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Factors to consider before redeeming your mutual funds

Gone are the days when redeeming your mutual funds was a lengthy and hectic process. For this, one had to go to a branch, fill extensive forms and only then one was able to liquidate one’s investment. The process has become much simpler over the years. Funds can now be easily redeemed online with a click of a button.

 

However, before redeeming your mutual fund schemes, make sure to consider a few things so that your investment is not impacted. Even though there is no hard-and-fast rule that pinpoints the right or the best time to redeem a mutual fund scheme, there are some situations under which investors could consider exiting or redeeming their mutual fund investments.

 

For instance, if your fund is consistently underperforming, or if there are changes in objectives of the scheme that are no longer in line with your goals, you could consider redeeming your funds. Additionally, if you find out that there are many similar types of funds in your portfolio, selling some of them could give the investor’s portfolio a more diversified look.

 

Here are some of the instances when you should consider exiting your fund;

 

Change in asset allocation

 

Various asset classes such as equity funds, debt funds, balanced funds, etc. are included in mutual fund schemes. The asset allocation of a mutual fund scheme depends on the type of scheme it falls under. For instance, while most equity funds usually invest fully in equities, some schemes also split their allocation between equity and the rest in other sectors such as debt or allocation between domestic and international equity. While a fund manager can change allocations, but only within the limits specified, not beyond them.

 

Here is how the spread looks like for,

 

i) equity funds – invest 80 per cent–100 per cent in equity and/or 0–20 per cent in money market securities;

 

ii) balanced funds – 65 to 80 per cent in equity and/or 15 to 35 per cent in debt securities, and 0 to 20 per cent in money market securities.

 

Usually, experts say asset allocations change due to differential returns from various asset classes. Market movements also impact asset allocation significantly. Under such circumstances, if the fund no longer suits your goals, or is not in line with your risk appetite, you could plan on redeeming the fund.

 

Approaching goals

 

Among the various advantages of mutual funds, their ease of buying and selling, professional management, inbuilt diversification mechanisms, are some of the top factors that make them ideal for investors to meet their future goals and financial requirements. Therefore, if you are nearing the financial goal that you were saving for, and you need money, you could redeem your funds.

 

Industry experts usually suggest, when the goal deadline is 2 to 3 years away, an investor should move his/her moving from equity mutual funds (with long-term objectives) to debt funds, as they are liquid and good for short-term goals.

 

A Systematic Transfer Plan (STP) might be the best way to go about this. Similar to the process of SIP, it allows investors to periodically transfer/redeem certain units from one scheme and invest in another scheme of the same mutual fund house.

 

Changed or Postponed goals

 

We all know that chances of returns go up exponentially with the duration one stay invested in mutual funds. Simply put, the longer you stay invested in it, the more are the chances of higher returns. However, different type of goals needs different duration to stay invested.

 

For instance, for short term goals such as buying a car or going on a short vacation, one might need to invest in a mutual fund for roughly two or three years. While long-term goals such as buying a house the investment tenure could be 7–8 years or even more.

 

Therefore, if you start investing with a short-term goal in mind, and a few months down the line, you change your mind and think of directing the investment for a long term goal, you can do so but you are required to also make changes in the asset allocation of the scheme. It is so because, while a short term investment will be more inclined towards safer options like debt funds, long term goals require investments in equity funds. Hence, a change of goals could also be the reason to redeem your mutual funds.

 

Under-performance

 

It is always suggested by financial planners and advisers never to time the market, and as mutual funds are market-linked instruments, it is quite normal to see falling returns, especially over the short term.

 

However, you should only worry about your fund’s performance, after checking how other funds in the category have performed, or are performing. If your fund has been underperforming as compared to the peer group for more than two years or so, it should be a signal for you to exit that fund and move on.

 

Source: financialexpress

Is it a good time to invest in equity?

  • We don’t invest thoughtfully in equity because we try to follow the mantra “buy low, sell high” and fail to do it. It is seen that when markets hit rock bottom, most investors focus on exiting their investments to preserve their capital rather than trying to take advantage of lower prices and deploying additional capital. Or they do not think long term and put off their investment.
  • The common reasons investors give when they wish to avoid or postpone their investment are…
  • “It’s too late!”
  • Or “It’s not a good time.”
  • Or “Why should I invest now?”
  • Or “When should I invest in Mutual funds?”
  • Or “What is the best time to invest in mutual funds?”
  • If you too are giving these reasons when it comes to investing, then you are making a big mistake. Remember, you should not delay investing; start your investment journey right away! The best time to start your investment journey, if you haven’t already started, is ‘Today’!
  • Here are a few tips to help you begin your investment journey.

