Considering the current situation, where the market is down owing to COVID-19 pandemic, many of you must be thinking how to identify underperforming mutual funds. Although if you have invested for long term goals, short term volatility should not bother you. But still you should learn to identify underperforming funds and to take corrective action.
Mutual funds have been the most amazing tax saving investment instrument and simultaneously have outperformed conventional saving instruments in long term. However, even if you invest in mutual funds for long term, it is imperative to look at the performance of the funds periodically. But, the question arises, what if any of the funds underperform.
Read More :- Understanding Systematic Transfer Plans (STP)
How to take stock of the mutual fund portfolio?
Investing in the mutual funds is one of the best options to gain the maximum returns for the capital invested in the market. It is a better way to make money. But in order to gain the benefits, the mutual funds investments should be tracked regularly. The performance of the mutual funds has to be seen in the right way. Following are some of the measures :-
- Review the performance of all the mutual funds in your kitty periodically.
- Indicators to be checked for performance of the fund. Few of them are:-
1. AUM (Assets Under Management)
Reduction in size of AUM consistently may indicate underperformance.
2. CAGR (Compounded Annual Growth Rate)
If CAGR is less than benchmark as set by the mutual fund house, then it is not so lucrative to invest in the fund.
3. NAV (Net Asset Value)
NAV is debated to be considered as a performance measure. Since, stock markets fluctuate daily and mutual funds invest in stocks, mutual funds are subject to market momentum gains or losses. However, consistent lowest NAV in a similar fund category would be a red signal.
- You can identify the underperformer based on a combination of performance indicators. The mutual funds which lag in the category and with respect to the benchmark, in such measures, will be most probably the underperformer.
- If you are holding the funds for long like 2 or more than 2 years, and are still experiencing that the fund is not going to turn around the performance, then it’s the time to act.
- Deep analysis of the portfolio of the fund is essential. For e.g. if you are investing in blue chip funds, it is not necessary that your fund invests in large cap only. This fund may invest in large cap as well as mid cap, for a balanced exposure. Mid-cap and small cap stocks are known to be high risk- high reward, so if the market rallies, you will get superior returns, but in case of bear market, the same fund will underperform. In such a case, your investment is secure due to disciplined investment approach, but your fund may underperform a few times when the market goes down, which may not be a matter of concern.
Reasons behind underperformance of the mutual funds
- Fund investment strategy or change in existing investment strategy
If the fund is aggressive then it will fare better in bull market but will underperform in bear market. Similarly, a mutual fund with value investing approach will not be performing better in the bull market.
- Overweight on underperforming sectors or industry
Certain funds are sector specific or may follow and invest in stocks based on theme (like emerging equity or infrastructure industries). Every sector may not perform up to the standard every time.
- Higher expense ratio
The fund may have moderate to high return magnitude but may also result in reduced return due to higher expense ratio. This is because, returns are paid out only after deducting for management fees, administration fees, etc.
- Fund management approach
If there happens to be a change in fund management style or fund manager, which may result in total change in stock selection or even long-short strategy.
There may also be other reasons like merger of the fund with another fund. However, even if you could find out the reason why the fund is underperforming, you must know what to do next since you are already holding the units, so let’s see what you can do now.
What to do when the fund is underperforming?
If you are holding any flagship scheme or core scheme of the fund house, (which is generally promoted by the fund based on its performance), then you may continue holding it for a while. However, keep a look at its alpha (capability to generate returns over and above benchmark returns).
One more notable point is that if the fund manager’s approach is disciplined like value investing, then you may continue to hold the fund, even if it underperforms. Since all funds fluctuate in short and medium term owing to stock market fluctuations, it is not rare that even a sound and stable fund may underperform.
Some of the investors may even buy more units to achieve rupee cost averaging when the funds are underperforming. However, if the fund does not possess the capability to yield better returns in future and the investor buys the units just to reduce the loss, this step may even cause you to incur more loss in coming years.
- Switch or sell
If the fund is underperforming in its category as well as against benchmark, then it’s the time for some action. If the sectoral or thematic underperform due to cyclic changes in the sector, then you may redeem the units and may place the investment in another worthy investment, since thematic or sectoral funds are generally far too dangerous since they owe to seasonal fluctuations.
If the fund’s underperformance is due to some of the factors like merger of the fund or change in fund manager, then you may separate such funds from others in your portfolio and keep close watch for a year or so, to let the hidden potential to come up. However, quarterly reviews are must so that you may come to know whether these funds still underperform and that it is time to get out of those funds.
Lastly, it is suggested that you take assistance from your investment advisor or consultant as they can help you to make best decisions by analysing your portfolio. You may also download the Fintoo app for the same.
How many of you are familiar with STPs?
I’m sure not many of you. Now with so many investment options available, people are confused in what to invest, where to invest and how to invest. Some people do not know what are the investment options available, and how to make the best use of them.
You may have different goals and dreams in life, but to fund those goals is a big task. It is always suggested that if you don’t know your way through the market, you seek help from an advisor. They will be able to guide you in the right path and help you build a bridge between your funds and goals.
You must be aware of Systematic Investment Plan (SIP) which is one good option to invest in mutual funds. In SIP, a fixed amount is deducted from your savings account every month and directed towards the mutual fund you choose to invest in. Systematic Investment Plans are a disciplined way to start investing to create wealth for the longer period of term.SIPs bring about a good saving habit in one’s routine, which is necessary.
