Sunday, February 22, 2015

My Expectations from the Indian Union Budget 2015

The Union Budget is due in a few weeks and people’s expectations from our Finance Minister are at a high. The previous budget wasn’t a full-fledged one and hence the finance minister promised a lot of reforms which will be due this year.

Once the budget is released, we will review it in great detail but for now, I just want to share with you guys, what my expectations are from this budget…

Before We Begin: The Union Budget contains numerous sections but, this post is purely from a personal finance perspective.

Expectation No. 1: Revised Individual Income Tax Limits

Though the finance minister slightly increased the taxation limits (slabs) last year, I feel there is still some more scope for improvement. For Ex:

  • Up to 5 Lakhs – NIL
  • 5 Lakhs to 10 Lakhs – 10%
  • 10 Lakhs to 15 Lakhs – 20%
  • Above 15 Lakhs – 30%
  • Above 50 Lakhs – Extra 5% Tax

Expectation No. 2: Revised Expenditure & Exemption Limits

The Indian Tax Laws allow us to offset many of our expenditures to reduce our tax liability. For ex: Medical Bills, Transportation Expenses etc. However the limits for these have not been revised for over a decade. In fact, the numbers are the same from the time I started working in 2004.

The Revised Limits could be:

  • Transportation Allowance: 15,000 (Existing 8,000)
  • Medical Allowance: Rs. 25,000 (Existing 15,000)
  • Section 80D - Medical Insurance: Rs. 20,000 (Existing 15,000)
  • Section 80DD - Medical Treatment of Physically Disabled Dependent: Rs. 1 lakh (Existing 50,000)

Expectation No. 3: Revised Investment and Savings Limits

Section 80C and Section 80CCG are two sections that allow tax payers to invest a portion of their income for their future and avail tax exemption. Though the Finance Minister revised the Section 80C limit and increased it by 50,000 rupees last year, I feel this can still be hiked to stay tuned with the increase in cost of living in our country.

  • Section 80C: 3 Lakhs
  • Section 80CCG (Rajiv Gandhi Equity Savings Scheme): Rs. 1 Lakh (For People whose Incomes do not Exceed Rs. 15 lakhs in a year)

Expectation No. 4: Revised Housing Benefits

The Tax Laws allow us to offset a portion of our income if we have purchased our house on a home loan. I would expect the following amendments

  • Increase the Interest Repayment Exemption Component to 5 Lakhs (Existing 2 Lakhs) for the first home
  • No Interest Repayment Exemption from the second home onwards (If Self Occupied or Empty)
  • Interest Repayment Exemption of 2.5 Lakhs from the second home onwards (If Rented Out)

Existing laws only distinguish as self-occupied and rented houses. But, I feel higher benefits must be offer to first time/first home buyers rather than folks who invest their surplus to generate a second income. Yes, if they are filing their taxes by including the rental income, then they should get the exemption but that shouldn’t be as much as the first time home buyer. 

Housing in India is becoming unaffordable with every passing year. This additional tax benefit will bring much needed breathing room for the hard working middle class families who need the help.

Expectation No. 5: Focus on Pension Schemes and Retirement for Citizens

India is one country where almost 80% or more people retire with little to no corpus. EPF is the only saving grace and even that gets compromised these days with people withdrawing their PF Every time they switch jobs. With the Universal PF Account Numbers, this can be curbed but still, I feel the pension schemes need further pushing.

The National Pension Scheme is an excellent option and is by far the cheapest pension product available in the market right now. But, it is not being marketed as aggressively as it should be (obviously due to lower profit margins for the folks who are supposed to be selling it). Maybe the government can add in a sub-section in 80C for NPS (Maybe 1 lakh) or even add a brand new category that gives exemption only for NPS Investments (At least 50,000 in a year or more)

There have been a few articles on NPS in this blog already. If you havent considered NPS as an investment, you should check it out...

So, what are your expectations from the budget? Sound off in the comments section. 

Lets hope our Finance Minister can satisfy our expectations...

Wednesday, February 18, 2015

All Your Questions About Mutual Funds – Answered!!!

Mutual Funds are a preferred route of Investment for many people and we have had multiple articles in this blog about them. With the stock market being revived with a never before bull-run over the past year, investor interest in mutual funds has gone up as well. The purpose of this article is to help answer many of your common queries about Mutual Funds.

Before we begin:

If you have been a follower of this blog (or any other investment blog/magazine) you may feel that some of the questions are very basic and are ones for which you already know the answer for. However, there may be many novice/new investors who may not be as knowledgeable as you are. So, please bear with me while we cover the basics also as part of this article.

