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Equity investments simplified

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Date: 10th August 2015
Time: 4 PM to 4:30 PM

An investment option for safety seeking investors

Article in Mid-day, Mumbai on 3rd August

http://epaper.gujaratimidday.com//epaperpdf/gmd/03082015/03082015-md-gm-11.pdf


The English translation is as below:

MIP – Monthly Income Plan – do not go by the name, there may not be monthly income, after all.

Among the various mutual fund products, there are some that invest in more than one asset categories. These schemes are known as hybrid schemes. One such hybrid category product is known as MIP or Monthly Income Plan. These schemes are predominantly debt funds with marginal allocation to equity. Whereas the debt component provides stability, equity has the potential to boost up the returns.

The objective of combining the two assets is to get the best out of the two as mentioned above. However, one needs to be more careful while considering investing in MIPs.

While in some of earlier articles we talked about the debt funds and equity funds separately, in a hybrid fund, one must check both the debt and equity portfolios.

The equity portfolio could be large-cap or mid-cap or multi-cap; concentrated in few stocks or well diversified. Normally the equity portfolio of MIP is diversified across sectors and market capitalization (or size of companies).

The debt portfolio could have different maturity papers (higher or lower interest rate risk); higher or lower credit quality of the debt papers. In most cases, the average maturity of the portfolio is not long, but not too short, either. Thus, the interest rate risk may not be too high. At the same time, even the credit profile of the portfolio is good in majority cases.

Another important thing one must check is the allocation between equity and debt. One could see many variations here. The equity component could be as low as 0% to as high as 35%. The debt component on the other hand would typically be more than 65%, and could go up to 100% of the portfolio. Higher allocation to equity increases the risk of price fluctuation. At the same time, the same has the potential to increase long term returns of the scheme.

While talking about the allocation between equity and debt, some schemes try tt maintain constant allocation between the two, whereas in some cases, the fund manager may want to have the flexibility to change the percentage allocation based on one’s view on the markets.

Having said that, let us go back to the statement made in the opening paragraph. Due to the equity component, and sometimes due to the debt component, too, the NAV of the fund may fluctuate such that no surplus may be available for payment of monthly dividends, occasionally. In such cases, the scheme may skip dividends for some months.

This does not mean the scheme is bad. It only means that some time the monthly dividend may not be available, especially in the initial period after the launch. However, once the scheme has built reserves, it has the potential to pay regular dividends.

Overall, an MIP is a good investment option for the conservative investors since:

1.     It is a stable portfolio

2.     The long term returns are more tax-efficient

3.     It has potential to deliver higher return than traditional fixed income products without significantly increasing the risks.

Make sure you make a wise choice.

Happy investing.

-        Amit Trivedi

The author runs Karmayog Knowledge Academy. Recently, Amit has authored a book titled “Riding the Roller Coaster – Lessons from Financial Market Cycles We Repeatedly Forget”. The views expressed are his personal opinions.

Why Buffett asks you to invest within circle of competence

Why Buffett asks you to invest within circle of competence

To make the most of an opportunity is a great idea, but one should also know what an opportunity is.

Read more at:http://www.moneycontrol.com/news/investing/why-buffett-asks-you-to-invest-within-circlecompetence_2207381.html?utm_source=ref_article

My interview about the book

You need to know how not to lose money

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The importance of a mutual fund account statement

Click on the link below to read my article in Mid-day Mumbai edition today:

http://epaper.gujaratimidday.com//epaperpdf/gmd/20072015/20072015-md-gm-11.pdf


The English translation is as under:

“Can you please provide me the information of your investments?” Asked the financial adviser to the client. The client answered: “I invested so much in XYZ mutual fund, this much in ABC mutual fund, …, etc.” The adviser was not satisfied with the answer, as he wanted to know the current value of the investments.

The client was unable to understand the question, as they were talking on phone. The adviser suggested that they meet. He also requested the client to carry the account statements for the meeting.

How the adviser helped the client to know the value of investments?

When an investor invests in a mutual fund scheme, one gets an account statement. This statement looks quite like a bank statement in that it contains the record of various transactions the investor has done in the account as well as the current balance and any dividends one has received. The statement also contains some basic details of the investor and the mode of holding.

As far as the investor’s question in the discussion above is concerned, the account statement serves an important purpose. An investor can see the unit balance in the respective mutual fund scheme folio. Multiplying this unit balance with the current NAV of the scheme gives the current value of investments.

While how much money you invested is important to know, after a while, it is important to know how much money has been accumulated in this account.

An account statement, as mentioned earlier, also shows the cumulative value of the dividends paid by the scheme in this investment folio. This gives a good idea to the investor about how much Rupee returns one has made.

One should be careful to understand that the total returns one has got through the investments cannot be simply added as what one received few years ago cannot be equated with what one got now. The concept of “time value of money” is important for anyone interested in the study of investments and loans.

How often can one get an account statement?

Actually, any number of times. A mutual fund account statement is just a document that records the transactions and unit balance, it can be obtained from the office of the mutual fund company or the registrars any number of times one wants. There are no charges levied for this. Mutual fund companies also offer online services to the investors, which help an investor check the current value of investments anytime and from anywhere. Today, there are mobile phone applications also that help one check the current value of investments.

Investing in mutual funds is quite simple. Checking the current value of investments is even simpler.

Amit Trivedi

The author runs Karmayog Knowledge Academy. Recently, Amit has authored a book titled “Riding the Roller Coaster – Lessons from Financial Market Cycles We Repeatedly Forget”. The views expressed are his personal opinions.