Mutual Funds

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Each MF can now invest up to $300 mn overseas

Investment norms for mutual funds (MFs) have been further liberalised. The Securities and Exchange Board of India (SEBI) on Thursday raised the limit for overseas investment for each mutual fund from $200 million to $300 million.

Further, to create a level playing field between new and existing players, the sub-ceiling linked to net assets of a mutual fund house has been dispensed with. Also, the requirement of 10 years of experience of investing in foreign securities for being eligible to invest in overseas Exchange Traded Funds (ETFs) has been dispensed with. Now, there is only an overall limit of $5 billion for the overseas investments.

Investors can expect more product offerings from the mutual fund stable as the gamut of investments that MFs could invest in has been widened. The new categories of overseas instruments that has been added include ADRs/GDRs issued by foreign companies, IPO and FPOs for listing at recognised stock exchanges overseas, derivatives for purpose of hedging and portfolio balancing.

Investors might even get a chance to indirectly invest in real estate abroad by investing in units that have mandates to invest in Real Estate Investment Trusts (REITs) listed in recognised stock exchanges. Today, countries like Hong Kong, Japan, US, Australia, Singapore offer REITs. Among the other new categories of investments are foreign debt securities, short term deposits, repos, government securities, money market instruments.

“Although the limit of $4 billion has not yet been used by funds, the latest announcement is a good step,” says Mukul Gupta, CEO of Birla Sun Life AMC. “It will encourage more Indians to invest abroad and participate in the global equities scenario besides get the benefits of diversification,” he said.
 
MF overseas investment cap raised to $300 mn

The capital market regulator SEBI has raised the cap on overseas investments by individual mutual fund houses to $300 million, following the Reserve Bank's liberalisation of overseas investment norms to rein in the rising rupee.

Earlier, the limit was $200 million or 8-10 per cent of the total assets under management, whichever was lower.

The RBI's new measures include higher ceiling of money parked abroad by all MFs to $5 billion from $4 billion earlier.

"Within the overall limit of five billion dollars, mutual funds can make overseas investments subject to a maximum of $300 million per mutual fund," SEBI said in a statement here on Wednesday.

The capital market regulator also said the overall cap of $1 billion for investment in overseas exchange traded funds (ETFs) that invest in securities is subject to a maximum of $50 million per mutual fund.

Under the cap of 300 million dollars for individual mutual funds, MFs can invest in American Depository Receipts and Global Depository Receipts by Indian or foreign companies, initial and follow on public offerings for listing on stock exchanges overseas, besides other instruments.

Earlier in the day, a Finance Ministry official said the limit on overseas investment by individual MF would be lifted and SEBI may make announcement to this effect in two to three days.

Source:The Economic Times
 
'MF industry to grow at 30% to Rs 9.50 lakh crore by 2010'

The mutual fund sector would grow at compound annual rate of 30 per cent in next three years to become Rs 9,50,000 crore industry, industry body Assocham predicted from a survey on its growth.

The industry has grown at 25 per cent between 1999 and 2007 to stand at Rs 4,67,000 crore and the trend would improve as MFs are becoming a preferred choice for both rural and urban retail investors. This would contribute to the growth of the MF industry, the chamber said in its survey on 'MF Growth Patterns'.

The share of privately managed MF players in the total MF industry is expected to fall to 70 per cent from the current estimation of 82 per cent. The reduction would result from the alliance of the private sector with overseas partners, it said.

The public sector share in the industry would go up nearly 20 per cent from 10 per cent now. Similarly, the share of joint sector would also rise to about 10 per cent from 8 per cent currently.

The chamber said the country's MF industry is 100 times behind that of the US where the size of the industry is at staggering $12 trillion.

In India, MF industry manages nearly 700 schemes against 12,000 schemes handled by the US MF industry.

Assocham said market penetration in MF industry would more than double by 2010 from about 4 per cent now. This rate is, however, 49 per cent in the US and 20 per cent in the UK. MFs in India are now focussed on enhancing their reach to cities other than the metros, it said.

Source: The Economic Times
 
17K indicates strong economy, investor confidence: MF industry

With the BSE benchmark index Sensex scaling yet another milestone of 17,000 today, the mutual fund industry sees it as an indication of the strength of the Indian economy and growing investor's confidence for the stock market.

The BSE benchmark index Sensex today covered another 1,000-point journey in the shortest span of six trading sessions, crossing the 17,000 mark in the early trade today on sustained buying by funds.

The 30-share Bombay Stock Exchange index gained over 174 point to touch an intra-day high of 17,073.07 from yesterday's close of 16,899.54 points.

"Though the milestone as such is not a great concern for mutual funds as we investment in stocks for the long term perspective but the number shows that the country's growth story is getting recognised and is a good indication of the strength of the economy," Association of Mutual Funds of India Chairman AP Kurien said.

Mutual funds had been major buyers in th equities market in August when the foreign institutional investors had turned net seller on concerns of the US subprime mortage crisis. Mutual Funds had picked up Rs 4,093.90 crore in the month of August.