1. Do Not Delay, It Can Cost You 
 
When we stall or avoid investing, we are simply delaying or completely evading successful wealth creation. Delay in investing reduces the power of compounding as the investment term decreases.
To understand better, let us see the amount three friends – Ajay, Vijay and Ram – would get at the end of their investment tenure. If Ajay starts investing INR 2,000 per month at the age of 25, for his retirement at age 60, and two of his friends, Vijay and Ram, begin investing 5 and 15 years later, respectively, then the future values of each will be different.
It is seen in Table 1 that the future value reduces with the reduction in the investment term (subtract the age of the person from the retirement age).

Table 1: Effect of delayed investment
  
Even though they have all earned the same rate of returns per annum on their investment, Ajay who started investing early will have the biggest corpus by far at the time of retirement. Therefore, starting the investment journey early is a boon, if you want to build a huge corpus for your financial goals.
In fact, let us assume that even though Vijay delays his investment by five years, he invests an additional sum of INR 1.20 lakh per annum to catch up with Ajay, and Ram invests INR 3.60 lakh per annum to catch up with both. Even then, the corpus will be INR 1.11 cr for Vijay and INR 99.05 lakh for Ram, which is less compared to Ajay’s future value. The difference is nothing but the cost of delay.
 
2. Choose the Right Asset to Deal with Volatility and Risk
 
Choosing the right asset is important as it will help in growing wealth for you. Equity as an asset class can help you grow your wealth manifold but along with higher returns comes its volatile nature, which investors tend to confuse with risk.
Volatility reduces over a period of time but risk may not. Risk is about choosing the right product. For example, if you chose a company with bad management, it could be a risk; irrespective of how the market moves, the price of the share may never appreciate.
The stock of Kingfisher Airlines is a perfect example (graph 1). The stock in 2006 was at INR 76, and later in 2007 it reached its peak of nearly INR 300+ only to fall drastically and never recover. In the end, an investor would have lost all his money because the stock was delisted. This is a classic example of a risky proposition which resulted in a permanent loss; but it was not volatility.

Graph 1: Price movement of Kingfisher Airlines
  
Now, if instead you choose a company with good management, the price may be stagnant and may not move for a really long period of time, but eventually it will deliver results. Choosing a management is risk and the price movement is about volatility. Volatility is a market related phenomenon and risk is more intrinsic.
For example, the price of Reliance Industries remained within the range of INR 400 to INR 500 from 2010 till January 2017. Later, the stock rallied and has kept its momentum (as seen in graph 2). The stock price moved from INR 544 in February 2017 to INR 2,370.25 in December 2021.

Graph 2: Price movement of Reliance Industries
When you choose equity mutual funds you are investing in a basket of multiple stocks of various companies. This diversification prevents you from larger losses when the market gets tepid. So while you still have to deal with volatility, the risk factor is reduced. This is one of the primary reasons that mutual funds are an ‘all season’ investment plan.
Equity markets by nature will be volatile. It is a given. In the short term the volatility will be more and as the time horizon increases, volatility reduces.
The best way to understand volatility is to look at rolling returns. In the table 2 given below the maximum and minimum rolling returns over 20-year periods have been taken.
What this means is that if you had invested on any day during this period and held the investment for one year, your minimum return was -51.70% and maximum return was 97.32%. As the time period increases the difference between the two becomes less. In the third year, the minimum returns are negative still, but the gap between the negative and positive maximum returns reduces.
Further, in the 5th year, the minimum returns have turned positive along with maximum returns and the difference between the two has decreased further. Lastly, in the 10th year, the difference between the minimum and maximum returns narrows and both are positive. So, if an investment was held for 10 years, an investor never made a loss and the minimum return made was 6.38% and the maximum was 22.08%. In reality, the investor’s actual return would be somewhere in between.

Table 2: Volatility range
 So, to grow wealth by investing in equity mutual funds, you should think long term as the volatility tapers and only the minimal market risk remains.

3. Invest Regularly and Diligently
 
While investing in equity mutual funds, do it via systematic investment plans (SIPs) as you are reducing the risk factor further by investing a fixed amount at regular intervals, irrespective of prevalent market conditions. This is because when markets are down, you get more units and when markets are up you buy fewer units.
For example, if you are investing INR 10,000 monthly in a SIP and assuming that the Sensex drops by 5% every month for the next 6 months and then it rises 5% every month for the remaining six months, at the end of the year, the amount you receive is INR 1,45,971 on an investment of INR 1.20 lakh even though you saw a rise of 30% and then a drop of 30% in the markets.
If you observe, you started with an NAV of INR 10 and at the end it was again back to around INR 10 after a year (refer table 3 below).
The Sensex is just a reference point to show market movements.

