Less Expensive

Sebi has decided to scrap initial issue expenses for close-ended mutual funds

The Chairman of the Securities and Exchange Board of India (SEBI), M Damodaran, saw the completion of his tenure in February 2008. But before he said goodbye, he ensured that mutual fund investors would remember him fondly. Though the distributor community would certainly not.

Early January, 2008, SEBI waived off the entry load for mutual fund investors who invest directly in schemes from fund houses. Investors now have the option of bypassing the distributors and not paying any entry load. This was certainly bad news for fund distributors.

By the end of January, market regulator SEBI decided to scrap the initial issue expenses for close-ended funds. SEBI chairman, M Damodaran, explained the move as one that will “make close-ended mutual fund schemes less expensive for retail investors”.

Way back in April 2006, SEBI had prohibited mutual fund houses from charging and amortising issue expenses on open-ended schemes. This move was particularly beneficial to the long term investor in an open-ended fund, who would have to bear the cost of earlier redemptions by other unit holders. But the regulation was not of much help as fund houses rushed to launch close-ended schemes. That's because the same ruling stated that fund houses could continue to charge and amortise the initial issue expenses of the close-ended schemes for the entire period they remained closed - up to three years. But they could not charge an entry load like the open ended schemes.

After that, fund houses switched to launching more close-ended schemes. The mutual fund houses were allowed to amortise issue expenses of up to 6 per cent of the amount collected when a new scheme was launched. So if a scheme raised Rs 1,000 crore it was allowed to recover up to Rs 60 crore as initial issue expenses from the investors investing in the scheme. These expenses would include all costs related to sales, marketing, advertising, printing, mailing and commissions paid to agents and brokers. In other words, expenses that had to be incurred in order to make an investor aware of a scheme and get him to invest in it.

Distributors not only got commissions from the entry load but also from the initial issue expenses. Many distributors would pass on part of this commission as kickback to high networth investors who would put in big amounts in a new fund offering (NFO). Now that mutual funds cannot charge the investor for initial issue expenses, there is no way it can pay its distributors such high commissions.

Fund houses will still launch closed-ended schemes, if the nature of the scheme warrants such a structure. But no longer will it be a monetary move. As they are no longer in a position to pass on the initial issue expenses to the investors, there remains very little incentive for them to launch such schemes.

(by value research)

Invest in Existing Schemes

I want to invest one lakh in Sbi Tax Advantage Nfo and Magnum Tax Gain for tax benefits and good returns. Please advice.
-Dipak, Almora
SBI Tax Advantage is a 10 year closed ended new fund offering. It is advisable to invest in an on going tax saving scheme like Magnum Tax Gain which has a good performance history. Some other tax saving funds that you can opt for are Birla Sun Life Tax Relief, Sundaram Tax Saver or HDFC Tax Saver.

Is it worth investing in Principal Large Cap now?
-Ravi Kanetkar
Principal Large cap is an unrated equity diversified funds. The fund has been an average performer. You should look to invest in some well rated equity diversified fund with a long proven track record.

Is it advisable to invest Rs 500 each in Reliance Vision & Reliance Diversified Power sector fund as SIP? Please advice.
-Raj
This is a good combination but you should note that Reliance Vision is a diversified equity fund whereas Reliance Diversified Power is a sectoral fund (hence riskier). Choose a sectoral fund only if you have a high risk appetite.

I want to invest around Rs 40,000 in a good fund for a period of 1-2 years. Tax rebate is required.
-Rohit
If you wish to avail of the tax benefit, invest in tax saving mutual funds. Take note that these funds would have a lock in period of three years. Some good tax saving funds are Magnum Tax Gain, Birla Sun Life Tax Relief, Sundaram Tax Saver and HDFC Tax Saver.