Besides, Mutual funds have net buyers of equities worth Rs 97 crore in September so far.

"Its celebration time for investors, good times are continuing for mutual fund investors," Mutual Fund tracking firm Value Research Online CEO Dhirendra Kumar said.

When asked about the rupee appreciation effect on certain sectors like information technology and other export related segments, Kumar said, the current rally in the market is stock-selective and is not broad-based as the previous rallies had been.

"The milestone also portrays the growing confidence of the investors in Indian markets which includes huge inflows from the foreign institutional investors," Kurien added.

The total Assets under Management (AUM) of the 32 fund houses for August stood at Rs 4,67,623.44 crore, according to data from Association of Mutual Funds in India.

Reliance MF remains the country's largest fund house with its AUM of Rs 67,597.65 crore in August followed by ICICI Prudential MF with Rs 50,611.89 crore.

Source: The Economic Times
 
End of entry load to benefit small MF investors

The proposal of SEBI to remove entry load (an initial charge on the fund) on direct MF investments is good news for retail investors. This facility would be available for investors who apply directly to the asset management company (AMC) either through the Internet or by visiting the premises of the fund house without involving the services of agents.

This move is progressive as entry loads only reduce overall returns earned by mutual fund investors. The entry loads — which are charged at the time of investment — can range anywhere from 1%-2.25% of the investment amount depending upon the category of the scheme (See Table). So, for instance, an investor seeking to invest Rs 10,000 in an equity fund actually ends up paying Rs 225 as entry load, while the rest is invested.

Says Gaurav Mashruwala, a certified financial planner: “An investor who is equipped to make his/her own decision in choosing schemes and has time to visit mutual fund office directly will save a substantial amount. Eventually, it is a forward step towards free pricing, where the investor and the distributor agree on the load structure”.

Most mutual fund investors of the country today rely on the advice rendered by their agents to pick and choose the schemes to invest in. Those who are better off use the services of their financial advisors. However, the ones who can truly understand the industry and make their own decisions are only a handful. And it is probably this third category of investors who will benefit the most from this new proposal.

The no-front-load model was reportedly introduced for the first time by Vanguard, which decided to go ahead and sell mutual funds without the service of agents. In India, Quantum MF is following a similar model of selling mutual fund schemes. The fund accepts investments through the Internet and does not charge a front-end load to the investor.

Says Quantum MF chief investment officer Devendra Nevgi: “This is a welcome proposal and will benefit the investor if and when it comes through. Right now, we need more investment education so that more investors can actually take the decision of their investment in their hands than depend on other advisors and agents.”

Today, actively-managed funds charge loads on equity-oriented mutual fund schemes. Many mutual funds are ready to waive off the loads if investors are ready to invest more than Rs 10 lakh at a go. Thus, higher the investment, lower the fees.

Mr Nevgi sees a problem in this. Ideally, small investors invest around Rs 10,000 to 20,000 in mutual funds. But since their investments are small, they get charged the highest loads, he feels. If front end loads are removed, the investor will benefit in this regard as well.

Source: The Economic Times
 
After SIP, smart investors can take a dip in STPs

Over the past one month, equity investors across the globe have seen their fortune swing back and forth. Concerns over subprime lending, yen-carry trade and the looming spectre of a US slowdown not only battered global equity markets , but also raised doubts among several retail investors on the course of the markets in the short- to- medium-term .

In India too, investors have had a tough time given the kind of gyrations the markets have been witnessing.

The Sensex has seen several major corrections since it touched its life-high of 15,868 on July 24 this year, and after dropping to 14,000-levels it bounced back to 15,600-levels.

A retail investor is likely to remain confused as to whether it is the right time to enter the markets? Should one expect some more corrections? Unfortunately, no one can predict the course of the market.

For a retail investor, timing the entry or exit is a difficult act to follow. The best way to survive a volatile market is to keep investing in equities and stay put with a long-term horizon.

TAKING A SIP


For mutual fund investors, the systematic investment plans (SIPs) are the best method to stay invested without bothering too much about the market ups and downs. Through regular investing, one gets to invest in the highs as well as the lows. This helps in averaging out the market volatility. The investor keeps investing a certain amount (as small as Rs 50) at regular intervals.

As the market soars, even the value of the investment scales new highs. And when the market tanks, the value of the mutual fund units —the net asset value (NAV) — too comes down. This means more units for the same SIP amount.

Apart from inculcating the discipline to invest regularly, the fact that the investor has to stay invested for at least two years in a fund to free his/her investment in oneyear SIP from capital gains tax, gives enough time for the money to stay put in the market and appreciate.

SYSTEMATIC TRANSFER PLAN


The SIP is the best route to invest with regular cash flows. But what if someone has a huge corpus and plans to invest in equities and at the same time is worried about the prevailing uncertainty in the market? Still, the systematic investment route remains the best vehicle to move ahead.

