SIP Top Up - a very good facility for the salaried class

My article in Gujarati Mid-day today on SIP Top-up facility

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The English translation is as under:

Earlier, we have discussed about the benefits of SIP and also seen how it works. We highlighted the two major principles on which the concept of SIP works, viz., “Rupee cost averaging” and “power of compounding”. The power of compounding helps one accumulate large sum of money through small regular contributions. We know that small drops make an ocean. It is the same with SIP, too.

An investment of Rs. 5,000 per month for a period of 25 years adds up to more than Rs. 65.00 lacs, if the investment grows at 10% p.a. yes, every drop makes an ocean.

Well, there is practical difference here. Of course, we do not know the exact return that any scheme would be able to generate in future, there is a small difference between an illustration as above and real life. In real life, most of the time, the ability to save also increases. How do we factor for that?

That is where mutual fund companies came up with a practical and a very useful innovation known as SIP top ups. In this case, the monthly SIP amount is increased periodically. Let us assume for the purpose of simplicity that the amount is increased every year at the rate of 5%.

Thant means, in our example above, while the investor started with monthly investment of Rs. 5,000; the same was increased to Rs. 5,250 per month in the next year (Rs. 5,000 plus 5% growth on that). In such a case, the accumulation would definitely be higher, since the invested amount keeps increasing.

The calculations suggest that the amount accumulated would be more than Rs. 1.50 cr. Compare this to Rs. 65 lacs accumulated if the invested amount was not increased.

There are schemes available that allow an investor to increase the amount by a certain percentage (as shown above) or by a certain amount, say Rs. 500 per year. There are schemes that allow an investor to top up the SIP amount every six months, too.

If you expect your income to grow year after year, it is logical that the savings would also grow. In such a case, SIP top up is an ideal choice for most people earning regular income.

- Amit Trivedi

 

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Arbitrage funds - for short term parking of funds

Please click on the link here to read the article, published in Mid-day Gujarati, Mumbai edition on 6th February, 2017

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The English translation is as under:

In the last few years, one of the mutual fund categories has become quite popular – especially among individual investors intending to park money for short periods of time. This category is known as “arbitrage funds”.

As such, the name does not indicate anything, especially for the uninitiated investors or someone who is less familiar. However, these funds are among the safer funds in that they do behave almost like liquid funds. As mentioned earlier, these funds may be considered for parking money for short periods like a month or a quarter or so.

Let us understand how these funds work.

The term arbitrage means “simultaneous buying and selling of same securities, commodities, or foreign exchange in different markets to profit from unequal prices.” Arbitrage requires two separate markets and a price difference in these markets for the same security. Since one is simultaneously buying the cheaper one and selling the costlier one, this is a profit-making opportunity without involving any risk.

In reality, there could be transaction costs involved in both buying as well as selling. These costs need to be adjusted before arriving at the profit number. Such anomalies do exist at times and many players take advantage of the same.

Lest us elaborate on this in the Indian context through the example of arbitrage opportunities in stock markets.

On 3^rd February, Axis Bank stock closed at Rs. 489.90 on the National Stock Exchange and at Rs. 489.65 on the Bombay Stock Exchange (both prices are taken from the cash market segment). If someone could buy on BSE and sell on NSE simultaneously at the closing price, there was a net profit of Rs. 0.25 per share, assuming the transaction costs to be zero. (For the purpose of this discussion and example, we would assume the transaction costs to be zero. For simplicity, we are also assuming that one has to deliver the shares at the NSE only after receiving the same from the BSE.)

Since both purchase and sale happened simultaneously, there is no risk involved – whatever happens to the price of the stock. The profit of Rs. 0.25 per share on a share price of Rs. 489.65 translates into a profit of 0.051% for a day, or 18.64% per year. Please understand that this calculation is based on the assumption that the transaction costs are zero. Once you adjust for the costs, there is no profit opportunity left.

