Looking at the current market situation, you might feel this is not the right time to invest as the markets are volatile due to slow economic conditions owing to global spread of deadly coronavirus. The impact has aggravated in most sectors due to extended lockdown in the country which is now at a stage of phased unlock.However, to create wealth for the long term, this would be the best time to invest in equity markets. Wise people say, “little drops of water make up the mighty ocean.” And it is amazingly accurate and perfectly fits the wealth appreciation through mutual funds SIP.
SIP is just a modest way to start a mutual fund portfolio and it can prove to be the most powerful tool for wealth building.
What Is SIP?
SIP refers to Systematic Investment Plan, which is similar to recurring deposit in a way that a specific sum of money is required to be invested periodically. Generally, a bank account is required to be assigned for direct debit or ECS facility for such SIP investment. Every mutual fund house offers investment in mutual funds through the SIP route.
Advantages of SIP
SIP can be started with any minimum sum prescribed (minimum Rs.500 per month), but afterwards can be topped up with additional sum of money as and when excess funds are available. This means that additional units can be purchased through SIP route as and when excess money is available. Such flexibility increases the attractiveness of the SIP route.
- Compounding effect
SIP leads to wealth appreciation as the amount contributed periodically is invested over and over again along with the return earned on the principal. This yields better when the investment tenure is longer and the investor has entered into the investment at much early age. Compounding effects can provide for a good swell in your mutual fund portfolio.
Even a small investor can enter the mutual fund investments through the SIP route. This is because, only a specific sum committed at the beginning of mutual fund SIP is required to be invested periodically.
Even conventional and conservative investors can easily opt for SIP route, because money at stake is much lower (even if we accumulate lowest contributions for a longer term), but return on such investment and wealth appreciation is very lucrative, especially in case of equity mutual funds. So those who do not wish to enter the stock market directly, but wish to enjoy stock market ups and downs, SIP is an ideal way to go in.
- Professional management
Even though you are sparing for management fees while you purchase a mutual fund through SIP, it is worth every penny spent, because your funds are managed by experienced and academically well off fund managers. This gives you an extra edge over common equity shareholders, who trade in the markets on the basis of individual experience and study.
- Inflation effect
Inflation is the real enemy of your future income earning capacity. Inflation reduces the returns in real terms. For e.g. if Rs.100 is what is needed to buy 10 bottles of juice, then considering 10% inflation rate, next year, you will only be able to buy 9 bottles of juice.
This means that inflation reduces the purchasing power, thereby creating a need for inflation adjusted returns in the long run. Mutual fund returns are usually inflation adjusted, as there they provide returns more than the inflation rate in the long run.
- Rupee cost averaging
SIPs give us an added advantage of rupee cost averaging which refers to lower average costs than different individual purchase costs (which at times may be higher in case the markets are bullish) of various lots of mutual fund units, purchased at different point of times.
Rupee cost averaging yields better results especially when markets are bearish and end up in down trending stock prices. This results in lower NAV, meaning that a fixed sum of SIP amount will be able to purchase more number of units as compared to a bullish market scenario.
SIP in mutual funds is not restricted only to equity markets, but also to debt funds or hybrid funds or even gold funds etc. There could be any type of underlying asset for the mutual fund, so if you invest in different types of mutual funds (equity, debt, hybrid, gold, emerging equity, GILTs etc.) with a minimum sum allocated to each of those, you may enjoy a balanced bouquet of returns as well as decent wealth appreciation as compared to conventional modes of investment like bank fixed deposits etc.
How to build a mutual fund portfolio through SIP?
- Diversification is the key
As discussed herein before, mutual fund SIPs are the cheapest way to diversification within the investment portfolio. Hence, it is important that you should invest in SIPs of various mutual funds with different underlying assets like equity, debt, gold etc. This would offer you superior returns, when markets are spurting growth and at the same time, will ensure minimum risk to the principal invested, when markets are falling down.
- Align your mutual fund to your financial goals
Every individual has different financial needs and hence has different financial goals at each age group. Hence, it is better to align the mutual fund SIPs according to your investment strategy based on long term and short term financial goals. For e.g. it is better to invest in equity mutual funds SIP, if you are investing for your retirement corpus which is a long term investment.
- Don’t hustle
The markets are usually much heated and are very volatile, so it is very common that NAV will keep fluctuating every now and then. However, there is no need to panic and get out of mutual funds, when markets fall down. If you stay put for 1-3 years for short and mid-term goals and 5 or more years for long term goals, then you may very well be richer than you already are, giving you benefit of rupee cost averaging.
- Age appropriate investment
For e.g. if you belong to the age group of 25-35, then equity exposure in your mutual fund SIP portfolio should be almost around 60-70%, which would earn superior returns and will offer tax benefits also (for equity), thereby increasing the effective rate of return.