The gains could be enhanced by opting for a systematic transfer plan (STP) along with the SIP. STP allows one to make periodic transfers from one fund into another.

In an SIP, an investor typically parks the money in a bank savings account and a certain amount is transferred at a regular interval from the savings account to the fund house for buying into a specified equity fund.

In the case of an STP, the lumpsum is invested in a liquid or a floating short-term plan and is transferred at regular interval to a specified equity fund. For example, one has Rs 60,000 to invest in equities, he can put the entire amount in a liquid plan and go for a monthly SIP of Rs 5,000 in an equity plan through a systematic transfer. However, the limitation of this investment process is its inability to invest in different fund houses.

So, if you have an equity fund to invest through the SIP mode, you would have to choose the liquid fund of the same fund house. But with little difference in returns among different liquid funds and its almost riskfree status, STP is still a better bet.

While an investor earns only around 3.5% pa interest on the amount parked in the savings account, a liquid fund gives a higher return of 5-7 % pa on the corpus with the same level of liquidity . As these funds invest in safe and liquid debt instruments, the level of risk remains very low.

SOURCE:THE ECONOMIC TIMES
 
What is a mutual fund

A vehicle for investing in stocks and bonds
A mutual fund is not an alternative investment option to stocks and bonds, rather it pools the money of several investors and invests this in stocks, bonds, money market instruments and other types of securities.

Buying a mutual fund is like buying a small slice of a big pizza. The owner of a mutual fund unit gets a proportional share of the fund’s gains, losses, income and expenses.

Each mutual fund has a specific stated objective

The fund’s objective is laid out in the fund's prospectus, which is the legal document that contains information about the fund, its history, its officers and its performance.

Some popular objectives of a mutual fund are -

Fund Objective What the fund will invest in
Equity (Growth)- Only in stocks
Debt (Income)- Only in fixed-income securities
Money Market (including Gilt)- In short-term money market instruments (including government securities)
Balanced- Partly in stocks and partly in fixed-income securities,
in order to maintain a 'balance' in returns and risk

Managed by an Asset Management Company (AMC)

The company that puts together a mutual fund is called an AMC. An AMC may have several mutual fund schemes with similar or varied investment objectives.

The AMC hires a professional money manager, who buys and sells securities in line with the fund's stated objective.
All AMCs Regulated by SEBI, Funds governed by Board of Directors
The Securities and Exchange Board of India (SEBI) mutual fund regulations require that the fund’s objectives are clearly spelt out in the prospectus.

In addition, every mutual fund has a board of directors that is supposed to represent the shareholders' interests, rather than the AMC’s.

Source:Moneycontrol.com
 
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Net Asset Value or NAV

NAV is the total asset value (net of expenses) per unit of the fund and is calculated by the AMC at the end of every business day.

How is NAV calculated?

The value of all the securities in the portfolio in calculated daily. From this, all expenses are deducted and the resultant value divided by the number of units in the fund is the fund’s NAV.

Expense Ratio

AMCs charge an annual fee, or expense ratio that covers administrative expenses, salaries, advertising expenses, brokerage fee, etc. A 1.5% expense ratio means the AMC charges Rs1.50 for every Rs100 in assets under management.

A fund's expense ratio is typically to the size of the funds under management and not to the returns earned. Normally, the costs of running a fund grow slower than the growth in the fund size - so, the more assets in the fund, the lower should be its expense ratio.

Load

Some AMCs have sales charges, or loads, on their funds (entry load and/or exit load) to compensate for distribution costs. Funds that can be purchased without a sales charge are called no-load funds.

Open- and Close-Ended Funds

1) Open-ended Funds
At any time during the scheme period, investors can enter and exit the fund scheme (by buying/ selling fund units) at its NAV (net of any load charge). Increasingly, AMCs are issuing mostly open-ended funds.

2) Close-Ended Funds
Redemption can take place only after the period of the scheme is over. However, close-ended funds are listed on the stock exchanges and investors can buy/ sell units in the secondary market (there is no load).
Important documents
Two key documents that highlight the fund's strategy and performance are the prospectus (legal document) and the shareholder reports (normally quarterly).
 
The right approach to Mutual Fund Investing

STRATEGIES

Systematic Investment Plan (SIP)
For someone who wishes to build up capital over the longer term and is not familiar with equity markets, investing regularly through a SIP in an equity fund is one strategy that can ensure success to a large extent. What SIP really means is that you invest a fixed sum every month. When you invest a fixed amount, you buy fewer units when the share prices are high, and more units when the share prices are low. Besides, you take advantage of the fact that over a period of time stock markets generally go up, so your average cost price tends to fall below the average NAV. This “averaging” ensures that you buy at different levels, not just the top. The key is to continue investing irrespective of whether the market falls or rises.