On the other hand, there is generally a price difference between the cash market and the derivatives market. Taking the example of Axis Bank once again, on the BSE cash market segment, the closing price was Rs. 489.65 and that for Axis Bank futures (expiring on 23^rd February) was Rs. 491.30. This meant that the futures price is higher than the cash market price by Rs. 1.65 per share. Someone can profit from this opportunity (once again, this calculation is without factoring the transaction costs) by buying the shares in the cash market segment and selling the futures. The futures contract would automatically expire on 23^rd February, whereas the shares bought on cash market must be sold on the same day. That means, the investor would be investing Rs. 489.65 per share for 20 days and earn a profit of Rs. 1.65 for the same. This translates into an annual profit of 6.15%.

If during the 20 day period, share prices go up, one would profit on the cash market – the shares bought, whereas lose on the futures market – futures contracts sole. If the prices go down, it would be reverse, i.e. loss in the cash market segment and profit in the futures market. Thus, theoretically, one has pocketed the annualized profit of 6.15%, irrespective to what happens to the price thereafter. This is why such trade is considered risk-free.

Arbitrage funds take the advantage of such opportunities.

At the same time, as we have seen in the numbers, most of the time, the profit is in the range of the returns liquid funds can generate.

Since these funds invest in the stock market, such funds may get classified as equity funds for the purpose of income tax. That makes these funds very attractive as compared to liquid funds.

- Amit Trivedi

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Mutual funds serve various investment related needs of investors ...

Mutual funds manage our money - almost everyone knows about this. However, most often, some of the other functions related to investing are forgotten. These are also taken over by asset management companies, making life very simple for investors. Click on the link here to read further ...


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The English translation is as under:

“If I have Rs. 100 to invest, how much money should I invest in mutual funds and how much in stocks?” Recently, someone asked this question.

This is an oft-repeated question, asked in various forums and in many different ways. Some ask as a simple question as mentioned above. Some frame their questions using technical terminology as: “How much should I allocate to mutual funds out of a total fund of Rs. 100?”

What is the correct answer in such cases? Should you allocate 30% to mutual funds? Or does it depend on a person’s situation? Or risk profile? Or age?

The person asking such questions has probably not understood what mutual funds really are and is considering mutual funds as just another product – a substitute of stocks, for example.

Are mutual funds really another option for investing in stocks? It is important, hence, to understand what mutual funds are and how these are different from the traditional investment avenues.

A mutual fund is not an investment by itself, but outsourcing the investment management and administration function to a professional organization. Instead of investing in various instruments ourselves, we can outsource that job to a professional organization.

Within a mutual fund company, there are people that take care of some very important functions:

·      Fund management team: This team handles functions related to management of funds, which involve securities research, decisions regarding buying and selling of securities, execution of trades through brokers, and other paper work related to the same.

·      Fund accounting team: This team manages the accounting function related to the investors’ money invested in the scheme.

·      Registrar and transfer agency: This team is the record keeper of investor data and transactions. This team also maintains the records of unit balance in each of the investment folio. It also takes care of issuance of account statements, as well as dividends and various investor transactions in the folio.

·      Custodian: This is an outside agency and not part of the mutual fund company. They keep custody of the securities and settle trades with the clearing house of the stock exchanges, where the trade takes place. It is a security feature that the custodian is never part of the asset management company.

In other words, you get much more than just a portfolio manager by investing through a mutual fund. And, yes, just to reiterate, you also outsource the function of finding relevant and suitable investment avenues to professionals.

So, let us come back to the question asked in the beginning, “If I have Rs. 100 to invest, how much money should I invest in mutual funds and how much in stocks?”

The answer is, “You can invest all your money through mutual funds”. There are various different kinds of mutual fund schemes to cater to various requirements of investors. There are various conveniences built into these. You take your pick. Identify your need and go take the advantage of mutual funds.

- Amit Trivedi

Do you know the future?

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