Table 3: Rupee Cost Averaging benefit illustration:

So, SIP investing in an equity mutual fund, irrespective of market movements, is an extremely helpful tool in the hands of the investor.

 

4. Be Patient and Disciplined
 
The road to wealth generation requires patience and discipline, just as Rome was not built in a day. Over a short term period, the market is very volatile and the returns generated are in a broader range. But over the longer time period, market volatility subsides and the returns are within a narrow range.
For example, look at the performance chart given below of a large cap fund vis a vis the S&P BSE Sensex over 15 years. You can see that despite the sharp falls in the years 2008-2009 (Lehmann crisis), 2015-2016 (post-election) and March 2020 (COVID crisis) in the graph 3, the fund has done well and outperformed the S&P BSE Sensex.
If an investor had invested INR 10,000 in HDFC Top 100 Fund in Jan 2006, when the Sensex was up in December 2007, the value reached INR 19,451. Later when there was a market fall between 2008 and 2009, the value crashed back to 10,602 (March 2009). However, if the investor continued to stay invested, the value was at INR 55,202 in Jan 2018.
Now if the investor had been patient, for a span of 12 years, the value increased nearly 5x, but in March 2020, the value dropped to INR 39,495 consequent to the Covid scare. However, if the investor continued to hold on, the value as on date would be INR 77,516.
This shows that when you invest in equity, being patient helps you grow wealth.

Graph 3: Long-term growth despite short term volatility
 Values taken to the base of INR 10,000
When you invest in equity mutual funds you don’t have to worry about the stock selection process. Instead, you should focus on your goal and continue investing systematically, without giving in to market turbulence related panic.
There are roughly 250 trading days a year, making it 2500 days for a decade. A large portion of a stock’s return in a decade happens in 50 to 60 trading days. This means that what happens in 2% of the days, decides your decadal returns.
Even market guru Warren Buffet, advocates that, “Successful Investing takes time, discipline and patience. No matter how great the talent or effort, some things take time: You can’t produce a baby in one month by getting nine women pregnant.”
Therefore, when you invest in equity mutual funds, be patient, show perseverance, diligence and let your funds grow, without timing the market. Time in the market is of essence.

Bottom Line
 
We earn monthly and we spend monthly; so why shouldn’t we cultivate the habit of investing on a monthly basis? Treat an investment journey as a marathon not a sprint. So think long term, and equity mutual funds are an ideal product to create long term wealth if you follow two mantras for investment: the best time to invest is now and the best way to invest is regularly, in other words every month.
  

Source: Forbes

7 Ways Smart Spenders Save and Invest Their Money

Spend today, or save for tomorrow? The former gives us a rush of instant pleasure, while the latter helps us build a solid future for ourselves and our families. However, what’s the point of putting in long hours at the office if you cannot enjoy the fruits of your labour – at least partially? The key lies in maintaining a balanced approach between saving and spending so that one act does not cannibalise the other. Also, it’s essential to invest in mutual funds through SIP’s to let your ‘savings’ compound and grow over the long term. Here are seven things all smart spenders tend to do. You should, too!

 

1.    They save first

While reckless spenders indulge themselves to their content the day their paychecks hit their accounts, smart spenders save for their financial goals first. They’ve usually got a well-documented financial plan in place,

and with it, they have a fair degree of awareness about just how much they need to put away each month to make these dreams a reality. Having saved first, smart spenders enjoy the luxury of ‘guilt-free spending’.

 

2.    They have a written budget in place

The boring old budget is the bedrock of the smart spender’s financial plan. By earmarking sums of money each month for things such as home purchases, dining out, electricity, fuel, and the like, they inadvertently follow the tried and tested ‘coffee can’ system of bucketing monthly spending.

If they exceed their budget in one category in a given month (say, a great play hits but the tickets cost a bomb), they cover the deficit by scrimping on another one ( clothes bought for one month never killed anyone!).

 

3.    They ‘sleep’ on large purchases

Smart Spenders avoid the infamous “buyers regret” syndrome by delaying the impulse to make big-ticket purchases before properly thinking them through. Tempting as that 100-inch flat-screen TV seems to them as they stroll past it in the mall, smart spenders will rarely succumb to the impulse buy.