Read More :- Importance of Continuing SIPs Amid COVID-19
Another option is STP (Systematic Transfer Plans), this is good for those investors who do not want to take the risk of investing a lump sum amount in a particular fund at one go. Especially in the current scenario, where the market is volatile due to COVID-19 pandemic, it is suggested to not invest lump sum. So Systematic Transfer Plans comes to your rescue.
Under Systematic Transfer Plans, an investor can invest a lump sum amount in a fund and transfer regular amounts, which are predefined by the investor, to another fund, on a specified date. You can make these transfers on a monthly, quarterly or even weekly basis. This is a better option than directly investing the whole lumpsum amount in a risky fund.
There are 2 types of STPs:
- Fixed STP: Over here, the amount that is to be transferred from one scheme to another is fixed. For example, Mr. A invested Rs. 100000/- in a fund ABC, and he has opted for a STP to fund XYZ, he wants Rs 5000/- to be transferred to fund XYZ on a monthly basis. Here we can see that Rs. 5000/- is the fixed amount that is to be transferred.
- Capital appreciation STP: Under this, the amount that is to be transferred will depend on the profit earned. This means that the investors want only the profit amount to be transferred to the other fund. Let us take the same above example to get a better idea, If after investing Rs. 1 lakh in fund ABC, he gains Rs. 6000/- (after a few months or a year) on it, the same amount of 6000 will be transferred to fund XYZ.
Now lets see how STP is relevant to you.
If an investor, who has a lump sum amount to invest, doesn’t want direct exposure in the equity market, can invest his lumpsum amount in a debt fund and through STP, transfer the amount he wishes to in the equity fund.
He can make the transfers monthly, quarterly or even weekly, as he wishes. However, one must keep in mind that, whenever an amount is transferred from one fund to the other, the units of that fund, from which money is going out, becomes less and units of the fund where the money is transferred increases.
Lets say, if the funds are being transferred from debt to equity, then the units in the debt fund will reduce and the units in the equity fund will increase.
Read More :- Understanding SIP, SWP and STP
STPs from debt to equities are more effective, when markets are volatile, and an investor does not want to take a risk. STPs are a better option than one time investments, in cases when the market is down which we are experiencing right now because of global pandemic. However, if we look at it the other way round, then one time investments would be a better option, if the markets are moving upwards. Having said all this, it is very difficult to predict the market scenario for a retail investor. So it is better for them to invest through STPs and get better risk adjusted returns, over a period of time.
STPs help investors reduce their risk, if the regular transfers are maintained. Just like how the concept of Rupee Cost Averaging works for a SIP, it can be applicable to a STP also. People usually think that when the market is down, they should redeem their money, before they make a bigger loss. However, people investing through SIPs, can avail this benefit.
Let us continue with earlier example to understand above point:
Mr. A invested Rs. 100000/- in a fund ABC, and he has opted for a STP to fund XYZ, he wants Rs 5000/- to be transferred to fund XYZ on a monthly basis. Now let us say in the 1st month, the NAV of fund XYZ was Rs. 10/-. So the no. units added will be 500 (5000/10). After a few months, if the NAV drops to Rs. 8/-, 625 (5000/8) more units will be added to the XYZ fund compared to 500 earlier.
In this example, you can see how an investor can take the advantage of the market when it drops. This example is taken also with a few months gap. Now, imagine if an investor keeps his money for years, how much will he gain.
STP is a tool to reduce risk, like SIP. The transfers should be made in a disciplined manner to avail this benefit. Well now you’ve understood all you need to know about STPs, so you can start planning for your investments, and make use of the funds you have in a proper and ‘Systematic’ way even during the current volatile market owing to COVID-19.
While investing in mutual funds, it is important that you look at past returns, compare the returns with the benchmark, category average and it’s peers. But returns should not be the only criteria while selecting a mutual fund.
One should also look at how much risk is associated with the particular scheme. Risk and return are two sides of the same coin and thus we should not ignore the other side i.e. RISK.
As a rational investor, everyone should look how to obtain maximum return with comparatively lesser risk.
“Mutual funds are subject to Market risk please read the scheme related documents carefully before investing.” Most of us have heard this line many times. So, in this blog we will understand what are the different measures to check risk components in a mutual fund.
Equity vs Debt
Equity investment is considered to be more risky compared to any of the investments because of it’s volatile nature. At the same time, it is also important to understand that if you want to grow your wealth in the long term, this is the only investment avenue which beats inflation and is tax efficient. So one should definitely have some exposure to equity in their portfolio. The safest way to do this is by way of Mutual Funds.
Debt investment on the other hand is for conservative investors but it is also exposed to some risk like interest rate risk, credit risk etc. So it is better to have some knowledge to understand how to measure risk.
Now let’s see how to gauge the riskiness of mutual fund scheme:-
Standard Deviation (SD)
Standard deviation measures the deviation of a fund’s return from it’s average return. Return on a Mutual fund can be predicted based on it’s past returns. Therefore, an average is calculated called as Mean. For example, Fund A has an average return of 12% and it’s Standard deviation is 6%. What does this mean? We should be able to understand and interpret this information. This means that the returns from this fund varies 6% from it’s average. That is this fund returns will vary from 6% to 18%.
Minimum return = 12%-6%=6%
Maximum return =12%+6%=18%
So most of the time, this mutual fund gives return in this range i.e. 6%-18%. Broader this range, higher the volatility which means more risk. Therefore, SD is used to measure a fund’s volatility in comparison to it’s average. High standard deviation means a high volatility. You should choose a fund with a lower standard deviation.