Reverse is the case when your age progresses, which means you should concentrate more on balanced funds which provide reasonable returns with moderate or low risk.
- Focus on long term
If you are investing in SIP for mid-term or long term goals like kid’s education or retirement planning, then it would be better if you are invested for at least 3 years in any particular mutual fund. For e.g. compare the returns generated by any mutual funds for 1 year, 3 year and 5 years. You could observe that funds have generated higher returns in 3rd year or 5th year. This is because of the compounding effect.
Now that you are aware of all the features and benefits of investing through SIP, do not waste any more time and start investing. You can download the Fintoo App to start your SIP today.
Coronavirus made us realise the importance of having adequate insurance to protect our family from any unforeseen incident. We all know that life insurance gives financial protection to your family when you are no longer there to care for them. There are different types of life insurance policies to cater to your different needs. One of them is Term Insurance.
Term Insurance is a policy which provides the policyholder with the death benefit. Usually, there is no maturity benefit in these policies and that is the beauty of it. As insurance companies do not promise a maturity benefit, these policies come at a very low premium and high sum assured. It provides an adequate protection to your family at minimum cost.
However, term life insurance can be a big aid in case of other problems too. This article will portray a number of problems which can be solved with term insurance. This is possible because insurers are offering additional benefits along with the term insurance.
Let us now see how a term insurance can be useful for you in 5 different ways.
Financial security during the times when you are unable to care for your loved ones
Have you ever imagined what will happen if you are no more to care for your loved ones? Standard term life insurance provides the death benefit, which means that the disbursement is made only in the event of death of the insured.
Your term insurance cover which offers the death benefit should at least be 10-12 times of your income. As everything is becoming expensive year on year, you should make sure your insurance cover is adequate.
Taking term insurance would ensure that your loved ones will not be affected by inflation impact. This way you would not only satisfy your family’s basic needs, but will also be consistent with their lifestyle needs.
Cover against disability or critical illness
Insurance industries have adapted themselves to the changing needs of the customers. Like I mentioned before, the basic term insurance only ensured payout in case of death of the insured.
But now many insurance companies have come up with various other types of term insurance with additional benefits. These additional benefits are called riders.
Certain term insurance policies provide cover against disability and critical illness, by paying an additional amount as premium for such additional benefit.
This option is cheaper as compared to the whole other insurance policy for the purpose of the critical illness or disability.
Also, term insurance for disability and critical illness comes much cheaper and is beneficial when you are diagnosed with a critical illness or meet with permanent disability.
Taking this rider of critical illness will be useful in the current phase of COVID-19 pandemic.
Term insurance with benefit of return of premiums
While most of the people still think of their term insurance as an insurance only where nothing is received on maturity, here is a fresh twist in the story.
The insurance companies have come up with a newer version which will pay the premiums back to the insured in case he survives the term of the insurance policy.
This has an added benefit to the death benefit existing in standard term insurance policy. This can be applied in retirement planning strategy as well. The amount received on maturity will be useful in incurring retirement expenses
Money back plans for liquidity
Money back plans are a combination of a term plan and endowment policy. It is the best instrument for tackling liquidity as well as insurance cover. This type of policy would benefit the insured in two ways.
First, if the insured passes away before the maturity of the term insurance, his family will get payout for the full sum assured even if the premiums were not paid for the whole term. This disbursement includes any accrued benefits or bonuses, if any.
Second, he is entitled to receive proportionate amounts at periodic intervals and will get the remaining corpus (with additional benefits) if he survives the tenure of the policy.
However, this type of plan is recommended only where you are unable to save money and are planning to reinvest the periodic payback amounts in attractive investments or to buy huge assets (which would otherwise cost you exorbitant interest on the loan).
Double benefit rider in case of accidental death
Some of the policies will have the benefit of opting for additional riders for accidental death. If the insured meets with the accident, then term insurance will generally pay double sum assured.
This type of policy is suited for those who work in hazardous environments or the risky work environment. This type of insurance cover is usually available on payment of slightly higher premium and it is not available as a separate policy type.
Term plans are not just an insurance cover, but they also act as an investment in some cases. When you opt for any other plan than standard term insurance plan (like TROP or money back plan), they pay you back the premium and in certain cases, the added benefits as well. This happens where the insured outlives the term of the insurance.
Retirement Planning can be done by various investments like mutual funds, NPS etc. Treat this term plan as a cushion in your corpus. You should not consider it as the only option for doing investments for retirement.
While planning for retirement, you can always look at term insurance plans as you will benefit from cheaper premiums (where the candidate enters at an early age) and provides cover for the maximum term.
In the case of survival benefits, you will get the rest of the corpus in addition to the regular payout during the term of the insurance.