Instead, they’ll head home and contemplate the purchase decision and its ramifications with the mind. If it still seems good tomorrow, they’ll head right back to the mall and buy it!

4.    Occasionally, they observe ‘fiscal fasts’

 

Smart spenders are known to go on self-inflicted ‘fiscal fasts’. These purchase hiatuses could last from a few weeks to a few and can be very cathartic indeed. By restricting themselves to only spending on ‘needs’ and not ‘wants’ for a few weeks in a year, smart spenders effectively deleverage themselves – scaling back on money-draining, costly credit and stabilising their financial situations in the process.

In doing so, they also build their willpower to resist impulse purchases that could potentially set off a vicious cycle of unhappiness-inducing credit.

 

5.    They don’t bother with ‘keeping up with the Jones’s

Smart spenders understand that buying things merely to impress others is utterly futile, and akin to a never-ending race with a constantly shifting goalpost. They buy things with the singular intent of making themselves happy.

They never overextend their finances and spend their future incomes by taking on expensive personal loans or strapping on EMIs on their credit cards. In other words, they spend what they have, and for themselves alone.

 

6.    They know that saving isn’t investing

Smart spenders understand that saving money alone won’t make them rich unless they invest it fruitfully. Instead of procrastinating their investments, they deploy their savings into mutual fund investment plans through SIP’s, to secure their financial futures. Without curtailing their financial freedom, they invest in mutual fund SIP’s, which allow them to amounts as small as Rs. 500 per month.

 

7.    They believe in ‘tax-saving’ wealth creation

Smart spenders invest in tax-saving mutual funds and enjoy ‘tax-saving wealth creation’. They start their SIP’s into tax-saving mutual funds early on in the financial year and enjoy deductions under Section 80(C) in the process.

Smart spenders usually choose ELSS mutual funds over traditional tax-saving instruments, which give them the dual benefits of tax saving and wealth creation.

 

Source:finedge.in

How to use Mutual Funds for Retirement Planning

When it comes to Retirement Planning, Mutual Funds Sahi Hai! No investment instrument’s as flexible and customizable as Mutual Funds can be adapted to optimize your Retirement Planning goal at its various stages. Here’s a simple guide to using Mutual Funds to achieve your Retirement Planning Goal effectively and efficiently.


The Early Stages: SIPs in Equity Funds

The best time to start planning for your retirement is when you take up your first job and receive your first paycheck.  


After all, the money you put away at this stage of your life will have not years, but decades to compound and grow! During the early stages of your Retirement Planning, make sure you run SIP’s (Systematic Investment Plans) in aggressive funds such as small & mid-cap funds, without paying much heed to market volatility or even your risk tolerance.


The Mid Stages: Aggressive Step Ups

When you’ve spent a decade or so in your career, you’ll likely start witnessing some serious bump-ups in your income levels. This is the time that you should be stepping up your monthly SIP amounts aggressively. 


Unfortunately, left to your own devices, you’ll probably keep putting off this well-intentioned step up for a ‘better time’. A solution to this procrastination is to issue a standing instruction to the Mutual Fund to increase or “Step Up” your monthly SIP installments every year automatically.


Pre-retirement: STP’s into Debt Funds

When you’re 3-5 years away from your retirement, you’ll likely have accumulated a sizeable corpus if you’ve been disciplined in running your Mutual Fund SIP. However, your priority right now will be to safeguard your hard-won capital and ensure no erosion in its value. 


Therefore, this is the time that you should say “Debt Mutual Funds Sahi Hai” and start STP’s (Systematic Transfer Plans) from your Equity Mutual Fund investments to lower risk fixed income funds! By staggering your investment out of equity funds, you’ll end up averaging your exit cost, and ensuring that you get a fair value for your units and don’t risk cashing out at the bottom of a cycle.


Post Retirement: SWP’s from Debt Funds

Once you’ve retired, the lion’s share of your corpus will be parked into debt-oriented mutual funds, and your overarching objective will be to generate a reliable, constant income stream from it to meet your day-to-day expenditures. 


For doing this, you should start an SWP (Systematic Withdrawal Plan) from your debt funds to the tune of your monthly requirement. SWP’s are a tax-efficient means of generating post-retirement income and are highly flexible. With proper planning, they should help you sail through your retirement years comfortably!


Source: Finedge

Child Education Planning using Mutual Funds

One common inference emerges singularly in all Financial Planning surveys in India – planning for our kids’ education is always going to be a top priority for Indian parents! Although this aspiration hasn’t changed over the years, the way we save for this critical goal has undergone dramatic shifts. 