Eg, Fund A – Return – 12%, SD =6%
Fund B = 12%, SD= 2%
Then you should be selecting Fund B because you are expected to get 12% return by taking much less risk.
In the above point, we are finding out the fund’s volatility in comparison to its own average. But it is also important to compare it with the market. Therefore, beta comes into picture. Beta measures the volatility of the fund compared to it’s benchmark.
When you are looking at the beta of a mutual fund, you are finding out the tendency of your investment’s return to respond to the ups and downs in the market. Here, the market usually refers to the benchmark index the fund follows.
Beta measures the systematic risk in a fund. The beta of the market or the benchmark is always considered to be 1. Now we need to compare the beta of our mutual fund with the beta of this benchmark. How will we do that?
A beta of 1.0 indicates that the fund is as volatile as the market. A beta of less than 1.0 indicates that the fund will be less volatile than the market. Correspondingly, a beta of more than 1.0 indicates that the fund will be more volatile than the market. For example, if a fund’s beta is 1.1, it is 10% more volatile than the market.
So you should be selecting a mutual fund according to your risk profile. If you do not want to take much risk then go for a lower beta fund which has a beta of less than 1. If you compare two funds in the same category that are giving similar returns, then you should be selecting one with lower beta.
Risk Adjusted Ratios
We will discuss the few risk adjusted ratios which will help us to understand the risk component in a fund. These are:
Sharpe Ratio: The Sharpe’s ratio uses standard deviation to measure a fund’s risk adjusted returns. This will help you to understand how well your mutual fund has performed in excess of the risk-free return.
If you would have invested in government securities i.e. risk free investment, you will be earning some return without any market risk involved. So it is called risk free return. But as you have decided to invest in a mutual fund, you will be exposed to market risk. Nobody would want to earn a return equal to risk free return after investing in the market. So you would expect a higher return.
This ratio essentially gives you an idea if your returns are due to smart investment decisions or excessive risk.
Higher the Sharpe’s ratio, better the risk adjusted return of your mutual fund portfolio. So when comparing two mutual funds, go for the one with a higher sharpe ratio.
Treynor Ratio : This is exactly similar to sharpe ratio. The only difference is that this ratio considers beta to measure risk adjusted returns. So with the same logic, higher the treynor ratio, better it is.
Alpha : Alpha will give you an idea of the excess returns that your mutual fund may generate, compared to its benchmark. For instance, if a mutual fund scheme has an alpha of 4.0, it usually means that the fund has outperformed its benchmark index by 4%. It can be seen as the additional value the mutual fund manager adds or takes away from the return on your portfolio.
Alpha can be negative or positive. A positive alpha of +2 means the fund has outperformed its benchmark index by 2%. Correspondingly, a similar negative alpha of -2 would indicate an underperformance by 2%. For investors, the more positive an alpha is, the better it is.
The Bottom Line
Many investors usually focus exclusively on returns with little or no concern for investment risk. These risk measures can provide an insight to the risk-return equation. You can find these indicators in a fact sheet of a mutual fund and many financial websites.
You can combine the inferences from the above methods of measuring risk with other factors like the fund history, past performance and expense ratio to identify the best-suited mutual fund schemes for your portfolio and your risk profile.
Investing in the mutual funds is one of the best options to gain the maximum returns for the capital invested in the market. It is a better way to make money. Mutual fund are for long term investment goals. In order to gain the benefits, the mutual funds investments have to be reviewed and tracked regularly. The performance of the mutual fund has to be seen in the right way.
Considering the current situation, where the market is down owing to COVID-19 pandemic, many of you must be thinking how to check whether you should continue to stay invested or redeem your investments. Although if you have invested for long term goals, short term volatility should not bother you. But still we can track the performance of our portfolio and take the informed decision based on the outcome.
Though the future of the mutual fund are not dependent upon the past performance, the performance of the mutual funds are mathematically calculated based upon the performance in history. The mutual relationship between the potential risk factors and the potential returns are the determiners of the performance of the mutual funds.
Here are some of the key points to consider while evaluating the performance of the mutual funds –
- Risk adjusted returns: In general terms, the risk adjusted returns are the calculated returns that take into consideration the risk involved in the funds. For instance, we are comparing two mutual fund with similar returns. The one with the lesser risk will be a better option.
- Benchmark: It is a way of standardizing the quality of the funds. It is considered as a point of reference. Any mutual fund that has outperformed the benchmark is considered superior than ones which have underperformed compared to benchmark.
- Relative performance evaluation: The comparison of the performance of the mutual fund with that of the peer mutual fund is one of the options to track the mutual fund’ performance. It is just a measure of the effectiveness of the mutual funds.
- Evaluate the quality of the stocks: The portfolio of the mutual funds deals in various stocks. It is a point of consideration, whether the stocks are of good quality or not. The stocks will be performing in the market and the returns gained on your investment in the mutual funds are dependent upon the stocks. So it is necessary to track the quality of the stocks in the fund.
- Track the competence of the fund manager: The fund manager of the mutual fund company is the person that chooses how and where your invested capital will be placed to work. The fund manager is responsible for taking all the major investment decisions. One can track the past performance and records of the fund manager to determine the competence and experience in his decisions.
These key factors are used for tracking the performance of schemes offered by the mutual funds. The tracking and evaluation procedures can be done by following the proper guidelines. There are various mathematical models and calculations that can help the individuals to efficiently track the performance.