If you cannot find the answer to your query about Mutual Funds, feel free to sound off in the comments section and I will try my best to answer them.

1. Are investments in mutual fund units risk-free or safe?

This is a question that cannot be answered in general because there are mutual funds that are safe and there are also mutual funds that are extremely risky. A mutual fund as such is nothing but a pool of money collected from Investors and invested in a certain asset by a professional (AKA the Fund Manager). If the fund invests in the stock market or related instruments, then the fund is definitely not Risk Free or Safe. If the fund invests in Fixed Income Instruments like Bonds, it can be considered relatively safe. Funds that invest only in Government Securities or Government Bonds are the Safest.
Note: A Mutual Fund is not a Bank. So, even if the fund invests in Fixed Income or Safe Instruments, it always carries a default risk (What if the guy who issued the Bond declares bankruptcy?).

2. Are investments in mutual funds liquid?

It Depends…

Investors of open-ended schemes can redeem their units on any business day and receive the current market value on their investments within the next few days (Usually 3 to 5 working days).
Close Ended schemes or funds on the other hand do not allow investors to redeem their investments until the scheme matures. In this case, if the scheme is listed in the stock market (Like stocks – Ex: Exchange Traded Funds), they may allow you to sell them in the secondary market.
Investors of close-ended schemes can redeem their units only on maturity but can sell it in the secondary market like stocks

3. How much time does it usually take to receive Dividends?

A mutual fund is required to pay or release funds to the investors within 30 days of the declaration of the dividend. In case of failures to settle the proceeds within the stipulated time period, Asset Management Company is liable to pay interest as specified by SEBI from time to time. This penalty rate is presently 15%.

4. What is the history of Mutual Funds in India and role of SEBI in regulating the mutual funds industry in India?

Unit Trust of India was the first mutual fund set up in India in the year 1963. In early 1990s, Government allowed public sector banks and other institutions to set up mutual funds. In the year 1992, Securities and exchange Board of India (SEBI) Act was passed. The objectives of SEBI are to protect the interest of investors in securities and to promote the development of and to regulate the securities market. You can learn more about SEBI’s role by clicking here

As far as mutual funds are concerned, SEBI formulates policies and regulates the mutual funds to protect the interest of the investors. SEBI notified regulations for the mutual funds in 1993. Thereafter, mutual funds sponsored by private sector entities were allowed to enter the capital market. The regulations were fully revised in 1996 and have been amended thereafter from time to time. SEBI has also issued guidelines to the mutual funds from time to time to protect the interests of investors.

All mutual funds whether promoted by public sector or private sector entities including those promoted by foreign entities are governed by the same set of Regulations. There is no distinction in regulatory requirements for these mutual funds and all are subject to monitoring and inspections by SEBI. The risks associated with the schemes launched by the mutual funds sponsored by these entities are of similar type.

5. What is the role of a Fund Manager?

Fund managers are individuals who are responsible for implementing a consistent investment strategy that reflects the goals and objectives of the mutual fund. Normally, fund managers monitor market and economic trends and analyze securities in order to make informed investment decisions. Each fund usually has one or more fund managers who together take the investment decisions (what/when to buy/sell).

6. What are venture capital funds?

Venture Capital is the fund/initial capital provided to businesses typically at a start-up stage and many times for new/ untested ideas. Venture capital normally comes in where the conventional sources of finance do not fit in. Venture capital funds are mutual funds that manage venture capital money i.e. these funds aggregate money from several investors who want to provide venture capital and deploy this money in venture capital opportunities.

Typically venture capital funds have a higher risk/ higher return profile as compared to normal equity funds and whether you should invest in these would depend on your specific risk profile and investment time-frame. These type of funds are pretty popular in developed markets like US/Europe but are not so much in India.

7. Can a mutual fund change the asset allocation while deploying funds of investors?

Again, this is a question where I have to say – It Depends.

Most mutual funds invest in a combination of assets (Equities, Bonds etc.) these days. If the Fund Manager is taking a short-term decision to increase allocation to one asset class to take advantage of a short term market momentum or to protect the fund NAV in the short-term, he/she usually has this flexibility to take such a decision.

However, if the fund or the fund manager want to alter their asset allocation pattern permanently, they have to follow the points explained in the next Question.

8. Can a mutual fund change the nature of the scheme from the one specified in the offer document?

Yes. But, any change to the core or fundamental attributes of the scheme like Investment Pattern, Structure etc., cannot be carried out unless a written communication is sent out to all investors. The fund house must also advertise this change in at least one English Daily News Paper that has a nationwide circulation along with an advertisement in the local language of the region where the fund head office is situated. In such a situation, the unit holders have the right to exit the scheme at the current/prevailing NAV without any Exit Load if they don't wish to continue with their investment.