Gone are the days when investors looked no further than “Child Education Insurance Plans” to fund their kids’ higher studies. With AMFI’s impactful “Mutual Funds Sahi hai” campaign, has come the awareness that a low cost, potentially high return, and transparent tool exists for Child Education Planning, in the form of Mutual Funds. 


Here are the three stages of accumulating wealth for your Child’s Higher studies using Mutual Funds.


Stage 1: Accumulation

The accumulation stage must ideally commence as early as possible – smart investors start accumulating money via Mutual Fund SIP as soon as their children are born! During the accumulation phase, it would be wise to not pay too much attention to your risk profile and instead focus on making affordable monthly investments into mid-cap-oriented mutual funds that have high volatility. 


If you can achieve a 14% return over 18 years (not uncommon for many top-performing mid-cap oriented mutual funds), even a small saving of Rs. 5,000 per month can yield Rs. 50 Lakhs by the time your child turns 18.


Stage 2: Aggressive Step Ups

When it comes to saving for your Child’s Education using Mutual Funds, it’s of critical importance to re-evaluate your financial situation now and then and step up your monthly outgo accordingly. Since education costs tend to inflate at supernormal rates, a college degree that costs Rs. 50 Lakhs today will most likely cost between Rs. 2.25 Cr – Rs. 2.50 Cr, 18 years hence. 


But fret not – starting with Rs. 5000 per month; but stepping this monthly contribution up by just Rs. 3000 per month every year for 18 years, can help you accumulate nearly Rs. 2 Cr for your kid’s higher studies. Such is the magic of the power of compounding when coupled with regular and disciplined annual step-ups.


Stage 3: De-risking & Corpus Deployment

The final stage in planning for your child’s education using Mutual Funds would be to systematically de-risk your portfolio as the goal date approaches. A common mistake that savers make is to continue to have a 100% allocation to equities to the goal date.

 

This can prove to be catastrophic if market cycles turn unfavorable in the year that you need to redeem money. Imagine, for a moment, that a 2008-like situation was to arise in the year that you need to redeem funds to pay your child’s tuition fees or college seat booking amount. 


You may need to take a loan at that stage to circumvent the horrifying prospect of booking a 50% loss on your hard-won savings! Instead, make sure you begin STP’s (Systematic Transfer Plans) from your high-risk equity funds to lower-risk debt funds a good 3 years before your goal date. This will help you safeguard your capital as well as your profits, making them easily redeemable when you need to write that hefty check!


Source: Finedge

3 Mutual Fund categories worth considering right now

Has the COVID conundrum left you wondering which Mutual Funds make sense right now? Here are three fund categories that are worth considering – in increasing order of risk tolerance!


Dynamic Asset Allocation Funds

Dynamic Asset Allocation funds present an ideal solution to the moderate risk taker’s quandary at the moment. Since they implement automatic portfolio rebalancing models that go against the grain of market movements.


They act as a safety mechanism against a host of behavioral biases that would otherwise plague any investor who’s endured the absurd roller-coaster ride that equity markets have witnessed since March! For multiple reasons, not all Dynamic Asset Allocation funds are worth considering right now; so be sure to seek the support of an expert Financial Advisor before you invest in one.


Value Funds

Traditionally, exogenous shocks such as COVID-19 have thrown the door wide open for value investing. When the going is good and hot money is in full flow, it is growth stocks that benefit the most. However, when a crisis results in severe market dislocations, sectoral leadership undergoes dramatic shifts. 


In times like these, the high margin of safety in value stocks makes them lucrative as contrarians come cherry-picking. For this very reason, Value Funds have always outperformed Growth Funds during post-crisis revivals. 


Risk-taking investors who have the patience to weather returns that are frustratingly uncorrelated with index movements, and have a time horizon of at least 3-5 years from today, should add value funds to their portfolios at this juncture. Invest in a staggered manner though.


Small-Cap Funds

Small-Cap Funds invest in stocks that lie beyond the top 250 companies by market capitalization. For the past three years, these stocks have received the drubbing of a lifetime – most of the companies in this space are now trading at bargain-basement discounts of 60%-80% to their January 2018 peaks. 


While they may well correct further and will likely be the last to recover from this cycle, their lucrative valuations are hard to ignore at this point. 


