaw in your allocation to these funds.
Currently, your portfolio has an exposure of around 60 per cent to mid-cap funds - Reliance Growth, Sundaram BNP Paribas Select Midcap and Franklin India Prima. If you choose to invest an additional Rs 50,000 in Reliance Growth, you will increase your exposure to mid-cap funds even further. These mid-cap funds may push the returns from your portfolio up in a rising market, but they will also fall harder during a downturn.
On the other hand, large-cap funds like DSPBR Top 100 Equity and BSL Frontline Equity may not give chart-topping returns in rising markets but they will provide downside protection when markets tumble.
Therefore, a conservative investor should make up the core of his portfolio with large or multi-cap funds that provide stable returns over the long run.
For a less volatile portfolio, do not have more than 20 per cent exposure to mid-cap funds. Hence, reduce your exposure to mid-cap funds to this level and invest your proceeds in the large-cap funds that you have in your portfolio.
(source:valueresearchonline.com)
Can You Lose Money in Debt Funds?
An article in the U.S-based business magazine Forbes earlier this year stated that net $35 billion was pulled out from U.S. equity funds in 2009, whereas $421 billion went into bond funds. The columnist had an interesting comment to make on what she called such “unsophisticated money in bonds”. She wondered if “investors understood how miserable things could get when the low interest rate party ended”. Thanks to what is happening in Europe, the party does not look like it is going to end soon, something even the columnist could not predict. However the point is interesting. The stampede into bonds funds was not just about low short-term interest rates but about individuals who could not handle the volatility of the stock market. Which brings us to our next issue: Before you plunge into a debt fund, ask yourself why you are putting money there in the first place.
Debt, like equity, is an asset class. And for the purpose of diversification, some amount of your investments must be in this asset class. Having said that, you definitely would have some amount of savings in fixed-return instruments like fixed deposits (FDs) or Public Provident Fund (PPF) or National Savings Certificate (NSC). So if you put money in debt funds, you should do it for specific reasons: either because the tenure of the instrument matches your need, the tax incidence is lower when compared to other fixed returns instruments or the return, in comparison, is higher. But don't view any mutual fund debt product as a quasi fixed return instrument. Debt funds do carry a fair amount of risk, some more than others. You could lose money here too.
Intrinsically, debt instruments imply a fixed tenure and a fixed return. In that sense, they are assured. However, once you invest in a mutual fund, other factors like interest rate movements, the fund manager's call on their direction, his trading skills and also the intrinsic quality of the portfolio play an important role. The last factor is especially crucial. The greater the magnitude of low quality paper in the portfolio, the higher the returns that the fund manager is in a position to generate. For instance, one could broadly say that the difference between AAA and AA rated paper could vary from 25 to 50bps (100 bps = 1%). Unfortunately, it's not that simple. Let's talk about paper from companies in different industries. The difference in AAA Manufacturing and AA Manufacturing would be 25bps (the lower rated paper giving the slightly higher return despite both being from the same industry). If the industries change to AAA Manufacturing and AA NBFC, the difference could be 1-1.5 per cent. On the other hand, if it was AAA NBFC but AA Manufacturing, the latter would still offer a lower return and the difference could be around -75bps.
In extreme scenarios, the difference between a AAA Manufacturing and AA Real Estate would be around 5-6 percentage points. But if the paper was BBB Real Estate (theoretically speaking), it would give around 12-15 percentage points higher than what a AAA Manufacturing paper would offer. So if a fund is offering fabulous returns, there could be a compromise here. And compromises always leave you vulnerable.
Even if fund managers pack their portfolios with high rated paper, there is the interest rate risk if they get their call wrong. This is all the more prevalent in funds of longer tenure. For instance, let's assume that Bond A has a coupon rate of 8 per cent. Now let's say there is an increase in interest rates and Bond B has been issued with a coupon rate of 9 per cent. Now the price of Bond A will fall (since it is offering a lower interest rate) as the yield of Bond A will adjust higher (since bond yields and prices are inversely related). Consequently, debt funds that hold Bond A will be impacted. If there are many such bonds in the portfolio, the cumulative impact on the NAV would be negative.
