Ladder7 Financial Advisories
Adhil Shetty, BankBazaar.com
Credit rating funds offer investors a vehicle to play rating upgrade theme in a recovering economy. ...
Arnav Pandya, Financial Advisor & Writer
D Ramanathan, Shriram Asset Management Company
Are your mutual funds giving you good returns? The Returns Calculator gives you an answer by calculating fund returns for the period chosen by you
Use this calculator to check the returns generated by your SIP investments till date.
The cost of investing through a mutual fund is not insignificant and deserves due consideration, especially when it comes to fixed income funds. Management fees, annual expenses of the fund and sales loads can take away a significant portion of your returns. As a general rule, 1% towards management fees and 0.6% towards other annual expenses should be acceptable. Carefully examine the fee a fund charges for getting in and out of the fund. Again, you can query on entry and exit loads under our Find-A-Fund query module or get a pre-defined shortlist of funds on the load specification structure through the Mutual Fund Directory section.
Although past performance is no guarantee for the future, it is a useful way of assessing how well or badly a fund has performed in comparison to its stated objectives and peer group. A good way to do this would be to identify the five best performing funds (within your selected investment objectives) over various periods, say 3 months, 6 months, one year, two years and three years. Shortlist funds that appear in the top 5 in each of these time horizons as they would have thus demonstrated their ability to be not only good but also, consistent performers. To get help through this process, you can use our Find-A-Fund query module.
This depends on the underlying instrument that a mutual fund invests in, based on its investment objectives. Mutual funds that invest in stock market-related instruments cannot be termed "risk-free or safe" as investment in shares are inherently risky by nature, whereas funds that invest in fixed-income instruments are relatively safe and those that invest only in government securities are the safest.
To get the maximum benefit of reducing your risk through diversification spread your portfolio across different assets whose returns are not 100% correlated. Different assets should ideally span across different asset classes such as fixed income, equity, real estate, gold as well as different investment options within these asset classes e.g. within equity shares, your exposure should be to companies in different sectors; or within fixed income investments, partly government risk and partly corporate risk. As a thumb rule, diversify your investments across 15-20 different portfolio holdings if you are directly investing in stocks or bonds. If you are investing through mutual funds, then three MF schemes for stocks and three schemes for bonds should provide you adequate diversification.
All Asset Management Companies (AMCs) are regulated by SEBI and/or the RBI (in case the AMC is promoted by a bank). In addition, every mutual fund has a board of directors that represents the unit holders' interests in the mutual fund.
When a fund goes ex-dividend, the unit holders ( as of the ex-dividend date ) are paid out a dividend and the NAV of the fund declines by the amount of dividend per unit paid out. For an investor ( who has bought the fund prior to the ex-dividend date ), this results in an income that is tax-free in the hands of the investor and a capital loss ( as the ex-dividend NAV will be lower than the cum-dividend NAV at which the investor made his investment ) . For e.g., if a fund's NAV is Rs11 and it pays out Rs1 as dividend, its ex-dividend NAV will be Rs10. In this case, the investor has a dividend ( tax-free ) income of Re1 and a capital loss of Re1 ( Rs11-Rs10 ) . If the investor has made a corresponding capital gain, then it is tax-beneficial to purchase the units of mutual fund just before it goes ex-dividend, take the dividend and then sell the units ( at the ex-dividend rate ) and book the capital loss. If there were no tax benefits, from a pure returns perspective, there would not be any difference in buying a fund cum- or ex-dividend.
Index schemes attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50. The portfolio of these schemes will consist of only those stocks that constitute the index. The percentage of each stock to the total holding will be identical to the stocks index weightage. And hence, the returns from such schemes would be more or less equivalent to those of the Index.
Yes. Investors of open-ended schemes can redeem their units on any business day and receive the current market value on their investments within a short time period (normally three- to five-days). Investors of close-ended schemes can redeem their units only on maturity but can sell it in the secondary market like stocks.
Interval Schemes are those that combine the features of open-ended and close-ended schemes. The units may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV related prices.
Growth Schemes are also known as equity schemes. The aim of these schemes is to provide capital appreciation over medium to long term. These schemes normally invest a major part of their fund in equities and are willing to bear short-term decline in value for possible future appreciation.
Open-ended schemes can issue and redeem units any time during the life of the scheme while close-ended schemes cannot issue new units except in case of bonus or rights issue. Hence, the number of units of an open-ended scheme can fluctuate on a daily basis while that is not the case for close-ended schemes. Another way of explaining this difference is that new investors can join the scheme by directly applying to the mutual fund at applicable net asset value related prices in case of open-ended schemes while that is not the case in case of close-ended schemes, where new investors can buy the units from secondary market only.