Small Caps tend to rally after Large and Mid-caps do; but when they take off, they switch on their afterburners and rocket ahead with such force that fence-sitters are left gasping in awe! If you’re a savvy investor who doesn’t break into a sweat every time markets move sideways, this is an excellent time as ever to accumulate units in a small-cap fund in a staggered manner. You’ll need to have a 5-year holding time horizon, though.


Confused about where to invest? Leave it to the experts! Get in touch with us today.


How to Invest at A MARKET HIGH

It is that point of the year…the stock market is at its all-time high. All this while you waited for this opportune moment to begin investing. But wait! Don’t lose yourself in the exuberance all around. You never know where the market is heading the next moment.

 

The questions remain unanswered:

  • * Is the market going to rise further or is it going to fall?
  • * Should you be a skeptic and wait for a correction or cheer up and invest right away?

Waiting for a market correction to start investing would result in a loss of opportunity. This is exactly why you should get going immediately. If you keep waiting for a market correction, you will stay stuck. This is why you should invest, even at a market high, as the markets are only going to go higher. Sure, there will be a few hiccups on the way, but the general market trajectory is going to be largely upward-looking.


In case you are a novice investor, this time demands higher levels of composure from your end. Instead of placing impulsive bets and repenting later, sit down and formulate an investment strategy. 


Review the entire portfolio

When you initially constructed a portfolio at the beginning of the cycle, markets must have been quite different. Now that so much time has elapsed in between, chances are the valuations might have changed. 


The reasons which made you buy that bunch of stocks might no longer be existing. The market leaders might have changed ranks. In such a situation, sticking to laggards might end you in losses. So, use this time to review your entire portfolio. Weed out the stocks which don’t seem valuable anymore.


Re-balance the portfolio

You need to know that market volatility affects your portfolio’s asset allocation. Your original asset allocation might have been in a ratio of say 50:50 (equity: debt). But the steadily rising markets might have skewed the original allocations. 


It means that now the ratio must have become say 70:30 (equity: debt). On one hand, it may seem like a lucrative opportunity to accumulate more wealth. But if it is not in line with your risk preferences, you may land in trouble.


You got it right! Your portfolio has now become riskier than you actually can digest. If you don’t want to carry a riskier portfolio, then it is better to re-balance it. Re-balancing involves bringing the skewed allocation to its original asset allocation of say 50:50 in this case.


Diversify your portfolio

Your portfolio might be composed only of small-cap or mid-cap stocks. In a rising market, a concentrated portfolio might increase your chances of losing money. When markets are high, you need to diversify. In diversification, you need to include stocks of different market capitalization. You can invest in large-cap stocks which tend to be stable during such volatility.  


Start SIP in mutual funds

For first-time investors,  trading in the stock market can be tricky. If that is not your ball game, then go for equity mutual funds. Equity mutual funds give a similar kind of investment experience; although with greater diversification and professional fund management. 


You may think of starting a Systematic Investment Plan (SIP) in equity funds. In this, you will be consistently placing smaller bets. Over a period, it will give you the advantage of rupee-cost averaging.  


Never invest in something you don’t understand

One mistake you shouldn’t commit is investing in a complicated financial product. Market highs are usually accompanied by fund houses launching sophisticated offerings. You might come across a lot of New Fund Offer (NFO) during this time. 


These offerings might promise sky-high returns. However, you shouldn’t get enticed by the lucre, especially when the product offering is not transparent. Ensure that you understand what you are getting into before investing. 


Moreover, invest in a financial product that has an investment history of 5 to 10 years. Even if you want to take the risk, don’t invest a lump sum in a single stock or fund.


Goal-based investing

Mapping specific mutual funds to specific goals will help you not only choose mutual funds correctly but also keep track of them in a better way. You can choose mutual funds depending upon the term and the risk profile of the goal.


All said and done, market highs and market lows will come and go. The volatility shouldn’t bother long-term investors. You should keep an eye on your goals and invest systematically. 


Source: ClearTax

Why Investing in NFOs is not a good idea?

Whenever a fund house launches an NFO, there is a lot of buzz in the market. You see ads everywhere; there are fund manager interviews where they extol the virtues of the new fund’s investment strategy, you see newspapers carrying articles detailing what the new fund is, and a whole lot more.


With so much happening around you, it is quite natural to get carried away and invest. But is it a good idea to invest in an NFO? Before we get into this debate, let’s first understand what an NFO is?


So, what exactly are NFOs?

When an asset management company launches a new fund, it first opens it up for a subscription for select days. The aim is to raise money for buying stocks for the fund’s portfolio and get it off the ground. This entire process is called NFO or New Fund Offer. 