While at any given point of time, all these risks exist (see: What risks does your fund manager take?), there are different phases in the interest rate cycle and in the debt market history where different risks have been played out more prominently. During the period from 1997 right through 2003, huge money was made on interest rates because during this period rates came down from 14 per cent to 5 per cent (10-year yields). From then on till 2008, money was made by taking credit risks when BBB rated companies were borrowing at 14-15 per cent. In 2008, it was liquidity risk that took centre stage, though credit risk was also prominent.
Mid-2009, credit opportunities (crop) funds began to catch the fancy of investors when yield spreads (difference in yields between benchmark sovereign paper and corporate bonds) widened to up to 200-300bps. The credit market presented an attractive risk-return profile as even good companies found it difficult to raise debt. Such funds are designed for risk-taking investors since they invest in high-return, low-rated paper. In such funds, the credit risk and liquidity risk run high. Right now there are a few options in the market: DWS Cash Opportunities, Religare Credit Opportunities and Kotak Credit Opportunities. While their profile could be riskier than that of other funds of similar duration, none of them take very high risks. They tend not to go below A-rated paper, stretching it to probably AA-. Says a fund manager from one of the fund houses which runs a crop fund: “If you look at the credit rating history of CRISIL over the past 15 years, there has been no default from any AA-rated entity over a 1-year period.” In fact, a number of measures are put in place to ensure that these funds are not taking undue amounts of risk. Not going for paper rated below A, being cautious on the reputation of the paper issuer, lower investment ticket sizes and portfolios with shorter average maturity duration. If you are willing to take a slightly higher risk with your debt portfolio, consider such funds.
What risks does your fund manager take?
Interest Rate Risk: When interest rates rise, bond prices fall. So if the fund manager has his portfolio stacked with lower interest rate paper, the prices of his holdings will fall resulting in a lower NAV. On the other hand, if interest rates fall then the price of his holdings rise and so does his NAV.
The longer a bond's maturity, the greater the interest rate risk. A bond fund with a longer average maturity will see its net asset value (NAV) react more dramatically to changes in interest rates as the prices of the underlying bonds in the portfolio increase or decline.
Credit Risk: Bonds carry the risk of default, meaning that the issuer is unable to make further interest or principal payments. They are rated by individual credit rating agencies to help describe the credit worthiness of the issuer. Higher the credit rating, lower the risk and lower the returns. Lower the credit rating, higher the risk and higher the return.
Liquidity Risk: If the credit rating gets downgraded or the current interest rates are much higher than the coupon rate, then the bond would face liquidity issues because finding a buyer would no longer be easy. Liquidity risk describes the danger when one has to sell a bond in the secondary market but is unable to find a buyer.
(source:valueresearchonline.com)
Debt, like equity, is an asset class. And for the purpose of diversification, some amount of your investments must be in this asset class. Having said that, you definitely would have some amount of savings in fixed-return instruments like fixed deposits (FDs) or Public Provident Fund (PPF) or National Savings Certificate (NSC). So if you put money in debt funds, you should do it for specific reasons: either because the tenure of the instrument matches your need, the tax incidence is lower when compared to other fixed returns instruments or the return, in comparison, is higher. But don't view any mutual fund debt product as a quasi fixed return instrument. Debt funds do carry a fair amount of risk, some more than others. You could lose money here too.