Systematic Transfer Plan (STP)
A STP would be an ideal option if you have the lump sum amount and still want to benefit from systematic investing. Under STP, one can invest in say a Floating rate fund and give instructions to transfer a fixed sum, at a fixed interval, to an equity scheme of the same mutual fund. Considering that these debt oriented funds have the potential to give higher returns compared to a bank account, a STP offers dual benefits of systematic investing as well as improving overall returns.

Dividend, Growth or Reinvestment
Equity funds offer you three options i.e. dividend payout, dividend reinvestment and growth option. Choosing an option is as important as selecting a good fund. Therefore, consider various aspects relating to tax, rebalancing and time horizon before deciding one.

TRAPS TO AVOID

IPO Blur
The common perception is that by investing in an IPO at par value, one improves one’s chances of getting better returns. A new investor will do well to remember that the growth in the NAV depends on the quality of the portfolio, its exposure to various industries and segments of the market i.e. large cap, mid-cap and small cap as well as the strategy of the fund manager. Therefore, the logic that investing in an IPO guarantees success is completely unfounded. The right way would be to begin with existing schemes with a proven track record and then look for new schemes that have some compelling features.

Avoid Market Timing
Market timing – a strategy in which one tries to invest before the market goes up and sell before it declines remains one of the most tempting. Even if one is successful occasionally, the risk is not worth taking the trouble. It helps to know that invariably the rallies in the stock market occur in spurts.

Source:Moneycontrol.com
By: Hemant Rustagi CEO, Wiseinvest Advisors
 
10 must-reads in an MF offer document

You would have come across this line in all Mutual Fund advertisements, “Mutual Fund investments are subject to market risks. Please read the offer document carefully before investing.” It’s an open secret that this 80 to 100 page bulky document is not simple to read and the legal information it contains is not easy to understand for most investors.



However, Sebi has made the investor’s job easier by evolving an abridged form, the Key Information Memorandum. Also, Sebi has served the cause of investors by stipulating standard sections and standard disclosures in all Offer Documents. Hence, the Offer Document can be the friend and guide of an enlightened investor. Here is a guide to what an Offer Document is, why it is important and what are the 10 Most Important Things to Read in an Offer Document for investors.



What is a Mutual Fund Offer Document?


It is a prospectus that details the investment objectives and strategies of a particular fund or group of funds, as well as the finer points of the fund's past performance, managers and financial information. You can obtain these documents from fund companies directly, through mail, e-mail or phone. You can also get them from a financial planner or advisor. All fund companies also provide copies of their ODs on their websites.



10 Most Important Things to Read in an Offer Document:


Date of issue
First, verify that you have received an up-to-date edition of the OD. An OD must be updated at least annually.



Minimum investments
Mutual funds differ both in the minimum initial investment required, and the minimum for subsequent investments. For example, equity funds may stipulate Rs 5000 while Institutional Premium Liquid Plans may stipulate Rs 10 crore as the minimum balance. (Also read - How to reduce risk while investing?)



Investment objectives
The goal of each fund should be clearly defined — from income, to long -term capital appreciation. The investors need to be sure the fund's objective matches their objective.



Investment policies
An OD will outline the general strategies the fund managers will implement. You'll learn what types of investments will be included, such as government bonds or common stock. The prospectus may also include information on minimum bond ratings and types of companies considered appropriate for a fund. Be sure to consider whether the fund offers adequate diversification.



Risk factors
Every investment involves some level of risk. In an OD, investors will find descriptions of the risks associated with investments in the fund. These help investors to refer to their own objectives and decide if the risk associated with the fund's investments matches their own risk appetite and tolerance. Since investors have varying degrees of risk tolerance, understanding the various types of risks in this section( eg credit risk, market risk, interest-rate risk etc.) is crucial. Investors must raw be familiar with what distinguishes the different kinds of risk, why they are associated with particular funds, and how they fit into the balance of risk in their overall portfolio. For example, a Post Office Monthly income plan assures an 8% monthly income payment for its 6 years tenure. A Mutual Fund MIP invests in a portfolio of 80% to 90% bonds and gilts and 10% to 20% of equities, to generate capital appreciation, which is passed on to customers as monthly income, subject to availability of distributable surplus. In 2004, a lot of mutual fund customers underestimated this market risk and were caught by surprise when the MIPs gave low/negative returns. (Also read - Fear interest rate risk? Here is the solution)



Past Performance data
ODs contain selected per-share data, including net asset value and total return for different time periods since the fund's inception. Performance data listed in an OD are based on standard formulas established by Sebi and enable investors to make comparisons with other funds. Investors should keep in mind the common disclaimer, "past performance is not an indication of future performance". They must read the historical performance of the fund critically, looking at both the long and short-term performance. When evaluating performance, investors must look at the track record of a fund over a time period that matches their own investment goals.



They must check that the benchmark chosen by the fund to compare its relative performance is appropriate. Sebi is doing a fine job of ensuring this as well. In addition, investors should keep in mind that many of the returns presented in historical data don't account for tax. They must look at any fine print in these sections, as they should say whether or not taxes have been taken into account.