In a lot of ways, it looks like an IPO, and that pushes people to buy in the NFO period. But there is no advantage like IPO. We will come to that later.


Now, as per regulation, in India, the NFO duration cannot be more than 15 days for any mutual fund.


After the NFO period, if the fund is open-ended, it starts accepting new investments within a few days. So, you can invest in a fund after the NFO period as well.

If it is a close-ended fund, then an investor can subscribe to the fund unit only during the NFO period and will have to hold it until the end of the duration. 


Now you know what NFOs are, let’s look at reasons we believe you should avoid investing in them.


1) No Track Record

The fund being launched is new and therefore has no track record. In the absence of a history, people tend to rely on a fund house’s past performance, which might not be the best approach. 


That’s because a new investing strategy comes with its challenges, and you don’t know whether the fund house has the expertise to overcome those challenges.

Also, you only know the broad mandate of the fund. You don’t know what will constitute the portfolio or if it will be able to execute its mandate as intended.


So, if a fund is being launched in a category where funds already exist, picking a fund with a track record makes a lot more sense. You will know what you are getting into as you can evaluate it on various parameters like past performance, risk it takes amongst other things.


Always pick a fund with history and a proven track record over a new fund.


2) NFOs are not like IPOs – There is no benefit of investing in the NFO period

As we said in the beginning, people look at NFOs as they look at IPOs. They think they will get benefitted if the demand for funds increases, just like it happens in stocks. This notion can’t be farther from the truth.


That’s because a mutual fund’s NAV doesn’t get affected by demand and supply. 

Here’s why – the number of units available in case of a stock is limited, so their price goes up if there is more demand. On the contrary, there is no limit to how many units a mutual fund can have. Units get created as and when required.


3) Higher cost

Every fund charges a fee to manage your money. This fee is a percentage of the portfolio and gets deducted from the returns generated. In technical terms, it is called the expense ratio.


A higher expense ratio means you pay a higher fee and it affects the returns you get 

As per regulations in India, a fund with a smaller Asset Under Management (AUM) can charge a higher expense ratio as compared to a fund with a higher AUM. 


Now, since the fund size, when launched is small, the AMC has the flexibility to keep the expense ratio on the higher side.


4) Launch Timing

AMCs launch new funds because they want to complete or increase their product basket, other times it could be because there is a demand in the market for a particular kind of fund. The reason could be any.


So, just because a fund is launched doesn’t necessarily mean it is the right time to invest in that fund category. Especially if the trigger is market demand  (you can figure it out by seeing how many similar funds have come in the recent past), it is best to stay away.


But there are a couple of exceptions though:

  • If the NFO is for a close-ended fund and it fills a gap in your portfolio, you can consider investing. However, you need to be aware of the investing strategy the fund will follow as you will be committing for a specified duration.

  • When you are getting a discount during the NFO, like the 5% discount Bharat CPSE ETF NFO offered, it might be worthwhile considering them. In the Bharat CPSE ETF, you knew in which companies’ money will get invested (as it is an index fund) and you got a discount as well.

Conclusion

Investing in NFOs is like a shot in the dark. It will be wise to opt for an existing scheme that has a proven track record instead of going for something new or unpredictable.

Even if it is something unique and can be a good fit in your portfolio, wait for some time to see if the theme or investment strategy plays out as intended.


Source: ET MONEY

Is PMS investment the right way to invest for you?

1. One way of investing a large amount

Portfolio management services (PMS) is a customized solution for high net-worth individuals (HNIs), it offers greater flexibility with an investor’s money and higher returns too. 


So if you have a substantial amount you want to invest, such as say a crore, this service can prove beneficial. But is it the right product for you? Read to find out.


2. How PMS works for an investor

Portfolio management service (PMS) is provided by professional money managers to informed investors and can be tailored to meet specific investment objectives. PMS providers invest directly in securities through focused portfolios. 


So one’s account will be kept separate and operated according to his/her investment mandate in a discretionary PMS, where an investment manager takes all decisions in sync with the investor’s goals.


3. How it is different from MFs

Unlike mutual funds, the investors’ assets here are not pooled into one large fund. Portfolio Management Service (PMS) uses a separate bank account and Demat account for each client. 


The minimum investment amount is Rs 50 lakh for PMS. You can see the portfolio daily through your Demat account.


4. Higher risk-reward aspect

This structure allows the fund managers to take concentrated calls on their high-conviction stocks without too many regulatory and operational constraints prevalent in a mutual fund portfolio. 