Intrinsically, debt instruments imply a fixed tenure and a fixed return. In that sense, they are assured. However, once you invest in a mutual fund, other factors like interest rate movements, the fund manager's call on their direction, his trading skills and also the intrinsic quality of the portfolio play an important role. The last factor is especially crucial. The greater the magnitude of low quality paper in the portfolio, the higher the returns that the fund manager is in a position to generate. For instance, one could broadly say that the difference between AAA and AA rated paper could vary from 25 to 50bps (100 bps = 1%). Unfortunately, it's not that simple. Let's talk about paper from companies in different industries. The difference in AAA Manufacturing and AA Manufacturing would be 25bps (the lower rated paper giving the slightly higher return despite both being from the same industry). If the industries change to AAA Manufacturing and AA NBFC, the difference could be 1-1.5 per cent. On the other hand, if it was AAA NBFC but AA Manufacturing, the latter would still offer a lower return and the difference could be around -75bps.
In extreme scenarios, the difference between a AAA Manufacturing and AA Real Estate would be around 5-6 percentage points. But if the paper was BBB Real Estate (theoretically speaking), it would give around 12-15 percentage points higher than what a AAA Manufacturing paper would offer. So if a fund is offering fabulous returns, there could be a compromise here. And compromises always leave you vulnerable.
Even if fund managers pack their portfolios with high rated paper, there is the interest rate risk if they get their call wrong. This is all the more prevalent in funds of longer tenure. For instance, let's assume that Bond A has a coupon rate of 8 per cent. Now let's say there is an increase in interest rates and Bond B has been issued with a coupon rate of 9 per cent. Now the price of Bond A will fall (since it is offering a lower interest rate) as the yield of Bond A will adjust higher (since bond yields and prices are inversely related). Consequently, debt funds that hold Bond A will be impacted. If there are many such bonds in the portfolio, the cumulative impact on the NAV would be negative.
While at any given point of time, all these risks exist (see: What risks does your fund manager take?), there are different phases in the interest rate cycle and in the debt market history where different risks have been played out more prominently. During the period from 1997 right through 2003, huge money was made on interest rates because during this period rates came down from 14 per cent to 5 per cent (10-year yields). From then on till 2008, money was made by taking credit risks when BBB rated companies were borrowing at 14-15 per cent. In 2008, it was liquidity risk that took centre stage, though credit risk was also prominent.
Mid-2009, credit opportunities (crop) funds began to catch the fancy of investors when yield spreads (difference in yields between benchmark sovereign paper and corporate bonds) widened to up to 200-300bps. The credit market presented an attractive risk-return profile as even good companies found it difficult to raise debt. Such funds are designed for risk-taking investors since they invest in high-return, low-rated paper. In such funds, the credit risk and liquidity risk run high. Right now there are a few options in the market: DWS Cash Opportunities, Religare Credit Opportunities and Kotak Credit Opportunities. While their profile could be riskier than that of other funds of similar duration, none of them take very high risks. They tend not to go below A-rated paper, stretching it to probably AA-. Says a fund manager from one of the fund houses which runs a crop fund: “If you look at the credit rating history of CRISIL over the past 15 years, there has been no default from any AA-rated entity over a 1-year period.” In fact, a number of measures are put in place to ensure that these funds are not taking undue amounts of risk. Not going for paper rated below A, being cautious on the reputation of the paper issuer, lower investment ticket sizes and portfolios with shorter average maturity duration. If you are willing to take a slightly higher risk with your debt portfolio, consider such funds.
What risks does your fund manager take?
Interest Rate Risk: When interest rates rise, bond prices fall. So if the fund manager has his portfolio stacked with lower interest rate paper, the prices of his holdings will fall resulting in a lower NAV. On the other hand, if interest rates fall then the price of his holdings rise and so does his NAV.
The longer a bond's maturity, the greater the interest rate risk. A bond fund with a longer average maturity will see its net asset value (NAV) react more dramatically to changes in interest rates as the prices of the underlying bonds in the portfolio increase or decline.
Credit Risk: Bonds carry the risk of default, meaning that the issuer is unable to make further interest or principal payments. They are rated by individual credit rating agencies to help describe the credit worthiness of the issuer. Higher the credit rating, lower the risk and lower the returns. Lower the credit rating, higher the risk and higher the return.