9. Can I assign a nominee for my investment in a mutual fund?

Yes. Individuals (and also Joint Holders) can make nominations to their mutual fund investments. However, Non-Individuals (like Society, Trust, Corporate Body, Hindu Undivided Family etc.) cannot use the nomination facility when they invest in Mutual Funds.

10. Can a mutual fund impose fresh load or increase the load beyond the level mentioned in the offer documents?

No. Mutual funds cannot increase the load beyond the level mentioned in the offer document. Any change in the load will be applicable only to prospective investments and not to the original investments. In case of imposition of fresh loads or increase in existing loads, the mutual funds are required to amend their offer documents so that the new investors are aware of loads at the time of investments. Even if they amend now, they cannot backdate and charge existing investors the extra fees/load.

11. Can non-resident Indians (NRIs) invest in mutual funds?

Yes, Sure. NRI’s can invest in mutual funds. However, they must have either an NRI DEMAT Account or specify the fact that they are an NRI while applying via paper route and pay using an NRE/NRO Account

12. How are mutual funds regulated?

All Asset Management Companies (AMCs) are regulated by SEBI and/or the RBI (in case the AMC is promoted by a bank). In addition, every mutual fund has a board of directors that represents the unit holders interests in the mutual fund.

13. How can the investors redress their complaints?

Investors would find the name of the contact person in the offer document of the mutual fund scheme whom they may approach in case of any query, complaints or grievances. Trustees of a mutual fund monitor the activities of the mutual fund. The names of the directors of asset management company and trustees are also given in the offer documents. Investors should approach the concerned Mutual Fund / Investor Service Centre of the Mutual Fund with their complaints,

If the complaints remain unresolved, the investors may approach SEBI for facilitating redressal of their complaints. On receipt of complaints, SEBI takes up the matter with the concerned mutual fund and follows up with it regularly. Investors may send their complaints to:

Securities and Exchange Board of India,
Office of Investor Assistance and Education (OIAE)

Plot No.C4-A , “G” Block, 1st Floor,
Bandra-Kurla Complex,
Bandra (E), Mumbai – 400 051.
Phone: 26449199-88-77

14. I don't have a lot of investible surplus. Can I still invest via the Mutual Fund route?

Sure you can. Regular investing is a very good way to build up an investment portfolio and this can be done with any amount of money. You can check the fund prospectus/offer documents to check the minimum investment expected by the fund you wish to Invest. Most mutual funds expect an investment of at least Rs. 5000/- for One Time Purchases or Rs. 500/- for Regular/SIP Investments.

15. What is an Entry or Exit Load?

The Entry Load or Exit Load is nothing but a small fee that you pay while buying into or selling your funds. The amount that actually gest Invested in the fund is usually the Investment minus the Entry Load. Similarly, when you sell your investments, the current market value of your funds minus exit load is the amount you will receive.

16. Does this "Entry Load" or “Exit Load” eat into our investment returns?

Yes, of course. When you see an offer document for a fund mentioning 1% or 2% as entry load, it may sound small or insignificant. But, it still bites a decent sized chunk of your returns.

Lets take an example, I want to invest Rs. 1 lakh into a fund that has a 2% entry load and the current NAV is Rs. 10 (New Fund). You may think I will get 10,000 units. But, actually I am only going to get 9,800 units (2% of my investment or Rs. 2,000/- is the fee the fund house deducts as part of the Entry Load). Lets say I sell my investments after 5 years when the NAV is Rs. 35 per unit, I will only get back Rs. 3,43,000. I am effectively losing Rs. 7000/- (If there was 0 entry load, I would have gotten an additional 200 units that at the selling price is worth Rs. 7000)

If the fund also charges an Exit load, I may not get this full amount either. If the fund house charges a 1% Exit Load I will only get back Rs. 3,39,570 (Rs. 3430 is deducted as Exit Load)
Note: Most funds these days DO NOT charge an Entry Load and only charge an Exit Load if you sell your investment without completing at least one full year. The fund house is expected to clearly mention the Entry/Exit loads in the offer document.

17. What is Net Asset Value (NAV)?

NAV is the total asset value (net of expenses) per unit of the fund and is calculated by the Asset Management Company (AMC) at the end of every business day. Net asset value on a particular date reflects the realizable value that the investor will get for each unit that he/she is holding if the scheme is liquidated on that date.