It may generate a higher return as the fund manager will have greater flexibility to choose or hold stocks and capitalize on the market opportunities in the smaller and newer companies that may have the potential for high growth. This may lead to a higher risk, which may be best mitigated through a long-term investment horizon.


5. It is a good option if…

If you wish to set this corpus aside for your retirement or in other words, for the long-term, this makes sense. The higher transparency and regular reporting as compared to a mutual fund are also plus points. 


Stocks are bought and sold in your name, with the help of a power of attorney, which means you can monitor all investment activities in real-time. As a PMS investor, you may also hold direct interactions with fund managers, should you feel the need.


Source: – The Economic Times

Arbitrage Funds vs Liquid Funds, Which fund suits you best? |Deeva VenturesPvt Ltd

Arbitrage Funds vs Liquid Funds, Which fund suits you best?

While choosing the right investment option most suited to meet your short-term investment need most of you tend to invest in Bank FD or savings account. 


However, there are other short-term investment avenues that you can and should explore for your short-term investments. Arbitrage funds and liquid funds are two such investment options that can be considered to meet your short-term investment needs.


Arbitrage funds

These are mutual fund schemes that leverage the price differences in two different markets and thereby earn profits. As arbitrage funds are involved in simultaneous buying and selling of shares and making profits from market inefficiencies, they are considered to be low-risk investments and a safe option to park funds. 


The returns generated by these funds depend on the volatility of the underlying asset.  As these funds primarily invest in equities, they are categorized as equity mutual funds and taxed like any other equity mutual fund.


Liquid funds

Liquid funds, on the other hand, are open-ended debt schemes, that invest money in debt instruments such as treasury bills, commercial papers, certificates of deposits, and even term deposits, etc. Liquid funds are extremely liquid and have no exit load. The redemptions are processed within 24 hours.


Which fund to choose- Arbitrage Fund or Liquid Fund?

Arbitrage funds gained a lot of popularity after the Union Budget of 2014 when the minimum holding time for long-term capital gains on all debt investments was increased from 1 year to 3 years and long-term tax on equities was nil. 


However, now under the new budget, even gains from arbitrage funds would be taxed; 10% if sold after a year and 15% if the holding period is less than a year.


While both arbitrage funds and liquid funds are low-risk, low-return types of investments, there are few things you must compare and choose the investment option most suited to meet your needs.


Time Horizon of Investment

One of the most important things to consider before choosing between the two is the time horizon for which you are looking to invest. If you are looking to invest for a few days or weeks, then you should invest in liquid funds.  


Returns from arbitrage funds are dependent on arbitrage opportunities available, which are few. 


Thus, for such a short time you may not be able to generate any returns from such funds and hence more suited for investors who are looking to invest for at least 3 months or more.


Tax efficiency

Before you choose to invest in either of the two options, understand the tax implications on your returns. Short-term capital gains on arbitrage funds are taxed at a flat rate of 15% and those from liquid funds are clubbed with your total taxable income and taxed as per your income tax slab. 


Thus, the tax efficiency of the investment will primarily depend upon the tax bracket that you fall under. For low-income investors, liquid funds are more tax-efficient as compared to investors in the highest tax bracket. 


Similarly, arbitrage funds are more tax-efficient than liquid funds for investors who are in the tax brackets of 20% and above as the short-term capital gains tax is 15% which is lower.


Liquidity of investment

Liquid funds score over arbitrage funds when it comes to liquidity. Redemptions in liquid funds are processed within 24 working hours but in the case of arbitrage funds, the redemption is made within 3 to 5 working days.


Returns

The returns generated by arbitrage funds are slightly higher than liquid funds, especially in volatile market conditions when ample arbitrage opportunities exist.


Exit Charges

The exit charges in case of liquid funds are nil, but there is usually a pre-mature withdrawal charge in arbitrage funds if the withdrawals are in the first few months.


Risk

Liquid funds and arbitrage funds are both low-risk investment options but arbitrage funds are slightly more risky than liquid funds. 


While returns on liquid funds are similar to those of bank FDs, returns in the case of arbitrage funds are dependent on the arbitrage opportunities available in the market, which are erratic.


Conclusion

The choice of investment most suited for you will depend on your investment objective. Ideally, investors looking to invest for 6 months or more, especially those in the highest tax bracket should opt for arbitrage funds for better returns and higher tax efficiency


And those investors looking to invest for a shorter time frame or those in lower-income brackets can look at investing in liquid funds to make the most from their investment.