Liquidity Risk: If the credit rating gets downgraded or the current interest rates are much higher than the coupon rate, then the bond would face liquidity issues because finding a buyer would no longer be easy. Liquidity risk describes the danger when one has to sell a bond in the secondary market but is unable to find a buyer.
(source:valueresearchonline.com)
Nothing's Guaranteed
Don't let the name mislead you. You are not assured of a monthly return where such a scheme is concerned. Fund houses attempt to give regular dividends on their Monthly Income Plans (MIPs) but are not bound to declare them every month. So do not view this investment as a guaranteed return product. MIPs are hybrid investments, meaning they combine debt and equity in their portfolios. Thanks to the extra zing given by the equity allocation, their returns will be higher than that of a pure debt scheme. Each MIP will have its own mandate on how much the equity allocation has to be (15-25%). The balance can be in debt and money market instruments. While the equity exposure adds some amount of risk to the overall product, it would be wise to check this allocation. If the exposure to smaller cap companies is large, that would make it all the more risky.
Look at the debt exposure too. MIPs with lower equity allocations tend to take slightly higher risk (interest rate risk) and go with higher duration portfolios. But aggressive ones (higher equity allocation) opt for shorter duration debt portfolios.
What investors should note
Ultra-conservative investors or those who have retired and are living off their earnings and cannot afford to see a dip in their investments should not consider MIPs. Instead, consider a safe avenue like a post office monthly income scheme or bank deposit.
The returns, like any other fund, are market-driven. You have absolutely no guarantees here.
Though many fund houses strive to declare a monthly dividend, they have no such obligation.
If you are not in need of any income, don't consider this type of fund. Instead look at a balanced fund.
If you would like some sort of income but are not dependent on it for your bread and butter, then consider the various options available - monthly, quarterly, half-yearly or annual. In some instances, a growth option can be offered where regular dividends are not offered but capital appreciation is.
Dividends declared under MIPs are tax free.
(source:valureresearchonline)
Look at the debt exposure too. MIPs with lower equity allocations tend to take slightly higher risk (interest rate risk) and go with higher duration portfolios. But aggressive ones (higher equity allocation) opt for shorter duration debt portfolios.
What investors should note
Ultra-conservative investors or those who have retired and are living off their earnings and cannot afford to see a dip in their investments should not consider MIPs. Instead, consider a safe avenue like a post office monthly income scheme or bank deposit.
The returns, like any other fund, are market-driven. You have absolutely no guarantees here.
Though many fund houses strive to declare a monthly dividend, they have no such obligation.
If you are not in need of any income, don't consider this type of fund. Instead look at a balanced fund.
If you would like some sort of income but are not dependent on it for your bread and butter, then consider the various options available - monthly, quarterly, half-yearly or annual. In some instances, a growth option can be offered where regular dividends are not offered but capital appreciation is.
Dividends declared under MIPs are tax free.
(source:valureresearchonline)
Wednesday, July 7, 2010
MFs are now attempting to push ‘simplified products’ like hybrid funds, having learnt a hard lesson after the NFO boom of 2006-07. Except that they ar
Faced with dwindling assets caused by changing regulation and investor apathy, mutual fund companies have now hit upon a new strategy - launch all-in-one or hybrid products. These products combine multiple asset classes in one, supposedly making the job of asset allocation easy. Axis Triple Advantage Fund, now on offer, gives investors the chance to participate in three asset classes - equity-related, fixed income and gold. In April 2010 Religare Mutual Fund pioneered the move in this direction by launching a scheme that seeks to generate income through a portfolio of fixed income securities, gold and equity-related instruments. The scheme would invest 65%-90% in debt instruments, 0%-25% in equity and 10%-35% in gold ETFs (exchange-traded funds). The scheme is benchmarked against CRISIL MIP Blended Fund Index (65%) and price of gold (35%). Taurus Mutual Fund has just launched an open-ended income scheme called 'Taurus MIP Advantage' fund. The scheme is identical to Religare's. It aims to generate regular income through a portfolio of fixed-income securities, Gold ETFs and equity. The scheme is benchmarked against CRISIL MIP Blended Fund Index (75%) and price of gold (25%). Clearly, no sooner has one fund company launched a new kind of product than lemming-like, others are rushing in, offering identical products.