An average investor may look at the insurance plan only as an insurance cover which will secure the family’s future in case of his death. However, look out for various other options available within insurance to effectively use the same for solving the biggest problems.
Download the Fintoo app to get started with investing in Insurance.
Financial experts say that – Disciplined equity investing can change your life in a disciplined way! This means that the one who masters in equity investing can have a sound and safe financial future. Isn’t that great? With strong wealth creation strategies and practices, one can create their own strong financial base that could further prove to be a strong financial support for the family.
If you are getting worried looking at the current market situation where the market fell by approx 30% initially majorly because of the Covid-19 pandemic, then please be informed that this is not something which has happened for the first time. Even in 2008, when the markets fell drastically, soon after it recovered in 12 months time giving double digit approx 75% return the next year. So no need to worry looking at the short term volatility. Wealth creation is a long term process.
Now let us see how we can invest in equity.
Depending on your savings you can choose your investment options. In this, there are two cases-
- If your income is regular, you can invest through SIP mode
- If there is no defined pattern of your income, you can save and invest lumpsum.
It is suggested that you invest through the asset allocation process by matching your personal goals, investment objectives, risk profile as well as time horizon.
You must be thinking which option is better for investing among the above available two options, right? You can clear your doubts and queries in the below segment –
In any of the approaches that you choose, the main point of consideration is to align your asset allocation to your personal circumstances and objectives.
The SIP mode can be preferred for a regular saving that would further help in building the discipline to investing. This provides the benefit of rupee cost averaging as well as compounding in the long term. The lumpsum investment must be in line with the asset allocation that is necessary to compute the investment objective, risk profile and even time management.
This was about general investment plans of how to plan your investments and which factors to keep in mind before investing. With these investments, we can have our own wealth creation that is obviously everyone’s dream. In spite of this being a wish of everyone, not all are able to successfully do it. Apart from following the strategies of investment gurus, there are some of the really helpful practical tips that can help you with better investments.
Before we dive into these practical tips, let’s be clear that there is no full-fledged working strategy of wealth creation in equity. You need to implement ideas, develop strategies for your finances that could help you a lot in future. So, let us now have a peek at the top 5 insiders rather say key ideas for having good wealth creation in equity:
The prerequisite- Set your financial goals:
This is the primary requirement for your wealth creation plan. Depending on undertaking the risk, you can set up your financial goals. You need to understand your needs and wants clearly and accordingly approach it. Your hard earned money needs to be properly invested and so you must decide how and till which period you need to invest. This is called goal based investing. It is important to have a goal in place before starting the investment to achieve it. This is necessary because the investment decision should be based on the nature of the goal and tenure of the goal.
The most important thing- Research:
Research is another prime factor to consider for your investments. Generally, people say that investment in equities is nothing less than gambling. There is a term called “tip” that decides about your investment in equities which is just a mouth of victory without any backing. With strong and thorough research, equity can be a more of a knowledge based wealth creating medium. As a result, it is advisable to invest your time too in learning the basics of equity investments. You can also get in touch with investment experts online platforms like Fintoo to guide on the same and help you with the investment process.
The must-have thing: Focused Portfolio:
After thorough research, you need to have your focused portfolio for carrying out investments. Focus on a few good names that can help you out with wealth creation rather than running behind 100 present in the market. Instead of managing big portfolios, focus on the small but good ones. Investing in few quality stocks or mutual funds can help you in managing your portfolio in simplest ways.
Consider investment period- Long Term:
If you are planning to invest in equity, it is advisable to invest for a longer time. The best thing you can do is buy the right funds/stock and hold them across the market cycle. The investments that you make in equities are not just about picking up quality stocks, but it’s also about how much patience you have to see your money grow. Keep in mind that – Big money is not in buying or selling, but instead it is in waiting patiently.
The last one- Reconstruction:
In the investment process, there are chances that your risk appetite may change or you may even come across any unwanted or unexpected circumstance while you are still investing. In such time, you need to effectively revise and reconstruct your portfolio. This is necessary in order to benefit you from the risk reward equation. Churning and updating your portfolio at regular intervals is not advisable as you may miss something big at some time. So, a better option is to reconstruct the portfolio according to the risk appetite only when it is needed.
Thus, these were some of the best tips that one should keep in their mind before making investments. Just be updated with the market trends, update your knowledge and keep a strong focus on your strategies that can help you with better investment plans and of course return on investments too.
For any further guidance and to initiate your investments, download Fintoo App and get started.
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.
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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. 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, but it helps to know whether the fund is performing consistently or not.
- 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 a 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 invested in Govt. securities only. It doesn’t have a default risk, but having said this, there is a chance of risk with the interest rates, especially long term gilt funds, which are more risky. 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, certificate 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 the 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.
To quickly start investing in debt funds download our Fintoo app
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.