Various methods by which one can track the performance of the mutual funds –
- Use the various mutual funds trackers that are available in the market. One such platform is “Fintoo”. It is simple to track. You just have to go to your Dashboard, click on the transactions. Next click on the small “i” icon against the name of the scheme. It not only provides you the details about the past performance of the mutual funds but also evaluates how much rate of returns has been provided by the funds in a particular time frame. It helps to understand whether the returns that have been availed over the investment capital are good enough or not.
- Factsheets Fact Sheets are considered as a score card of a Mutual Fund. While referring to the factsheets for the performance of the mutual funds, one must take the help of the financial advisor. The factsheets are generated after the completion of the particular time period and as per the guidelines of the capital market regulator, the mutual funds have to give returns every month.
- Rolling Returns The factsheets do not mention anything about the rolling returns that are provided after a particular time. It is used to maintain the consistency of the mutual funds. So check the average of rolling returns, if the average is higher than the benchmark then the funds are good.
To sum up, you can begin the procedure of tracking the performance by comparing the scheme with the benchmark and if it has outperformed the benchmark, the next step would be to compare the performance with the mutual fund category. Additionally, you can check the portfolio of the scheme and compare it with the peers.
If your fund is not performing based on these factors, then you should switch it to better performing funds. But while doing so, it is suggested that you take help of a finance expert to guide you and optimise your portfolio performance keeping in mind exit loads and taxation.
Current financial situation of almost all the households is suffering owing to COVID-19 pandemic. The reason being layoffs, salary cut, fewer employment opportunities, business going into losses because of low consumption. Amid all this, students’ education is also at stand still as regular classes could not be conducted with the country under lockdown.
As the lockdown has been extended for the third time in a row to stop the spread of coronavirus, technology is coming to rescue with the online classes.
Even if you are trying to manage the current scenario by forcing your kids to attend online classes organized by schools and other educational institutions, at the back of your mind, you would still be worried about your child’s higher education.
You are not alone. Most of the parents are worried about their children’s current education and also how the situation will turn into their child’s future as this pandemic is going to be with us for some time.
No need to worry about your child’s higher education, if it is a long term goal which is at least 5 years away. Early savings can do wonders. In this blog, we will talk about an amazing investment option called SIP.
Many of you might have heard of the investment tool SIP i.e. Systematic Investment Plan. It is one of the best investment tools for a person who wants to save to reach a specific goal or even for a beginner. It’s the power of compounding in a SIP, that allows the person to reach their goal at the specified time. Though the power of compounding can work it’s magic only, if the SIP is invested over a longer period of time.
Education has become very expensive, especially if you want to send your child abroad. To do a post graduation, you will not find any college that charges less than few lakhs, yes it is a big amount. We know that the prices are rising, and you can just take an estimate that Rs. 15 lakhs for a post graduation today, will be how much 10 to 15 years down the line?
Must Read: Everything you Need To Know About Debt Funds
It comes up to almost Rs 30 lakhs to Rs. 40 lakhs if we consider inflation at 5% to 7% for 15 years. Whenever you plan for any goal, in this case education, always consider the future value of the cost today. So that you know how much you need to invest to reach that goal and of course in how many years you will require it.
The power of compounding is the most simple words is when you earn ‘interest on interest’. Let me just give you a glimpse of what it means. The below table will help you understand it better:
|MONTHS||Opening Balance (Rs.)||SIP amount (Rs.)||Interest @ 12% p.a. (i.e. 1% per month)||Closing balance (Rs.)|
|1||0||6000||60 (6000 x 1%)||6060|
|2||6060||6000||120.6 (12060 x 1%)||12180.6|
|3||12180.6||6000||181.806 (18180.6 x 1%)||18362.406|
As you can see in the above table, in the 2nd month, the interest is calculated on the previous month’s interest and SIP, as well as the new SIP. That is how the Power of compounding works.
Let’s say, Mr. Shetty wants to send his child to the US for his post graduation, when his son is 21 years. His son is currently 6 years old. He wants to start early planning because he knows the prices are only going to hike. He has considered the future value to be Rs. 50 lakhs. He also has Rs. 12000/- to spare every month as SIP in an equity fund, giving an average of 11%. Let us see if the monthly SIP can match his goal amount.
|FUND||SIP AMOUNT (RS.)||RATE OF RETURN||NO. OF YEARS||APPROX.FUTURE VALUE (RS.)|
As you can see in the above table, he reached his goal and has some extra amount too. So the earlier you start, the better for you.
Now SIP in equity funds, can fetch higher returns than SIPs in debt funds. An equity market is volatile as you witness it currently and this is the major reason why it is a risky investment. Investors also search for the right time to invest in the equity market. When in reality, there’s no right time to invest in the market. What many investors don’t know is that you can benefit from the market when it is down too. How?
Well, this process is called Rupee Cost Averaging, this means you get more units at a discounted value. In a layman’s language it means, taking advantage of the market downfall, not literally but, just to understand what it’s about.
Example, If Mr. A, started a monthly SIP of Rs, 12000/-, check the below table to understand it better.
|MONTH||SIP (RS.)||NET ASSET VALUE (NAV)||UNITS (SIP/NAV)|
In the above table, you can see that lower the NAV, the more units you get. So when the market is high, you will profit only, as you will have more units. So you see there’s no right time to invest in the market.
