For regular income - equity funds or balanced funds sahi nahi hai ...

Are you seeking regular income from your mutual funds? In that case, please do not look at equity funds or balanced funds. Do not consider regular dividends or even systematic withdrawal from such funds.

Read my article to know more ...

For regular income, equity and balanced funds sahi nahin hai ...

Read the English translation below:

Recent budget proposed by the Finance Minister introduced a tax on dividends from equity-oriented mutual funds. Some mutual fund investors and distributors were upset with this proposal. Some of them had opted for balanced fund seeking monthly dividend. Now these dividends have become taxable. The tax would impact the net amount received in hands.

First of all, let us understand the tax on dividends. This is not the regular income tax that is payable on the income received in hand. However, this is dividend distribution tax, which would be deducted before the dividend is paid out. The dividend that one receives remains tax-free in the hands of the recipient. This means that although the recipient does not have to add the dividend income in the taxable income and calculate the tax on it, it is received AFTER deduction of tax, which would mean that the investor’s returns are reduced.

This is what has upset those who invested in the balanced mutual funds seeking regular income.

We will not discuss about the merit of introducing such a tax. However, the focus of our discussion would be on the choice of equity or balanced funds to seek regular income. Before we launch the discussion, let us also add that now that the dividend is subject to distribution tax, many have started considering regular withdrawal, known as SWP (Systematic Withdrawal Plans) to get regular income. On paper, such a regular withdrawal strategy looks highly tax-efficient in comparison to dividends. This happens since the entire dividend amount is subject to tax, but in the withdrawal case, only the capital gains are taxable and not the capital withdrawn.

The question to consider should be: is it prudent to invest in equity funds or balanced funds for regular income? Very often, people get carried away with the taxes and try to save taxes, forgetting the true nature of the investment category. In the offer document of equity and balanced funds, an important item is called the “investment objective of the scheme”. In all such cases, the investment objective is “to provide long term capital appreciation” and not “to provide regular income”. In fact, even the nature of the asset does not support the ability to pay regular income.

We do not look at liquid funds when the objective is to create wealth. However, liquid funds are ideal when “liquidity” is the prime objective. Exactly in the same manner, if “long term growth” is the objective, equity could be a suitable asset category, but it is not suitable for short periods of time, or for liquidity, or for regular income.

- Amit Trivedi

 

Equity investments simplified - your queries regarding mutual funds

Here is the transcript of my chat on www.moneycontrol.com today.

http://www.moneycontrol.com/news/mgmtinterviews/chats/detail_new.php?chatid=2935

Worried about market peaking? 3 things first-time equity MF investors can consider

I have been quoted in this article. Click on the link below to read further:

A range-bound market near its all-time high make many first time investors worry. Here are three steps that should reduce their anxiety.

Transcript of chat 21-May-2017

Click on the link below to read the transcript of my chat on www.moneycontrol.com on 21st May 2017



Equity investments simplified

Reviewing portfolio regularly: A comparison of SIP performance

 How do you respond when you come across an article comparing SIP performance across various mutual funds? Read my article to understand further:

Reviewing portfolio regularly: A comparison of SIP performance

Chat transcript - build wealth through mutual funds - master your money

Click on the link below to read the transcript of the chat on www.moneycontrol.com

Moneycontrol - Master Your Money chat transcript

Large-cap or mid-cap, which funds are better? Or how do you evaluate these? Click on the link below to read my article in Mid-day Gujarati edition:

http://epaper.gujaratimidday.com//epaperpdf/gmd/09012017/09012017-md-gm-15.pdf

The English translation is as under:

Equity funds based on market cap bias

“Do you think mid-cap funds are better than large-cap funds?” This is a regular question these days from savvy mutual fund investors. On the other hand, when I look at some other mutual fund investors, their portfolios are heavily skewed towards mid-cap funds.

This is bound to happen. The mid-cap sector and the mid-cap funds have seen a dream run in the last few years. See the numbers below:

Fund category	1 year	3 years	5 years
Large cap	6.49% p.a.	13.00% p.a.	13.41% p.a.
Mid cap	7.24% p.a.	24.20% p.a.	21.75% p.a.

(Source: www.valueresearchonline.com)

The numbers are surely impressive for mid-cap funds – absolutely as well as in comparison to the large-cap funds.

It is this past performance that attracts many investors towards this sector. However, while the returns are visible, the risks are often not visible. In such a situation, investors tend to ignore the risk-return relationship, which says that in order to get higher returns, one has to be ready to take higher risks. In other words, the asset category that generates very high returns may carry higher risks.

Let us first look at what these fund categories invest into. The term “cap” in both large-cap and mid-cap is abbreviation of capitalization or market capitalization. This is the value the market has put on the entire company. In other terms, if one were to buy the whole company, the amount payable would be equivalent of the market capitalization of the company. It can be calculated by multiplying the market price per share with the number of shares issued by the company.