NAV is the total asset value (net of expenses) per unit of the fund and is calculated by the Asset Management Company (AMC) at the end of every business day. Net asset value on a particular date reflects the realisable value that the investor will get for each unit that he his holding if the scheme is liquidated on that date.
Fund managers are responsible for implementing a consistent investment strategy that reflects the goals and objectives of the fund. Normally, fund managers monitor market and economic trends and analyse securities in order to make informed investment decisions.
Don't just zero in on one mutual fund (to avoid the risk of being overly dependent on any one fund). Pick two, preferably three mutual funds that would match you investment objective in each asset allocation category and spread your investment. We recommend a 60:40 split if you have shortlisted 2 funds and a 40:30:30 split if you have short-listed 3 funds for investment.
What's strategy got to do with selecting a mutual fund? Shouldn't you just go and invest in the best performing fund? The answer is no. Mutual fund investing requires as much strategic input as any other investment option. But the advantage is that the strategy here is a natural extension of your asset allocation plan (use our Asset Allocator to understand what your optimum asset allocation plan should be, based on your personal risk profile). Moneycontrol recommends the following process: Identify funds whose investment objectives match your asset allocation needs Just as you would buy a computer that fits your needs and budget, you should choose a mutual fund that meets your risk tolerance (need) and your risk capacity (budget) levels (i.e. has similar investment objectives as your own). Typical investment objectives of mutual funds include fixed income or equity, general equity or sector-focused, high risk or low risk, blue-chips or turnarounds, long-term or short-term liquidity focus. You can use Moneycontrol's Find-A-Fund query module to find funds whose investment objectives match yours. Evaluate past performance, look for consistency Although past performance is no guarantee of future performance, it is a useful way of assessing how well or badly a fund has performed in comparison to its stated objectives and peer group. A good way to do this would be to identify the five best performing funds (within your selected investment objectives) over various periods, say 3 months, 6 months, one year, two years and three years. Shortlist funds that appear in the top 5 in each of these time horizons as they would have thus demonstrated their ability to be not only good but also, consistent performers. You can engage in such research through Moneycontrol's Find-A-Fund query module. Or, to get such a list, use our Best Picks reports which use this methodology as its predominant basis.
Yes, balanced funds invest in a combination of stocks and bonds, a typical mix is 60:40 in favour of stocks. Returns from balanced funds are normally lower than pure equity mutual funds when markets are rising, however if the market declines, the losses are also normally lower. Balanced funds are best suited for investors who do not plan their asset allocation and yet want to invest in equities. Buying separate equity and income funds for your portfolio also achieves the same results as buying a balanced fund. The advantage with the former option is that you can choose your own split (between stocks and bonds i.e fixed income) rather than let the fund manager decide the same.
Offshore funds specialise in investing in foreign companies or corporations. These funds have non-residential investors and are regulated by the provisions of the foreign countries where these are registered. These funds are regulated by RBI directives.
Close-ended mutual fund Schemes have a stipulated maturity period wherein the investor can invest directly in the scheme at the time of the initial issue and thereafter units of the scheme can be bought or sold on the stock exchanges where the scheme is listed. The market price at the stock exchange could vary from the scheme's NAV on account of demand and supply situation, unit holders' expectations and other market factors. Usually a characteristic of close-ended schemes is that they are generally traded at a discount to NAV; but closer to maturity, the discount narrows.
Venture Capital is the fund/initial capital provided to businesses typically at a start-up stage and many times for new/ untested ideas. Venture capital normally comes in where the conventional sources of finance do not fit in. Venture capital funds are mutual funds that manage venture capital money i.e. these funds aggregate money from several investors who want to provide venture capital and deploy this money in venture capital opportunities. Typically venture capital funds have a higher risk/ higher return profile as compared to normal equity funds and whether you should invest in these would depend on your specific risk profile and investment time-frame.
Regular investing is a very good way to build up an investment portfolio (read Dollar Cost Averaging to understand why) and this can be done with any amount of money. First, plan out how your investments should be spread out i.e. how much should be invested in equity shares and how much in fixed-income (bonds/ debentures) instruments. This should be based on your risk profile i.e. what your risk taking capacity is (how much risk can you take financially) and what your attitude towards risk is. Unless you rate high on aptitude, temperament and knowledge related to investing in shares, equity mutual funds offer a better alternative to investing directly in shares. Income mutual funds also offer a good alternative to fixed-income investment. For regular investment, most mutual fund schemes have a Systematic Investment Plan - this can be either monthly or quarterly installments. Typically, the minimum installment amount is around Rs500 and while choosing this plan, you will need to give around three- to four-post dated cheques at the time of investment.