If you already have some SIPs which are going on, it is strongly recommended that you don’t stop these SIPs looking at current fall in the equity markets owing majorly to global pandemic. Now you have understood that your SIPs will be advantageous in the long term and the reason being rupee cost averaging. So don’t stop your current SIPs and also you may start with new SIPs to have adequate corpus accumulated for children’s higher education.
All parents would want to give their children the best in life. Some may know how, some may not. But this can give you a head start. Everything is right in front of you, all you need to do is take that first step to provide a bright future for your child.
A financial planning platform where you can plan all your goals, cash flows, expenses management, etc., which provides you advisory on the go. Unbiased and with uttermost data security, create your Financial Planning without any cost on: http://bit.ly/Robo-Fintoo
Debt funds are basically mutual funds that are invested in fixed income securities like bonds, treasury bills, govt. securities, money market instruments. These bonds can be short term, medium term and long term. The maturity is for a fixed period. The returns are not that high as compared to equity, but they are linked to the market performance of the securities they are invested in. Debt funds ensure the investor that his money is safe and doesn’t have much risk.
Let us see some of the features of debt funds:
- Fixed maturity period
- Invested in fixed income securities
- More suitable for short term goals.
- Easy liquidity
Debt funds are very important to balance one’s portfolio. If a person is very conservative and doesn’t want to take any risk with his money, he can go for debt funds. Even though people find it the safest investment, there is still a chance of risk, if the interest rates go up. The chances of such risks occurring is very low.
Another benefit is that, if a person holds the debt fund for more than 3 years, his debt fund will be considered as long term and he will be taxed 20% after indexation. Indexation takes inflation into account and thus reduces the tax on capital gains. TDS is also not deducted on the gains.
Debt has 2 types of funds, open ended and closed ended funds. Open ended funds are those funds which can be sold or repurchased throughout the year. Some of these funds are short term funds, gilt funds, MIPs, etc. For open ended funds, there is no entry load but there can be an exit load, if the funds are withdrawn within a specific period. Now coming to close ended funds, these funds can be bought only at a specific time, that is during the NFO (New Fund Offer). Once the NFO closes, one cannot invest in it. Closed ended funds are for a specific period of time and the chance of exiting is very low. One can only exit by selling it in the secondary market. The risk factor is low compared to open ended schemes.
It is a big risk to put all your money in an equity fund. A better way to manage your money or rather a safer option to put your lump sum amount, would be in a debt fund. And through STP (Systematic Transfer Plan), you can transfer a certain amount to the equity fund from the debt fund. If a person is close to retirement, he can invest his money in a debt fund, because he cannot take a risk with this goal.
How to choose a debt fund?
Well, there are many factors that need to be considered, while choosing a debt fund:
- Need: The most important factor is to know one’s needs. The duration of the goal has to be known first. Only then can one search accordingly.
- AUM of the Fund House: Fund houses with AUM more than 500 Cr. should be considered. The more the AUM, the less the expenses ratio. There’s more trust in such Fund Houses.
- Exit Load: One should also look at the exit load charges if they want to exit their money beforehand.
- Past performance: It is also necessary to check the past performance of the fund, though it won’t help to know the future performance, it helps to know whether the fund is performing consistently or not.
- The asset allocation of the portfolio: It is also important to check where the fund has invested in. So you know which assets you’re comfortable with.
These are the factors to be looked for by a person who has no deep knowledge about debt funds. If they still don’t feel confident about it, it is always advisable to seek an expert’s help.
There are many debt funds in the market. It all depends on one’s need and for how long they want it. Some of the debt funds are as follows:
- Gilt funds: These funds are invested in Govt. securities only. It doesn’t have default risk, but having said this, there is a chance of risk with the interest rates, especially long term gilt funds, which are riskier. In this type of fund, one can look at it as a way to increase capital, instead of capital protection. They should also be willing to take the risk.
- Low Duration funds: These funds are invested in commercial papers, bonds with a maturity of 6-12 months, certificates of deposits, etc. Their performance is mostly stable as the changes in interest rates do not affect them. The returns are higher as compared to liquid funds. People who want to invest their surplus money for 6 – 12 months, can invest in this.
- Fixed Maturity Plan (FMP): They are invested for a fixed period of time, in papers matching their maturity. So, there is no interest rate risk in this case. The interest rates of these funds are very predictable, but not guaranteed. But there is reinvestment risk involved. If people are not sure of the interest rates, they can go for these funds.
- Liquid Funds: They are invested in liquid instruments like, treasury bills, Certificate of Deposits, commercial papers, etc. These funds have stable returns. People can invest in such funds instead of keeping their money in savings account. These funds are invested for a very short time, like a few days or months.
Apart from these, there are many other funds like Dynamic Funds, Long duration funds, and so on. so if you are a conservative investor and even planning to invest, to get a regular flow of income, debt funds are most suitable to you.
A financial planning platform where you can plan all your goals, cash flows, expenses management, etc., which provides you advisory on the go. Unbiased and with uttermost data security, create your Financial Planning without any cost on: http://bit.ly/Robo-Fintoo
Disclaimer: The views shared in blogs are based on personal opinion and does not endorse the company’s views. Investment is a subject matter of solicitation and one should consult a Financial Adviser before making any investment using the app. Making an investment using the app is the sole decision of the investor and the company or any of its communication cannot be held responsible for it.
Before jumping directly to understand what Arbitrage Funds are, let us first understand the basic meaning of “Arbitrage”.
