Friday, June 30, 2017

Estimation of Debt Fund Returns…

“Kitna return milega?” This is a very common question majority of investment advisers and distributors of investment products face. Very regularly. Many simply look at the historical numbers and gave some projections based on the past. Some others stick to various thumb rules, e.g. equity returns = GDP growth plus inflation. In the case of fixed income mutual funds, many assume that the fund should return net YTM to the investors (Net YTM = YTM – fund expenses)...

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Monday, June 19, 2017

What you should know about mutual fund switches

Mutual funds offer a facility called "switch", which allows an investor to shift money from one fund to another within the same fund family. Let us know more about this facility. Click on the link below to read my article about this facility:

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The English translation is as under:


One of the facilities that mutual funds offer is to shift from one scheme to another. This facility is called “switch”. This shift could be for the full balance or even a part of it. This facility is available to only open-ended mutual funds and not in case of close-ended funds. This is because, anyway, one cannot transact with the fund in case of close-ended mutual funds.
Are there any restrictions? How many switches are allowed per year? There are no restrictions in case of open-ended funds, except for applicable exit loads. One can do unlimited number of switches. The only restriction is the pay-in / pay-out cycles in case of fund schemes.
For example, if you redeem from equity funds, the redemption proceeds are paid on a T+2 basis., the applicable NAV in liquid fund would depend on availability of clear funds. Hence, in case of switch into a liquid fund from an equity fund, the switch would be effective only after the redemption from the equity is processed. This would reduce the total number of switches that can be done.
If any exit load is applicable, the same would be charged in case of switches, too.
One big restriction is that switches are allowed only across schemes within one fund house. That means, you are not allowed to switch money from a scheme managed by a fund house into a scheme managed by another fund house.
Why does an investor need this facility?
There are various reasons why an investor may need this facility.
First of all, many investors park their lump sum investment in a liquid fund and then transfer the same regularly into an equity fund over a period. This periodical system of switching is also called STP or Systematic Transfer Plan.
Secondly, some investors take a view on the markets and shift money from one scheme to another. So when equity markets appear costly to an investor, one may want to shift from equity fund to a debt or a liquid fund.
Many switch from equity fund to liquid fund when they want to book profits.
At the same time, some use the facility to switch from liquid fund to equity fund when the equity market appears to be cheap.
Those who believe in the benefits of asset allocation also rebalance the portfolio through the process of switches.
However, this facility is for the benefit of the investors and must be used only when required. It should not be misused.
Finally, please remember that a switch is redemption from one scheme and a simultaneous purchase into another. Hence, the scheme from which one is exiting, there could be applicable taxes.
Both the exit loads and taxes reduce the overall return on investment and hence one must be very careful about these two.
- Amit Trivedi

Thursday, June 15, 2017

This or that? Should I buy stocks myself or invest through equity mutual funds?

Often we are faced with choices and on many such occasions, making the choice is too difficult – sometimes we lack the information, at other times the trade-off is too tough and at some other times, we have to choose between some very good offers only because our resources are limited.
In this blog, we will take up some such choices related to money and give our own perspective. While your methodology and decisions may be quite different from us, it is important to have a good framework for making good decisions.

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Tuesday, June 6, 2017

On Facebook live with Bloomberg Quint


Investor Expectations – A Risk That Nobody Talks About

We hear a lot of discussion about managing the investor expectations, but have you ever looked at the investor expectation is a risk? Can we really call it a risk? This point can be endlessly debated. However, here is a perspective why we prefer to call it a risk. ...

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Monday, June 5, 2017

NPAs with sponsor banks - are my MF investments safe?


Read my article on this subject in Mid-day Gujarati, Mumbai edition today.

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The English translation is as under:


Right now when the PSU banks are burdened with so much NPAs, are the mutual funds sponsored by these banks safe?
For the last few months, the media is abuzz with the reports on Non-Performing Assets of the banks. Some reports talk about large numbers and some scare the readers without the mention of any numbers.
A mutual fund is a trust that holds various different schemes. Each mutual fund scheme is a separate portfolio of investments. The scheme invests in various securities in line with its stated investment objective. The money invested in a mutual fund scheme is not invested with the sponsor.
Let us understand how mutual funds are structured. This will help us with the above question.
A sponsor company sponsors (promotes) the mutual fund and the asset management company. The mutual fund is set up as a trust for the benefit of unit holders, who invest in various schemes launched by the fund. The asset management company’s primary function is to manage the investments of various investors that invest in the mutual fund schemes.
Now, even at the cost of repetition, it is important to highlight that the investors invest in the schemes launched by the mutual fund, whereas the asset management company only manages the funds.
The unit holders are the owners of the scheme, whereas the asset management company is the manager. How do the investors know whether the schemes are managed in their best interests?
This is where a third entity enters – the trustees, either in form of a trustee company or a board of trustees. Since the mutual fund is set up as a trust, these trustees oversee the functioning of the asset management company, to ensure that the funds are managed in the best interests of the unit holders.
The asset management company can only invest the funds in the manner specified by the offer document within the SEBI regulations.
If something happens to the asset management company, the schemes would not be impacted since the money is not invested with the company but in various securities. The trustees have the right to change the manager. Similarly, if something happens to the sponsors, the unit holders’ money invested in the mutual fund schemes is safe.
It is this three-layered structure that ensures safety of the investors’ funds in the mutual fund schemes.
Having said that, there is another point that we need to discuss here. What if the scheme has invested in companies that have turned bad? The way the loans have turned into NPAs, what if the investments made by the mutual funds turn out to be bad? That risk is directly on the investors. However, once again there is a built-in safety for the investors. First of all, the mutual fund scheme is allowed to invest only upto a certain limit in any single company or any single industrial group. This means, the risk of business failure is spread across many investments, thus reducing the impact. Secondly, mutual fund portfolios are very transparent and hence, one can see the investments made by the fund schemes on a regular basis. Almost all funds in India declare their portfolios on a monthly basis. Third, the schemes are managed by professional fund managers, whose full time job is to manage investors’ money. A professional manager is likely to be better at selection of securities than most individual part-time investors.
So go ahead and invest your money in mutual funds. Even if the sponsor bank has very high NPA levels, your investments in the mutual fund schemes are not affected by those NPAs.
- Amit Trivedi