Fees and expenses
“Mutual funds have two goals: to make money for themselves and for you, usually in that order.”- Quote from Fool.com. Entry loads, exit loads, switching charges, annual recurring expenses, management fees, investor servicing costs…these all add up over time. The OD lists the limits on these fees and also shows the impact these have had on the fund investment historically. (Also read - How to build your MF portfolio?)



Key Personnel esp Fund Managers
This section details the education and work experience of the key management of the fund company, including the CEO and the Fund Managers. Investors get an idea of the pedigree and vintage of the management team. For example, investors need to watch out for the fund that has been in operation significantly longer than the fund manager has been managing it. The performance of such a fund can be credited not to the present manager, but to the previous ones. If the current manager has been managing the fund for only a short period of time, investors need to look into his or her past performance with other funds with similar investment goals and strategies. Only then can they get a better gauge of his or her talent and investment style.



Tax benefits information
Mutual funds enjoy significant tax benefits under Sec 23 D and Sec 115 .For example, Equity funds enjoy nil long terms capital gains and nil dividend distribution tax benefits. A close reading of the tax benefits available to the fund investors will enable them to plan their taxes better and to enhance their post tax returns.



Investor services
Shareholders may have access to certain services, such as automatic reinvestment of dividends and systematic investment/withdrawal plans. This section of the OD, usually near the back of the publication, will describe these services and how one can take advantage of them.



Conclusion


After reading the sections of the OD outlined above, investors will have a good idea of how the fund functions and what risks it may pose. Most importantly, they will be able to determine if it is right for their portfolio. If investors need more information beyond what the prospectus provides, they can consult the fund's annual report, which is available directly from the fund company or through a financial planner.



This investment of time and effort would prove very beneficial to investors.




- Ajay Bagga

The writer is CEO, Lotus India AMC.

Source:Moneycontrol.com
 
HSBC offers SIP with health cover

HSBC Asset management has launched a new facility where an investor who opts for a systematic investment plan (SIP) in one of its equity schemes will get a critical illness cover of up to Rs 10 lakh. Illnesses that qualify for the cover are cancer, stroke, bypass surgery, accidental death and accidental permanent disability. There is a catch though.

The cover that can be claimed is proportional to the SIP amount paid every month. For instance, if you invest Rs 2,000 per month, you will get an insurance cover of up to Rs 72,000 over three years as that’s the minimum period you have to stay invested to claim insurance. How much Rs 72,000 will help one cure ones ‘critical illnesses’ is anybody’s guess.

Besides, the scheme is only open to investors between 20 and 50 years of age, not an age particularly prone to all these critical illnesses. According to a fund official, if an investor goes for mediclaim (pure insurance), he will have to pay a much higher premium for a similar cover against a SIP that will give him the advantage of group insurance. This scheme may be more suitable for people nearing 50 years of age, as according to the fund house it will not ask for any medical examination before enrolling customers.

Source:Economic Times
 
Sahara to launch retail, entertainment fund

Sahara Mutual Fund is launching a close-ended equity fund that will invest in retailing, entertainment and media, auto and auto ancillaries and logistics sector, with the Nifty as the benchmark. According to a fund official, these sectors are a good way to capitalise on strong growth potential that may emerge as the country moves from being a developing to a developed market.

Although he claimed that there are no funds in the similar space, a fund from the Birla stable and a couple of UTI funds do operate in the similar ‘emerging India’ theme. These funds have been doing pretty well over the long term. Whether Sahara will live up to its illustrious counterparts remains to be seen.

Source:Economictimes.com
 
Equity fund investors use bull run to book profits

Equity funds saw a net outflow of Rs 708 crore in September, the highest since June last year, as investors used a 12.88 per cent rise in the benchmark BSE index as opportunity to book profits.

These funds saw redemptions worth Rs 7,978 crore as compared to collection of Rs 7,198 crore during the month, data from the Association of Mutual Funds in India (AMFI) showed.

"Mutual funds have been net sellers in equities during month of September, indictaing that some investors may have booked profits at these higher levels," Dhruva Raj Chatterji, research analyst with global fund tracker Lipper, said.

Mutual funds sold net Rs 764 crore worth of stocks in September, he said, adding a lower number of new fund offers also lead to depressed collections by equity funds.

New equity funds contributed only about Rs 2,282 crore to the total inflow in September as against Rs 3,943 crore during the previous month, AMFI data showed.

In August, which had seen India's benchmark index fall 1.49 per cent, these funds had collected a net Rs 7,134 crore to register their highest monthly inflow since May last year.
Source:economictimes.com
 
SBI mutual launches capital protection fund

SBI Funds Management Pvt Ltd on Monday launched a five-year close-end fund that would attempt to protect investors' capital by investing majority of the assets in high quality debt instruments.

SBI Capital Protection Oriented Fund Series-1, open for subscription till November 23, would invest at least 73 per cent of the assets in debt securities and money market instruments and the rest in equities, the fund house said.