But what is the reason that fund companies are looking at hybrid funds for their salvation? It appears that the stricter regulations enforced by the Securities and Exchange Board of India since August last year has led to a drop in new sales of equity funds and some deep introspection among the fund community. Since the massive bull run of 2003-2007, the only way fund companies wanted to grow was bringing new funds to the market. The standard strategy was to tempt investors with new fund offers (NFOs), many of which had fancy names and complicated strategies. Fund companies gave fat incentives to distributors in order to encourage investors to sell their existing funds and buy the new ones - especially since they were available for Rs10 - which was of course, highly misleading. Unfortunately, this led to terrible performance of the vast majority of funds launched during this period. And when SEBI took away the fat upfront incentives for distributors, fund sales nosedived. Now, the MF industry is aiming to build rapport with investors by offering 'simplified' solutions to them in the form of hybrid funds.
The logic behind it is to offer investors the 'opportunity' to participate and gain exposure to different asset classes under one roof. Hybrid funds invest in a mix of equity and equity-related instruments and fixed-income securities. Some even invest part of the corpus in gold ETFs (exchange traded funds), a recent favourite among investors. This stands in sharp contrast to the relentless spewing of innovative and complicated fund offerings in the recent past.
Rajiv Anand, managing director and CEO of Axis Asset Management Co Ltd recently wrote in newspaper Mint that "MFs spend a lot on getting new investors, but pay little attention to existing ones. But MFs are not a one-time fill-it-forget-it product... We need to find ways to meaningfully engage with these investors." In a burst of plain speaking Mr Anand wrote, "In all the cloud and dust created by a surfeit of NFOs and products, the ultimate use of the product has been completely compromised somehow." According to him the biggest challenge for the fund houses and distributors is to prepare themselves for the arduous journey of getting investments in their existing funds pretty much on a 24x7x365 basis." You thought that Axis Mutual Fund would stop launching NFOs and push its existing products? Despite all this talk, Axis has gone down the same road as its peers and done exactly what the rest are doing. It has announced a me-too NFO! It seems that fund companies will continue to move in herds and be driven by the fad of the day. Interestingly, coinciding with the Axis Bank NFO opening for subscription, Mint gave Mr Anand an opportunity in to beat his own drum: "The one obvious way is to educate, and, perhaps, the other is to ensure that products… should blend equity and debt components. In other words, they should be hybrid funds." How nicely self-serving.
That leaves us with one last question. Do the 'simplified' hybrid offerings make sense for investors? Hybrid funds, in essence, are souped-up versions of existing products in the market - like balanced funds and monthly income plans (MIPs). While these offer investors capital protection with a chance to participate in equity markets, hybrid funds go a step further - they simply add gold to the soup. Instead of simplifying matters, hybrid funds would only complicate them further. They will not match the returns of equity, they will be marginally better than debt, they will still be more volatile than fixed income. Finally, gold, now historically high, may drag down their returns drastically. Invariably, such funds will lead to very average returns for the investor. The question is do investors care anyway, as long the fund industry tries to do everything except one thing they need to do - directly reach out to investors and engage them?