In simple words, arbitrage means buying in one market and selling in another market. For example, I buy a T-shirt in one market for say Rs. 700 and I sell that T-Shirt in another market where the demand is more at a price of Rs. 850. I have instantly made a profit of Rs.150.
So what have I done? In order to make profit, I buy in the market where the price is low and sell in the market where the price is high. This situation of having different prices in different markets gives me an opportunity to make profit. This is called Arbitrage.
Now let’s see how it works in the finance world. In this context, the markets are nothing but the stock exchanges. We have two prominent markets i.e. Bombay Stock Exchange and National Stock Exchange. Ofcourse, there are other stock exchanges as well but for simplicity sake, we are considering these two. If you notice there is always a slight difference in the prices of stocks listed on these stock exchanges. For instance, Stock A has a price of Rs.50 in BSE and Rs. 50.40 in NSE. As an investor, I can buy this stock in BSE at Rs. 50 and sell it in NSE at Rs. 50.40 and book a profit of Rs. 0.40.
You may say it’s just a small amount. Why will we invest?
This is just one stock and usually these transactions happen in huge volumes. So the profit amount is sizable.
I hope you have now understood what is an Arbitrage? Now, let us proceed to understand Arbitrage Funds.
Arbitrage funds is a type of mutual fund that leverages the price differential in the cash and derivatives market to generate returns. The returns are dependent on the fluctuations of the asset. The arbitrage fund consists more of equity. There is no lock in period as such, but if the amount is withdrawn before 1 month, there is an exit load. It varies from scheme to scheme.
Many of you must be wondering, how can a fund that is invested in equity have less risk. This is because of the magic of the market differentiation. When one invests in an arbitrage fund, the fund collected is invested in certain avenues across equity. The fund holds more of an equity portfolio, than debt. So if the funds invested in the equity portion are not performing well, they sell off the share and shift it to an equity avenue, that’s in favor of the market. Hedging is used in an arbitrage fund. This way it minimizes or makes up for the loss.
Let’s look at an example, to understand hedging in a better way. Mr. Lavish invested Rs. 800/- in gold in India, now the prices of gold is reducing, which is causing a loss for Mr. Lavish. However on the other hand, in the US, the price of gold has increased to Rs. 1000 (after conversion into rupees). So Lavish sells the gold in the US, making a profit of Rs. 200.
There are 2 types of arbitrage funds:
- Growth:This is used for capital appreciation
- Dividend: There is another option, if a person wants regular income.
An arbitrage fund can also be considered as a liquid fund. It has easy liquidity compared to other funds. If a person needs the funds immediately, then this would be a good option to invest in. Returns generated are also in line with liquid funds. For example, the arbitrage fund category is offering around 5.79% in the last one year, whereas the liquid fund category is offering around 5.68% during the same period.
We have all heard of debt funds and equity funds and the different options available under those funds. Arbitrage funds are less spoken of. When it comes to mutual funds, everyone goes to check for debt funds, equity funds and balanced funds, no one has really heard of arbitrage funds or looks for different options under these funds. This could be due to reasons like, people who don’t want to take risk, think that since equity is involved, risk is automatically associated with. Some may not understand how the fund works or it is too complicated to understand.
We shall now compare and see how an arbitrage fund has an advantage over other funds:
- Arbitrage funds were always compared with liquid funds, since their returns are similar. Arbitrage Fund has an advantage over Liquid Fund because of its taxability. Arbitrage funds are taxed as per Equity Funds where after a year, the income on such arbitrage funds are exempt upto 1 lac. This change has made liquid funds look less attractive since it is taxed as per debt fund.
- Equity funds have risk, that’s the reason why people don’t want to invest in equity. In this case, arbitrage funds are used for hedging, this way there’s hardly any risk involved. This fund works best when the market is volatile, as there are many options available.
So to conclude, Arbitrage Fund is a good fund to invest in, not the whole amount but at least 10% to 15% of your portfolio should consist of these funds. They do not qualify as long term investments but you can park your money for the short term. So if you do not want to take a risk and have your money, anytime you want, arbitrage funds are the funds for you and the bonus is tax-efficient. If you too want to park your money in an Arbitrage Fund, you can download the Fintoo app and do it easily online.
The finance minister Nirmala Sitharaman had announced that the deadline for investing in tax-saving instruments for the financial year 2019-20 has been pushed to 30th june 2020.
The usual deadline was March 31.
This move was taken as the entire country is in lockdown and it has been difficult to make last-minute tax investments.
If you have already invested for FY 2019-20 then you can invest to save tax for FY 20-21.
So are you looking for a tool to save tax?
Are you a risk taker?
Do you want to achieve a higher corpus?
If your answer is yes in all the three cases, then Equity Linked Saving Scheme is the right fund for you. It qualifies for all the above questions.
ELSS (Equity Linked Saving Scheme) is a diversified Mutual Fund and as the name suggests, majority of the fund is invested in equities. It is a saving scheme too, as it helps in saving your taxes, this deduction is available or can be claimed under section 80C. It appreciates one’s capital as well as saves taxes.
Let us now look at the tax benefits of this fund.
Tax planning plays a very crucial part in Financial Planning.
Tax is where you can save most of your money from getting deducted. As mentioned earlier, this deduction is allowed under section 80C.
However, to avail this benefit, you have to keep the fund for a lock in of 3 years. For example, If I invest in an ELSS fund, I cannot touch that fund for 3 years.