India's existing capital protection-oriented funds have risen about 6 percent on an average in three-month to October 3, data from global fund tracker Lipper showed.

SBI mutual fund managed assets worth about 237 billion rupees at the end of September, data from the Association of Mutual Funds in India showed.
SOURCE:ECONOMICTIMES.COM
 
A 10-step guide to evaluating mutual funds

Mutual funds are a convenient way to invest in the stock markets (as also debt and money markets). Indian investors are already beginning to realise this. That's the good news; the bad news is that a lot of investors seem to think that any mutual fund will do the 'trick'. The trick over here is to clock higher returns any which way. While generating an above-average return is every fund manager's mantra, it is not achieved that easily and when it is achieved it is not necessarily done in the right manner.

Which brings us to the question - what must investors do to ensure that they are invested in the right fund? With so many funds in the industry and many more being launched every month, this is not an easy task. Multiplicity (as also duplicity) of mutual funds apart, there are many elements within a fund that an investor needs to consider carefully before short-listing his investment options. To facilitate the decision-making process, we present a 10-step guide to investing in mutual funds.

1. Fund sponsor's integrity
In this age of financial irregularities and misconduct, it is a tough call to come across fund houses that haven't been embroiled in some controversy or the other. While major financial scams involving mutual funds are yet to make their presence felt in a India, it is quite common in developed markets like the US. That is why it is important to go for a mutual fund sponsor with an impeccable track record in terms of compliance and investor welfare. Equally important is requisite experience with a well-established track record in fund/asset management.

2. A competent fund management team
The team managing the fund should have considerable experience in dealing with market ups and downs. It should be competent enough to take the right investment decisions based on experience under varying market conditions. More importantly, these investment decisions must be in adherence to the investment mandate (so mid cap funds must be invested in mid caps and large cap funds must be invested in large caps and funds that must be fully invested in equities at all times must not go into cash).

At the end of the day, it is the fund management team's responsibility to deliver performance over the long-term across market cycles vis-a-vis peers and the benchmark index.

3. Well-defined investment philosophy
For many fund houses, the investment philosophy revolves around whatever goes with the Chief Investment Officer (CIO). In other words, the CIO defines the investment philosophy of the fund house. Actually it should be the other way round, the fund house must have a well-defined investment process that the CIO must abide by at all times. Sure he can introduce an element of individualism based on his experience, but this cannot override the fund house's philosophy. This will ensure that the investor's interests are aligned to the fund house and not a maverick fund manager/CIO.

Another important aspect of the fund house philosophy is related to asset mobilisation. How is the fund house accumulating new assets (either from existing investors or fresh investors)? Is it doing this by launching senseless NFOs (new fund offers) or is it concentrating on improving performance of its existing funds and drawing investors over there? If it's the former (i.e. the NFO route), then the AMC has got it wrong in our view; getting investors to invest in existing funds by establishing performance over the long-term (at 3 years for equity funds) is the right way to accumulate assets. As and when existing funds have established their performance over 3-5 years, the next NFO can be launched.

4. Get the fund nature right
A mutual fund can be classified in two categories i.e. open-ended funds or close-ended depending on whether new investors will or will not be allowed to invest.

a) Open-ended Fund
An open-ended fund never closes its doors to investors (unless the fund house decides to do so under exceptional circumstances like for instance, when the fund's net asset base grows too large to be managed effectively). On the same lines, existing investors can exit from an open-ended fund whenever they please (the only exception to this is the tax-saving fund or the equity-linked saving scheme - ELSS as it is known). It is evident that liquidity is the key advantage of investing in open-ended funds.

b) Close-ended Fund
A close-ended fund on the other hand opens the door to investors only during the NFO period. After that, it is closed for further investment over a pre-determined tenure (usually 3 or 5 years). Upon maturity of the tenure, the fund may or may not convert into an open-ended fund.

5. Get the fund category right
Funds can be classified into different categories based on where they invest your money.

a) Equity funds
These funds invest in the stock markets and are suitable for investors with a high risk appetite. Over the short-term, investors could lose considerable money depending on the performance of stock markets. Over the long-term (at least 10 years) equities are known to generate above-average returns (particularly in the Indian context) vis-a-vis other assets like bonds, gold and real estate.

b) Debt funds
These funds invest in debt markets (corporate bonds, government securities, money market instruments). More than capital appreciation, debt/debt funds are a good way to safeguard your assets over the long-term and to diversify across asset classes.

c) Balanced funds
Balanced funds (or hybrid funds) invest in equity and debt markets. However, to retain their equity-oriented nature (from a tax perspective) balanced funds are required to invest a minimum of 65% of net assets in equities. In our view, with nearly 2/3rd of assets in equities, balanced funds are virtually equity funds in disguise. There was a time when balanced funds needed to maintain just 51% of assets in equities, then was the time they were really 'balanced'.