(source:moneylife)
But what is the reason that fund companies are looking at hybrid funds for their salvation? It appears that the stricter regulations enforced by the Securities and Exchange Board of India since August last year has led to a drop in new sales of equity funds and some deep introspection among the fund community. Since the massive bull run of 2003-2007, the only way fund companies wanted to grow was bringing new funds to the market. The standard strategy was to tempt investors with new fund offers (NFOs), many of which had fancy names and complicated strategies. Fund companies gave fat incentives to distributors in order to encourage investors to sell their existing funds and buy the new ones - especially since they were available for Rs10 - which was of course, highly misleading. Unfortunately, this led to terrible performance of the vast majority of funds launched during this period. And when SEBI took away the fat upfront incentives for distributors, fund sales nosedived. Now, the MF industry is aiming to build rapport with investors by offering 'simplified' solutions to them in the form of hybrid funds.
The logic behind it is to offer investors the 'opportunity' to participate and gain exposure to different asset classes under one roof. Hybrid funds invest in a mix of equity and equity-related instruments and fixed-income securities. Some even invest part of the corpus in gold ETFs (exchange traded funds), a recent favourite among investors. This stands in sharp contrast to the relentless spewing of innovative and complicated fund offerings in the recent past.
Rajiv Anand, managing director and CEO of Axis Asset Management Co Ltd recently wrote in newspaper Mint that "MFs spend a lot on getting new investors, but pay little attention to existing ones. But MFs are not a one-time fill-it-forget-it product... We need to find ways to meaningfully engage with these investors." In a burst of plain speaking Mr Anand wrote, "In all the cloud and dust created by a surfeit of NFOs and products, the ultimate use of the product has been completely compromised somehow." According to him the biggest challenge for the fund houses and distributors is to prepare themselves for the arduous journey of getting investments in their existing funds pretty much on a 24x7x365 basis." You thought that Axis Mutual Fund would stop launching NFOs and push its existing products? Despite all this talk, Axis has gone down the same road as its peers and done exactly what the rest are doing. It has announced a me-too NFO! It seems that fund companies will continue to move in herds and be driven by the fad of the day. Interestingly, coinciding with the Axis Bank NFO opening for subscription, Mint gave Mr Anand an opportunity in to beat his own drum: "The one obvious way is to educate, and, perhaps, the other is to ensure that products… should blend equity and debt components. In other words, they should be hybrid funds." How nicely self-serving.
That leaves us with one last question. Do the 'simplified' hybrid offerings make sense for investors? Hybrid funds, in essence, are souped-up versions of existing products in the market - like balanced funds and monthly income plans (MIPs). While these offer investors capital protection with a chance to participate in equity markets, hybrid funds go a step further - they simply add gold to the soup. Instead of simplifying matters, hybrid funds would only complicate them further. They will not match the returns of equity, they will be marginally better than debt, they will still be more volatile than fixed income. Finally, gold, now historically high, may drag down their returns drastically. Invariably, such funds will lead to very average returns for the investor. The question is do investors care anyway, as long the fund industry tries to do everything except one thing they need to do - directly reach out to investors and engage them?
(source:moneylife)
Monday, July 5, 2010
MF investors to get single statement for all schemes
Suresh Nandi Mumbai, July3, DHNS
If you are a mutual fund investor with money locked up in different fund houses and tired of getting different statement of accounts for each one of them, then you are in for a relief soon.
MF investors to get single statement for all schemes
Suresh Nandi Mumbai, July3, DHNS
If you are a mutual fund investor with money locked up in different fund houses and tired of getting different statement of accounts for each one of them, then you are in for a relief soon.
Securities & Exchange Board of India (Sebi) is contemplating to cut down paperwork and provide common account statement for all mutual fund investors with the help of registrar and transfer agencts (RTAs). To start with, Sebi has asked four RTAs such as Computer Age Management Services (CAMS), Deutsche Investor Services, Franklin Templeton and Karvy Mutual Fund Services to combine investor data together and provide consolidated statement of account for all investments in mutual funds. This apparently will reduce paperwork and cost for asset management companies (AMCs) too.