For ex: If a Mutual fund has investments worth 10 lakhs and has 1 lakh units that are held by investors, the NAV in simple terms will be Rs. 10/-

18. How long will it take for transfer of units after purchase from stock markets in case of close-ended schemes?

According to SEBI Regulations, transfer of units is required to be done within thirty days from the date of lodgment of certificates with the mutual fund.

19. How significant are fund costs while choosing a scheme?

One thing that many people fail to consider or even realize while investing in Mutual Funds is the “Cost” incurred by the fund. Many different cost/fee like Management Fee, Sales Load, Advertisement Expenses etc will get deducted from the actual NAV. As a general rule of the thumb, about 1-2% of your annual returns will usually be used to offset these fees. Any fund that can actually keep its costs in this range can be considered an acceptable investment option.
Every investor must carefully examine the offer document of the fund to make sure that he/she isn’t investing in a fund that has exorbitant fees or charges.

20. How many funds should I invest in, to achieve proper diversification for my Portfolio?

As our forefathers said, keeping all our eggs in the same basket is not a good idea. However, if I want to buy 100 eggs and think about carrying them one each in a basket, it will become an overhead instead of protecting my Egg – right?

You can consider one or two good funds from the various categories like Diversified Equity, Large Cap Oriented, Small & Mid-Cap, Balanced, ELSS etc and form a core portfolio of about 4-5 well managed funds to achieve optimal diversification. Having more than 5 funds in your portfolio will make it complicated for tracking purposes and result in a situation called “Over Diversification” which isn’t a good thing.

21. What are the different types of Mutual Funds that I can Invest in?

Mutual Funds are classified by structure into Three Main Types: Open Ended, Close Ended and Interval Schemes. 

Based on Investment Objectives, Mutual Funds can be classified as:
  • Equity Schemes 
  • Income Schemes 
  • Money Market Schemes 
  • Tax Saving Schemes 
  • Balanced Schemes 
  • Offshore funds 
  • Index Funds
  • Arbitrage Funds
  • Hedge Funds etc.

22. What are open-ended mutual fund schemes?

Open ended schemes usually do not have a fixed maturity period and are available for subscription and redemption on an ongoing basis. The units can be bought and sold any time during the life of the scheme at NAV related prices.

23. What are close-ended mutual fund schemes?

Close ended mutual fund schemes are those that cannot be subscribed or redeemed by investors on an ongoing basis. Investors can subscribe during the New Fund Offer (NFO) period and have to wait until the scheme matures (usually 2, 3 or 5 years down the line).

The good news however is the fact that, most of these close ended funds can be bought or sold on the stock exchanges where the scheme is listed. The market price at the stock exchange could vary from the schemes NAV on account of demand and supply situation (like regular stocks), unit holders expectations and other market factors. As a result, you will need to compromise on a small % of your NAV Value if you wish to redeem/sell your units before maturity.

24. Do Mutual Funds offer any Income Tax Benefit?

Yes. A special type of Mutual Fund called Equity Linked Savings Scheme (ELSS) offer income tax benefits to Investors in India under the Section 80C of the Indian tax laws. These are nothing but  large cap oriented equity mutual funds that have a lock-in period of 3 years.

25. What are sector specific funds?

These are the funds which invest only in the securities of only those sectors or industries as specified in the offer documents. For Ex: a Pharma Fund will only invest in Pharmaceutical and Healthcare stocks.

The returns generated by these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time.

26. What are Offshore Funds?

Offshore funds specialize in investing in foreign companies and/or corporations. These funds have non-residential investors and are regulated by the provisions of the foreign countries where these are registered. These funds are also regulated by RBI directives.

27. What are Money Market Schemes?

Money Market Schemes aim to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer, short-term instruments, such as treasury bills, certificates of deposit, commercial paper etc.

28. What are Interval Schemes?

Interval Schemes are those that combine the features of open-ended and close-ended schemes. The units may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV related prices.

29. What are Index Funds?

Index schemes attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50. The portfolio of these schemes will consist of only those stocks that constitute the corresponding index. The percentage of each stock to the total holding will be identical to the stocks index weightage. And hence, the returns from such schemes would be more or less equivalent to those of the Index. As the fund manager doesn't really have to decide on what or when to buy, the fees associated with such funds are much lower than regular mutual funds.

30. What are Income Funds?

Income Funds are also known as debt funds. The aim of these schemes is to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited because their aim is to provide a regular income and capital protection to their investors.

31. What are Equity Funds?

Equity Funds are those funds that invest a big chunk (or even all) of their portfolio in equity and other equity related instruments. The aim of these schemes is to provide capital appreciation over medium to long term. Because of the nature of the stock market which is volatile in the short term, investors who are willing to bear short-term decline in value for possible future appreciation only should consider them. Risk Averse investors who do not wish to incur any losses (ones who choose capital preservation over capital appreciation) must stay away from such funds.