So the large-cap stocks are those belonging to companies with large market capitalization and mid-cap stocks are stocks of companies with mid-sized market capitalization. There are small-cap and micro-cap stocks also. The schemes get the category names based on where the money is invested, e.g. the mutual fund schemes that invest in large-cap stocks are known as large-cap funds.

As a general rule, large companies are leaders in their respective markets enjoying dominant position. Most of the times, these companies enjoy stable business conditions and are able to weather the storms better than the small and mid-sized companies. Thus, investment in such stocks turn out to be safer compared to the smaller counter-parts. At the same time, some of the small and mid-sized companies may turn out to be long-term winners and end up being large-cap and market leaders. Thus, the return potential could be immense. It is this return potential that lures investors towards such companies when the going is good. However, when the tide turns, investors tend to flock towards the safer large-caps.

The risk-return relation can be seen from the graph below:

(Source: www.valueresearchonline.com)

The above graph shows performance of BSE Sensex and BSE Mid-cap indices. The former represents the large-cap stocks, whereas the latter represents mid-cap stocks.

Take a look at the years 2009, 2011, 2012 and 2014. In all these years, the indices moved more than 20% up in 2009, 2012 and 2014 and more than 20% down in 2011. These are the only years with such large movements out of the last eight years shown in the graph above.

It is interesting to note here that in each of these four years of huge movements, the mid-cap index has witnessed a bigger move compared to the large-cap index (Sensex). In other words, when the stocks went up, the mid-cap stocks posted bigger gains and when the stocks went down, these posted bigger losses in comparison to large-cap stocks.

We can easily conclude from the above that while the returns in the last few years have been high, mid-cap stocks are subject to higher risks during an individual year, or even for a longer period, sometimes.

For example, if someone invested Rs. 1,00,000 in Sensex on January 1, 2011; the value of investments would be Rs. 1,03,234 after 3 years, whereas the same amount invested in BSE mid-cap would have reduced to Rs. 85,936.

It is important for anyone to understand the risk-reward relation while considering investment in various schemes. Looking merely at the recent past performance may not be enough to take a decision.

- Amit Trivedi

How do you know which scheme you have invested in?

"How do you know where the mutual fund scheme invests our money?"

To understand the answer to this basic question, click here to read my article in today's Mid-day Gujarati, Mumbai edition.

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The English translation is as under:

Recently, after an investment seminar, someone approached me and asked a very basic question: “How do I know if a mutual fund scheme is an equity fund, a balanced fund, a debt fund or a liquid fund?” Well, for someone who has spent more than a decade and a half in mutual fund industry, this was unthinkable. However, the question only reflects that there is still a lot of work required to spread the awareness about a good investment vehicle.

Well, let us come back to the question that the person asked. How does one know what type of a fund it is?

A mutual fund is a portfolio of investments. All of us have a portfolio built by ourselves. We invest some money in bank deposits, some in company deposits, we buy some debentures, we buy some small savings schemes, and we also buy some shares or even a real estate property. We refer to a combination of all these investments together as an investment portfolio.

Similarly, a mutual fund scheme is another portfolio with a few differences. For one, the portfolio referred earlier is self-managed by the investor; whereas the mutual fund portfolio is managed by a professional fund management team. Second difference is huge. While constructing our self-managed portfolios, we normally do not start with some guidelines regarding how we would manage the same. In case of a mutual fund, the scheme’s investment objective, investment style and the investment universe have to be clearly defined in a legal document called the offer document.

It is this offer document that one must refer to in order to understand the details of the scheme. Let us introduce this particular document. An offer document is like a janam-kundli. It is the legal document that binds the fund management company and the fund management team. The fund management team has to manage the scheme in accordance with this document. This is why details like the scheme’s objective, investment style and details of where the money can be invested – are all part of this document. Apart from this basic scheme related details, this document also gives details of the fund management company as well as its promoters, which includes their financial details. This helps one assess the financial and technical strengths of those who manage your money. One can also access information (including the past track record) regarding other schemes managed by the same fund management team. The service and operational details are also a must.

Since the single document was becoming too bulky with too much information, SEBI made an investor friendly change – breaking the document in two parts, viz., Scheme Information and Statement of Additional Information. The former carries details regarding the scheme one is considering, whereas the latter details information regarding the fund management company and other general details.

An investor is required to have read the offer document before investing in the scheme. Please follow this advice as it is always in your benefit to “look before you leap”.

Happy investing

- Amit Trivedi

Transcript of today's chat on www.moneycontrol.com

Click on the link below to read through the transcript of today's chat on www.moneycontrol.com

Equity investments simplified