Another mutual fund offering in this category is the monthly income plan (MIP). MIPs invest mainly in debt markets (usually 75%-80% of assets); the balance is invested in equity markets. For investors primarily concerned about capital preservation (although over the short-term MIPs can erode capital) with the secondary objective to clock capital appreciation, MIPs are worth a look.

6. Fees and charges (recurring)
Asset management companies (AMCs) charge investors a fee for providing fund management expertise. Like all other services, fund management costs money; there are salaries to be paid to fund managers and their team of investment analysts, then there are fees to be paid to the custodian and the registrar among other service providers. These expenses (as indicated by the Expense Ratio) are incurred by the fund on a recurring basis (annually). Such expenses are not to be considered lightly, higher expenses erode returns and over the long-term can make a lot of difference to the fund's performance.

7. The load (one-time)
In addition to the recurring expenses, most funds also levy a one-time upfront charge at the time of investment. This is known as the entry load. To understand how this works take an investor who invests in a mutual fund with an NAV (net asset value) of Rs.10.00. If the entry load is 2% the investor will have to pay Rs.10.20 to buy a single unit. The additional payment of Rs 0.20 (per unit) goes towards meeting the mutual fund agent's commission. Some funds also have a practice of imposing an exit load. In such a scenario the investor recovers his money after accounting for the exit load. For instance, if the investor sells his unit at an NAV of Rs 20.00 and incurs a 2% exit load, he will receive Rs 19.60.
8. The tax implications
The mutual fund tax structure is certainly not meant for lay investors. Even accomplished tax experts antagonise over it and wish that the finance minister simplifies it, rather than complicating it in every budget.

Put simply, there are several dichotomies in the mutual fund tax structure.

i) Investing in equity and debt funds have different tax implications.
ii) Within debt funds, liquid funds and other debt funds have different tax implications.
iii) Within debt funds, investments by individuals/Hindu Undivided Families (HUFs) and corporates have varying tax implications.
iv) Within debt funds, investments made from a long-term and a short-term perspective have varying tax implications.

As you would have figured by now, investing in mutual funds can be a 'taxing' proposition.

9. Evaluate the fund's portfolio
Service levels of fund houses vary. Some fund houses regularly update investors on details like stock allocation, sectoral allocation, asset allocation, Portfolio Turnover Ratio and Expense Ratio among other details. Most fund houses provide a lot of these details at monthly/quarterly frequency through mutual fund factsheets. However, this information is not quite as standardised as it should be, so the investor has to be careful while making a comparison. Making a comparison would typically include evaluating a fund's portfolio in terms of diversification across top 10 stocks and leading sectors (in case of equity funds) to ensure that the fund is not taking on more risk than necessary. It is evident that this is no mean task and requires considerable effort and patience on the investor's part.

10. Evaluate the fund's performance
Every fund is benchmarked against an index like the BSE Sensex, Nifty, BSE 200 or the CNX 500 to cite a few names. Investors should compare fund performance over varying time frames vis-a-vis both the benchmark index and peers. Carefully evaluate the fund's performance across market cycles particularly the downturns. A well-managed fund should not fall too hard (relative to the benchmark and peers) during a market downturn even if it does not feature at the top during a stock market rally.

Source:Personalfn.com
 
Mutual funds: The risk and returns

All investments carry an element of risk and mutual funds are not immune to it. It is a general perception that greater the risk, greater will be the returns. And lower the risk, lower are the returns. The risks associated with mutual funds are in tune with investments they in turn hold.

Risk refers to the possibility of investors losing their money. A simple rule for beating short-term volatility is to invest over a longer horizon. How do you measure the risk associated with a fund? The fund's beta value compares a mutual fund's volatility with that of a benchmark and gives an estimate of how much the fund could fall in a bad market and how high it can soar in a bull run.

Two popular parameters that give a clearer insight are the standard deviation and Sharpe ratio. Standard deviation This is a measure of how much the actual performance of a fund over a period of time deviates from the average performance.

While beta compares a fund's returns with a benchmark, standard deviation measures how far a fund's recent numbers stray from its longterm average. A low standard deviation translates into lower risk. Sharpe ratio This measures whether the returns that a fund delivered were in sync with the kind of volatility it exhibited. It quantifies the performance of the fund relative to the risks it takes. The larger the ratio, the better is the fund's risk-adjusted returns.

For those willing to take high risks, equity and sector funds are the picks. Sector funds limit their stock selection to the specific sectors and are not amply diversified. Since all the stocks are restricted to a particular sector like FMCG, pharma or civil, if the sector takes a beating, your returns will be directly impacted. Equity funds invest wholly in the stock markets. They have the same volatility as the investments in the stock market.

Debt funds and bond funds follow a low risk, low return pattern. However, bond fund faces interest rate risk and income risk. Income risk is the possibility that a fixed income fund's dividends will decline as a result of falling overall interest rates. There have been numerous instances of investors locking their money in debt or income funds. On seeing nil or very low returns, they pay up huge exit loads and get out of such schemes. Hence, it is very important that investors first gauge their risk appetite. Once they understand their risk tolerance level they can choose the appropriate investment vehicle.