It is different in the case of a person investing through SIP (Systematic Investment Planning). Since he is investing every month, he can withdraw the whole amount after 6 years or the other option available with him is to invest through SIP for 3 years and withdraw monthly for the next 3 years.
So all the monthly investments will have completed the 3 years lock in period. The maximum amount that you can claim under section 80C is Rs. 150000/-.
The added advantage is the gain realised upto Rs.1,00,000 in a financial year is also tax free. Any long term capital gain over 1 lakh attracts the tax of only 10%.
That is why it is considered as one of the most tax efficient investments.
There are 2 types of Equity Linked Saving Scheme funds:
- Growth Funds:This is simple, You invest a lump sum and withdraw the whole amount after maturity, If it’s through SIP, then make a monthly withdrawal after 3 years. So each SIP, will complete 3 years.
- Dividend Scheme: Under this option, you receive regular dividend, as and when the company declares.
Now we talk about, what to look for when choosing an ELSS fund:
- Long term performance is a must, to look at in an equity fund. People invest in equity only for long term, as it provides better returns in the long run, that also depends on the past performance.
- You have to look at the past performance of the fund before investing. You must see how often the market has fluctuated and how the fund performed compared to it’s benchmark. Check the volatility and accordingly make a decision.
- Fund Manager’s approach is also important.Check the track record of Fund Manager and instances where he is able to outperform the market indexes.
- Portfolio of the fund is important too. One should be comfortable in the avenues, the fund is being invested in.
- Expense Ratio is one more point to look at, while choosing an ELSS fund. The less the expense ratio, the better.
Let us see the advantages of ELSS over other tax saving tools, under section 80C:
- Lock in period: Compared to NSC, PPF and fixed deposit, the lock in period for ELSS is less. It is 3 years for ELSS, while for NSC it is 6 years, PPF it is 15 years and FDs it is 5 years.
- If we look at long term returns, ELSS will give you better returns than other investments.
- The procedure to invest in an ELSS is very easy as compared to the other investments. For investments like, NSC and life insurance premium, it takes 7 to 15 days to start, whereas in ELSS, the investment begins immediately.
There are just 2 disadvantages of ELSS funds:
- Investors, who do not want to take the risk, while investing, will not find it appropriate to invest in an ELSS fund. Higher the returns, the more risk involved. So it all depends on one’s risk appetite.
- Early withdrawal is also not possible in the case of an ELSS fund. One will have to wait for atleast 3 years.
So if you’re looking for a tax saving long term investment and willing to take the risk to for higher returns, ELSS is the best option for you.
You can invest in an Equity Linked Saving Scheme fund online through Fintoo from the comfort of your home.
Retirement planning is absolutely necessary so that you have a corpus at hand when you retire and need funds to meet your lifestyle expenses. As you plan for your retirement you have to factor in many questions like, how will you streamline your debt? Or how will you arrange for your medical bills? Or probably other aspects like estate planning. As individuals, we want a comfortable and secure future and for that one has to start planning from a very early age in life because we all know how the adage goes, ‘make hay while the sun shines’.
Let us now understand which investment avenue better suits an investor. Say you are 40 and are planning to invest INR 12000 per month towards your retirement corpus and you plan to retire at the age of 58. Now, when it comes to planning for retirement, there are various types of retirement investment plans which might attract you. Two of the most popular ones being the pension plans and mutual funds. Are you now wondering which avenue would be the best alternative for creating a good retirement corpus?
Many argue mutual funds are better while some swear by pension plans. What do you think?Though mutual funds and pension plans both help in creating a fund for retirement, mutual funds have the upper hand. Here are a few pointers which will help you make a distinct choice instantly-
Mutual funds are flexible
Mutual fund investments give you flexibility both at the time of investment and also on redemption. While investing you can invest in monthly installments through SIPs (which are as low as INR 500 per month) or invest in one lump sum. The redemption is also flexible wherein you can choose to systematically withdraw from your funds every month (through a Systematic Withdrawal Plan) or access your funds at once. Pension plans don’t provide this flexibility. Though you can get flexibility in paying premiums (monthly premium, limited premium, single premium or regular annual premium), the maturity proceeds have a rigid redemption rule. You can withdraw only part of your accumulated corpus in cash. The remaining would have to be taken in annuity installments which are paid throughout your lifetime. This annuity pay-out might not be suitable when you require lump sum funds for meeting an emergency expense.
The returns are better in mutual funds
The growth promised by mutual funds is better than those promised by pension plans, whether traditional plans or market linked. In mutual funds, the expenses involved are also low thereby increasing the return generated. Pension plans have lower returns associated with them. If the plan is traditional, the insurer invests in Government backed investment options giving very low returns. In case of market linked, there are a lot of expenses associated with the plan (administrative expenses, fund management expenses, mortality charge, premium allocation expenses, etc.). These expenses reduce the investment and thus the returns are lower. Even the annuity pay-outs paid under annuity plans are very low and do not earn market-linked returns.
The tax implication cannot be ignored
When it comes to tax, if you choose an ELSS scheme of mutual funds, you can avail tax benefit on your investment under Section 80C. The same is true for pension plans. But in case of redemption the tax implication is different. Annuity payments received under pension plans are taxed. Only the commuted part is tax-free. In case of mutual fund investments, returns are taxed as long term and short term capital gains. Long term capital gain in case of equity mutual funds is only 10% of the gain amount and that too a gain in excess of 1lac. This means upto a gain of 1lac, no tax needs to be paid.