The four RTAs have already begun work on compiling investor data, sources said. The plan is to set up separate platform so that the industry can deliver one statement across investments in various mutual funds, they said adding: “We have already initiated work on conceptualisation and scope of services. As huge economies will flow in, it will reduce the efforts of investors and distributors.”
Efforts are two pronged. One is those who have demat account (equity investors) can get their MF units in demat form for which consolidated information is available with National Securities Depository Limited (NSDL) and Central Depository Services (India) Limtied (CDSL). Another is on clubbing RTA data to provide consolidated statement.
Though resources are available for aggregating data, there will be no sharing of investor information between NSDL and RTAs. Any data aggregation will be based on PAN among other things, a source said. If investors are holding MF units in demat form with NSDL or CSDL and also some units through RTAs, they will get two separate consolidated statements – one from NSDL and other consolidated statement from four RTAs.
If they (investors) are also holding stocks, then same demat statement will reflect their stock and fund investments together. If investors information are with RTAs, then they will get single account statement across RTAs. Plans are to eventually club this data across all RTAs – as against current 4 RTAs – and send single consolidated statement to MF investors. The RTAs are awaiting Sebi’s nod for implementing this new system, which is expected to happen in the next 3-6 months.
Sebi Executive Director K N Vaidyanathan recently shared this plan with the participants stating: “The third area where regulator is focussed was for those who come directly through asset management companies or one of the investors services like Karvy or CAMS. We want to make sure that if investors so choose they should get single view.
We will put in place a mechanism to that effect.”
(source : http://www.deccanherald.com)
If you are a mutual fund investor with money locked up in different fund houses and tired of getting different statement of accounts for each one of them, then you are in for a relief soon.
MF investors to get single statement for all schemes
Suresh Nandi Mumbai, July3, DHNS
If you are a mutual fund investor with money locked up in different fund houses and tired of getting different statement of accounts for each one of them, then you are in for a relief soon.
Securities & Exchange Board of India (Sebi) is contemplating to cut down paperwork and provide common account statement for all mutual fund investors with the help of registrar and transfer agencts (RTAs). To start with, Sebi has asked four RTAs such as Computer Age Management Services (CAMS), Deutsche Investor Services, Franklin Templeton and Karvy Mutual Fund Services to combine investor data together and provide consolidated statement of account for all investments in mutual funds. This apparently will reduce paperwork and cost for asset management companies (AMCs) too.
The four RTAs have already begun work on compiling investor data, sources said. The plan is to set up separate platform so that the industry can deliver one statement across investments in various mutual funds, they said adding: “We have already initiated work on conceptualisation and scope of services. As huge economies will flow in, it will reduce the efforts of investors and distributors.”
Efforts are two pronged. One is those who have demat account (equity investors) can get their MF units in demat form for which consolidated information is available with National Securities Depository Limited (NSDL) and Central Depository Services (India) Limtied (CDSL). Another is on clubbing RTA data to provide consolidated statement.
Though resources are available for aggregating data, there will be no sharing of investor information between NSDL and RTAs. Any data aggregation will be based on PAN among other things, a source said. If investors are holding MF units in demat form with NSDL or CSDL and also some units through RTAs, they will get two separate consolidated statements – one from NSDL and other consolidated statement from four RTAs.
If they (investors) are also holding stocks, then same demat statement will reflect their stock and fund investments together. If investors information are with RTAs, then they will get single account statement across RTAs. Plans are to eventually club this data across all RTAs – as against current 4 RTAs – and send single consolidated statement to MF investors. The RTAs are awaiting Sebi’s nod for implementing this new system, which is expected to happen in the next 3-6 months.
Sebi Executive Director K N Vaidyanathan recently shared this plan with the participants stating: “The third area where regulator is focussed was for those who come directly through asset management companies or one of the investors services like Karvy or CAMS. We want to make sure that if investors so choose they should get single view.
We will put in place a mechanism to that effect.”
(source : http://www.deccanherald.com)
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