Open-ended schemes usually do not have a fixed maturity period and are available for subscription and redemption on an ongoing basis. The units can be bought and sold any time during the life of the scheme at NAV related prices.
A 2.25% entry load sounds small. But it still bites a chunk off your returns over a long period of time. For instance, Rs 1 lakh invested directly in the no-load option of an equity fund that grows at a rate of 15% over a period of 20 years yields around Rs 16.36 lakh against Rs 15.99 lakh that a load fund would return-a difference of Rs 36,820. This is because even a small sum of 2.25% gets compounded over the years. The pinch remains the same even in a systematic investment plan (SIP). As SIPs entail investments on a regular basis, say every month, you end up paying entry loads on all your investment instalments. Assume you had invested Rs 5,000 in Reliance Vision Fund (RVF) on January 1, 2003 through a monthly SIP. If you had withdrawn your entire investment after five years, on December 31, 2007, you would have got back Rs 11.52 lakh in the no-load option and Rs 11.25 lakh in a load option, a difference of a cool Rs 25,914.
Start investing as early as possible - the power of compounding is the single most important reason for you to start investing right now as even a relatively small amount invested early will grow over the course of your working life into a substantial nest egg. Remember, every day that your money is invested, is a day that your money is working for you. Buy stocks or equity mutual funds and hold long-term - historically, world over, and even in India, stocks have outperformed every other asset class over the long run. Invest regularly - use the Dollar Cost Averaging approach - this will help you to adopt a disciplined approach to investing and works equally well for both buying and selling decisions. Importantly, it increases your potential gains when acting against the market trend, reduces risk when you are playing the market trend and relieves you from the pressures of forecasting tops and bottoms. Dollar Cost Averaging can effectively convert a regular savings plan into a regular investing approach. And, Diversify your investment - by diversifying across assets, you can reduce your risk without necessarily having to reduce your returns. To get the maximum benefit of reducing your risk through diversification spread your portfolio across different assets whose returns are not 100% correlated.
Most private sector funds provide you the convenience of periodic purchase plans (through a Systematic Investment Plan), automatic withdrawal plans and the automatic reinvestment of dividends. You would basically need to give post-dated cheques (monthly or quarterly, periodic date of the cheque is fixed by the Asset Management Company). Most funds allow a monthly investment of as little as Rs 500 with a provision of giving 4-6 post-dated cheques and follow up later with more. Regular monthly investments are a good way to build a long-term portfolio and add discipline to your investment process.
Some Asset Management Companies (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. Entry load is charged at the time an investor purchases the units of a scheme. The entry load percentage is added to the prevailing NAV at the time of allotment of units. Exit load is charged at the time of redeeming (or transferring an investment between schemes). The exit load percentage is deducted from the NAV at the time of redemption (or transfer between schemes). This amount goes to the Asset Management Company and not into the pool of funds of the scheme.
Alpha measures the difference between a fund's actual returns and its expected performance, given its level of risk (as measured by beta). A positive alpha figure indicates the fund has performed better than its beta would predict. In contrast, a negative alpha indicates a fund has underperformed, given the expectations established by the fund's beta. Some investors see alpha as a measurement of the value added or subtracted by a fund's manager. There are limitations to alpha's ability to accurately depict a manager's added or subtracted value. In some cases, a negative alpha can result from the expenses that are present in the fund figures but are not present in the figures of the comparison index. Alpha is dependent on the accuracy of beta: If the investor accepts beta as a conclusive definition of risk, a positive alpha would be a conclusive indicator of good fund performance. Of course, the value of beta is dependent on another statistic, known as R-squared.
American Depositary Receipt (ADR)
Shares of non-US companies traded in American stock exchanges in US dollars. ADRs work like any other share that we know of. They are negotiable receipts held in a US bank representing a specific number of actual shares (called ADS). For the American public ADRs simplify investing. So when Americans purchased Infosys stocks listed on Nasdaq, they could do so directly in dollars, without converting them from rupees. Such companies are required to produce financial results according to a standard accounting principle, thus, making their earnings more transparent. An American investor holding an ADR does not have voting rights in the company.
Asset Allocation Fund
A fund that spreads its portfolio among a wide variety of investments, including domestic and foreign stocks and bonds, government securities, gold bullion and real estate stocks. Some of these funds keep the proportions allocated between different sectors relatively constant, while others alter the mix as market conditions change.