Given these benefits, mutual funds are the best retirement plans. You can start your retirement planning by choosing SIPs and investing an affordable amount every month. Thereafter, as your age increases, you should shift your investments to debt oriented funds to safeguard the generated returns against market fluctuations. Lastly, SWPs are a good way of redeeming your mutual funds partially to create a source of regular income in your retirement years. So, choose mutual funds and create an inflation proof and considerable corpus for your golden years.
After our last blog on Importance of continuing SIPs amid Covid 19, we have received some queries on SIPs and most of the concerns were actually turned out to be myths. So we have decided to debunk those myths in today’s post.
After our last blog on Importance of continuing SIPs amid Covid 19, we have received some queries on SIPs and most of the concerns were actually turned out to be myths. So we have decided to debunk those myths in today’s post.
For the ones who have not read our last blog, we are starting with a little introduction about what exactly are SIPs.
SIP or Systematic Investment Plan is an effective means of investing funds in the mutual fund territory in accordance with the convenience and discretion of the investor. The periodicity of payments in this case gets determined by the chosen plan. Instances are not rare when retail investors shy away from the usual mutual fund investments due to inadequacy of funds.
A SIP can come to their rescue in such a scenario by helping them in proceeding with small investment amounts on a regular basis. Now, let’s discuss in brief about eight of the biggest SIP myths and examine their validity in its true sense.
Only small investors can benefit out of SIPs
There is a common misconception amongst investors that those having large funds cannot benefit adequately out of SIPs. However, just as its name suggest, SIP creates a systematic investment environment to instil the saving habit amongst its investors who can start with as low as 500 INR per month. Correspondingly, high net worth individuals can invest lacs of rupees in the SIP schemes according to their preferred tenure.
Missing SIP instalments attract heavy penalty
Investors are often worried about being penalised with hefty amounts if they miss out one or more of their SIP instalments. But in reality, no penalty, fine or similar charge is imposed by the Asset Management Companies if investors default on paying their instalments in time.
Let us take the example of Mr A who invests 2000 INR in SIP schemes per month having a NAV of 100 INR. Thus 20 units are added to his portfolio. If the investor defaults on paying a particular month’s instalment, then he will not be able to avail the units belonging to that particular month.
If you want guaranteed returns, SIP can serve as your perfect choice
SIP should never be thought of as a guaranteed return scheme. Investors often think that opting for the SIP method completely eliminates all the associated risks and capital loss. But in reality, the ultimate profits or gains of an investor depends upon the market scenario. In the event of a market crash, an investors capital might totally erode even if he proceeds with SIP investment.
However, the extent of loss in this case shall be significantly lower in comparison to lump-sum investment. SIP is the ideal choice for benefitting out of rupee cost averaging through investment in both high and low prices although it cannot completely eliminate the risk of loss.
You should start with your SIP only during the bear phase
Contrary to this popular misconception, you can also start with SIP investments when the market is undergoing a bullish phase. The main reason behind the same is that an investor can collate more units pertaining to a particular fund on the event of a market correction.
The total number of units held by an investor will keep on increasing coupled with a downfall in NAV of the fund. This brings down the investor’s average purchase cost. His gains will also be higher when the market is correctly valued as he collects greater number of units at a lower average cost.
The entire money invested in a tax-saver ELSS can be withdrawn after 3 years
Under ELSS, a majority of the investor’s corpus stays parked in equity and related products. There is a common misconception related to investing in ELSS funds as investors feel that they can withdraw their entire investment amount after the completion of the 3-years lock-in period. However, this 3 year is calculated starting from the date of investing a particular SIP instalment and not the entire fund itself.
You can take the example of Mr A who is planning to invest 1000 INR every month starting from 1st April 2019 in an ELSS fund. The units purchased on 1st April 2019 can only be sold on 1st May 2022 whereas the ones purchased on 1st May 2019 can be sold only after 1st June 2022. In simple terms, each single SIP instalment is treated as an individual investment having a separate lock-in of 3 years.
You cannot invest a lump sum amount in an ongoing SIP scheme
SIP is merely a mutual fund investment vehicle and it does not impose any restriction on lump sum investment even while proceeding with a monthly payment scheme. Suppose Mr B is investing 1000 INR monthly in a particular SIP scheme with a reputed fund house. If he gets a bonus worth 50000 INR from office and wishes to invest the same, then he can proceed with it readily without hampering his normal SIP investment.
Lump Sum and SIP mutual funds are different from each other
Lump-sum and SIP are simply two different modes of mutual fund investment. While one encourages periodic investment, the other is perfect for bulk investment at one-go. Both these two methods carry their individual investment philosophy and are meant for two completely different sets of investors.
It is better to invest in stock periodically
Mutual fund investments bring down the level of risk when compared to individual equity stock. However, if the investor parks all his money in a particular stock and its value crashes, then he might have to suffer heavy-duty losses. Mutual fund investment however tries to address this common problem by diversifying your investment to an array of stocks each having a separate set of risk and returns.
This distributes and brings down the overall risk by increasing chances of benefitting out of higher returns. This is why fund houses advise investors to proceed with balanced investment in mid-cap, large-cap and small-cap sectors. Alternatively, they can also proceed with multi-cap funds to enjoy the best of both worlds.
SIP has been accredited with inculcation of discipline amongst the investing folk while safeguarding them from the wrath of inflation. It also leads to holistic participation by a bigger chunk of investors coupled with relatively less risk.