Balanced funds are a good alternative for those who seek something between high risk sector funds and low risk bond funds. Balanced funds invest 80 to 90 percent of their money in equity instruments and generate decent returns. The remaining money is locked in safe debt instruments. Investors should build a well-diversified portfolio

Inefficient diversification can mean too many investments from a particular sector or segment. This can mean greater exposure to risk. Proper asset allocation with investor risk profile in mind must be the first step to building a portfolio. Create a well-defined strategy with investment goals and objectives clearly chalked out.

SOURCE:Economic times
 
HNIs bail out MFs with foreign investment plans


Schemes of Indian mutual funds investing in overseas markets are finding more takers among high net worth individuals compared to average retail investors. Showing signs of steady growth, 11 overseas mutual funds, out of which nine were launched over the past six months, have raised around $2.2 billion (around Rs 8,467 crore) to invest abroad.

Though industry experts say that this is a good number to start with, it is not even half of the permitted international exposure quota of $5 billion (or around Rs 20,000 crore).

“Selling overseas funds is a bit of a problem. There is scepticism at large. Retail investors are not really keen on diversifying their investments to overseas markets. It’s HNIs who have greatly helped funds boost their NFO collections by contributing 40-60% of the total money,” said the research head of a leading fund house.

Most funds that were launched this year stuck to the basic structure of investing around 65% of their assets in equities and mutual funds units overseas, and the remaining in debt and money market instruments.

Counting out Principal Global Opportunities fund (launched in March 2004) and Templeton India Equity Income (launched in April 2006), nine funds raised around Rs 6,372 crore over the past six months. Indian regulations permit fund companies to invest around $300 million (around Rs 1,200 crore) in markets out of the country. Tata Global Infrastructure Fund, Fidelity International Opportunities Fund and Templeton India Equity Fund have already collected more money that they could be invested abroad.

“If you look at individual NFO collections of certain schemes, they might not be really impressive. But the crux of the matter is that they have really managed to sell the idea of investing in overseas assets. These funds have managed to take investors abroad when Indian equity market has been doing exceptionally well,” said Value Research’s Dhirendra Kumar. Value Research is a mutual fund research and advisory firm.

The general perception among fund managers is that emerging markets will yield better returns than developed markets. Most fund managers are placing their bets in stocks listed on hi-return emerging markets like Mexico, Brazil, Hong Kong, Poland and Korea. Emerging markets account for around 50% of the world GDP and commands a petty 7% weightage over world market cap with lots of upside.

A peek into the stock profile of Templeton India Equity Fund (the only one among international mutual funds to disclose their stock profile till now) could probably give an idea as to what companies would these funds be investing in. The Templeton fund has invested around 30% of its investible pool in emerging markets.

The fund has taken sizeable positions in stocks of companies like Alfa Sab Decv (Mexico), United Microelectronics Corporation (Taiwan), Lukoil-Holdings (Russia), Haci Omer Sabanci Holding (Turkey), Polski Koncern Naftowy Orlen (Poland) and Shanghai Prime Machinery Company (Hong Kong).
 
Look beyond past while investing in mutual funds

When it comes to mutual funds, which are touted as a useful vehicle for small investors, don't be dazzled by the previous year's high returns that may have occurred because of a surge in the stock markets.

The standard approach is to look at past performance, the risk associated - as indicated by standard deviation - and the rating given by credit rating agencies.

But investors should delve into parameters like beta, portfolio turnover, stock or sector concentration, exposure to illiquid and unlisted stocks etc.

Standard deviation and beta indicate the risk associated with price volatility, which essentially indicates the uncertainty regarding the returns that the portfolio would generate in future.

Both these factors need to be used to compare two or more funds. The fund with higher standard deviation or beta is riskier than other funds.

"Since we don't understand the mechanics of the stock market, we prefer to invest in mutual funds, which are less risky. And in the past few years, I have earned good returns on my investments," said Ashish Goyal, a Delhi-based investor.

Mutual funds are however not guaranteed or insured by any government agency - even if you buy through a bank and the fund carries the bank's name. Investing in mutual funds, you can lose money.

Every fund house or every fund manager has a particular style of working, certain values and certain appetite for risk. Some funds are aggressive while others are conservative.

"Often, portfolio managers knowingly take certain risks in order to spawn 'high water marks', higher returns for the portfolio. Some of the approaches that the fund manager may adopt are taking higher exposure to certain companies or sectors where they have a very high conviction about a brighter future," Vineesh Thukral, northern head (wealth management), ICICI Bank, told IANS.

Rahul Prabhakar, product head of Motilal Oswal, said: "Some funds believe in taking certain risks, whereas others would keep away from those. While none of the approaches is wrong, it is up to the investor to decide what suits him or her most. There is nothing like one-size-fits-all in investments."

Information about the parameters mentioned above can be obtained through one's financial advisor.

source:ET
 
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