I am investing in ICICI Prudential Life Insurance (ULIP), in maximiser (Growth) fund. My policy is almost 3 years old. Should I continue this policy for few years (i.e. 2-3 years)?
-Ajay Jagtap
ULIPs have high associated costs and are complex products. After three years you can exit from this policy and invest in some well rated equity diversified mutual funds in a phased manner via SIP.

I want to invest Rs 1 lakh in mutual funds. Please tell me top 3 funds.
-Neeraj
You can choose any three from Reliance Vision, HDFC Equity, Birla Frontline Equity or Sundaram Select Focus. These funds are well rated and have been consistent in their performance over years.

I want to invest Rs 10,000 per month for 10-15 years .My age is 43 yrs. Kindly suggest.
-Gautam Choudhury
Opt for two funds for SIP of Rs 5000 each. Well rated funds like DSP ML Top 100, Reliance Vision, HDFC Equity, or Sundaram Select Focus can be good picks.

What is a Sip?
-Abhey
SIP (systematic investment plan) is a hassle free way of investing a fixed amount in a mutual fund scheme of your choice every month/quarter. This helps you automatically average the cost of your purchase over the long term. It is the most advisable way of investing in equity mutual funds.

Please recommend funds to invest. My age is 63.
You should create a balanced portfolio with 60 per cent equity and 40 per cent debt (assuming a medium risk level). Invest in equity diversified funds like Reliance Vision, HDFC Equity or Sundaram Select Focus via SIP. For debt, choose well rated funds like ICICI Pru Long Term or Kotak Flexi Debt.


(by value research)

Profit Booking

I have two questions. If I sell my equity fund units before the completion of a year, is short term capital gains (STCG) tax deducted at source before the proceeds are credited to my bank account? If a mutual fund gives a return of 60 per cent within a year, is it wise to book profits?
-Dr. Saxena

The rate of STCG tax as per current tax norms is 10 per cent. Whether you redeem your mutual fund units or sell your shares within a year of buying, you need to pay this tax on the gain. You need to specify the short term gain in the income tax return that you file and pay the tax accordingly. The broker or the mutual fund company does not deduct this tax at source. Whether it is a good idea to book profits occasionally and pay STCG tax is a personal call as that depends on your financial status, goals and risk appetite. You need to assess the time horizon you have and for how long you would like your money to stay invested. Historically it has been proved that equity investments reap best results when one invests for the long term. Yet again, how each individual

(by value research)

Reliance NRI Fund

Can you tell me about the performance of Reliance NRI Fund? How is the 'beta' factor of the fund, considering the current overheated equity market? I understand that only NRIs are eligible to apply for this fund. Does this fetch any unique benefit to the NRI applicant?
-Amlanjyoti Basu

Reliance NRI Fund is a 5-star rated, diversified equity offering with assets under management of around Rs 190 crore (as on December 31, 2007). The fund has done exceptionally well till now and has delivered an annual return of 55.35 per cent in the past three years (as on January 10, 2008).

Only NRIs are eligible to purchase units of this fund and resident Indians are prohibited from doing so. But there is no special benefit for NRIs. Most other mutual fund schemes are open for purchase by NRIs on a repatriable and non-repatriable basis.

Beta is a measure of the fund's sensitivity to market movements. It is calculated based on the trailing three-year monthly returns of the fund and the benchmark and hence can change over time. Though the beta of the fund is 0.78 for its benchmark, it may not be useful gauge to evaluate a fund. Beta is very relevant for a stock but not so for a fund. A fund's portfolio keeps changing in complexion and character making beta less relevant.

(by valueresearch)

50% Dividend under DSPML T.I.G.E.R. Fund

DSPML Mutual Fund has announced a dividend of 50% (i.e. Rs 5.00 per unit on the face value of Rs 10) under the dividend option of DSPML T.I.G.E.R. Fund. The record date for the same has been fixed as February 22, 2008.

This would be the fourth dividend being declared by the fund so far. Earlier, in March 2007 the fund paid 45% dividend.

(by valueresearch)