32. What are Gilt Funds?

These funds invest exclusively in government securities. Government securities have no default risk (on paper). NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes. However, with added safety comes lower returns because Government Securities usually offer much lower rate of interest than other bond issuers.

33. What are Balanced Funds?

Balanced Funds are schemes that aim to provide capital appreciation to its investors while at the same time trying to preserve some/all of the capital. As a result of this two-fold idea, these funds invest in both safe (fixed income) as well as risky (equities) instruments. The % allocation for both sides usually hovers around the 40% to 60% range with the fund manager having the flexibility to alter the % based on market situations.

A point to note here is that the returns generated by such funds may not be as high as pure equity oriented funds if the market is rising. However, if the markets are falling, the losses wouldn't be as much as equity funds either.

34. Should you evaluate past performance, and look for consistency?

Yes, definitely. Consistent Past performance is a good indicator for any well managed fund. Though past performance is no guarantee that the fund would perform at the same level in future, the chances of a good fund that has consistently given good returns in the past, giving you good returns in future are much higher as against funds that haven’t been so consistent.
The longer the time period (1 year, 3 years, 5 years etc) where the fund has consistently performed, the higher the fund should be on your shortlist.

35. Which is better – SIP or one time Bulk Investment?

Actually, there is no One Correct answer for this Question.
Both SIP and Bulk Investment option have their own merits. For ex: In case of a volatile market (one that is going up and down), going the SIP route would be beneficial because it will help you average out your purchase price and make more profits. On the other hand, if the market is purely going up, then the Bulk route will be beneficial because you will get lesser and lesser units each month.
However, in the long run, the chances of the SIP route outperforming the bulk route are pretty high because, as I have said many times, the stock market is volatile and keeps going up or down frequently. So, being a regular/consistent investor always has its perks.

36. Are arbitrage funds a good choice for earning high returns with low risk?

No, not at all.
Arbitrage Opportunities are a special class of investment where the fund manager tries to make a profit out of the pricing mismatch between the Equity and Derivatives Market. Anything that invest in either the Equities market or the Derivatives market carries with it, the risk of a downside and hence, the low risk part is ruled out. Yes, arbitrage funds can give you good returns but at a high risk (just like regular equity funds)

37. Is it good to buy a fund just before it goes ex-dividend?

This is one of those misconceptions that people have. Buying into a fund just before the ex-dividend date basically means that you are eligible to receive a dividend right after you actually buy into the fund. However, what many people fail to note is that the NAV of the fund falls by an appropriate amount after the fund house actually gives you the dividend.
Let me explain with an example. Lets assume I invest 1 lakh into XYZ mutual fund Dividend scheme which is selling @ Rs. 24/- per unit just before the ex-dividend date where the fund is declaring a Rs. 3/- dividend per unit.

Units purchased: 4166.67 (Value @ NAV Price = 1 lakh)
Dividend Earned = Rs. 12,500/-
Value/Worth of my units after Dividend = Rs. 87,500/- (Same 4166.67 units)
Basically after I invest the 1 lakh, the fund house is giving me Rs. 12,500/- of my own money back thereby reducing my fund value. So, I might as well wait until the dividend is declared and buy more units for the same amount (4761.9 units @ Rs.21 per unit) which will give me a higher chance of returns in future.

38. If schemes in the same category of different mutual funds are available, should one choose a scheme with lower NAV?

This is yet another big misconception that investors in India have. People feel funds with lower NAV’s are cheaper and therefore are better. This is one of the reasons why New Fund Offerings (NFOs) tend to get heavily subscribed even though there is no past performance benchmark to prove how good the fund manager is.
Let me explain with an example. Lets say MF X is available now for NAV of Rs. 15 per unit and then we have MF Y that is available for NAV of Rs. 150 per unit. Suppose, I want to invest 3 lakh lakh rupees now and I split my money equally between the 2 funds.
Units got from Investing in Fund X = 10,000 (@ 15 per unit)
Units got from Investing in Fund Y = 1,000 (@ 150 per unit)
10,000 units sounds a lot more than 1,000 units – right? But, this is not a correct comparison because the value of each unit of X is only 15 rupees whereas the value of each unit of Y is 150 rupees. Meaning Y is 10 times more valuable than X. At today’s market valuation (NAV) the value of my investments in both funds is the same – 1.5 lakhs.
Lets assume that the investment philosophy of both funds is very similar and their returns follow the BSE Sensex Index. At the end of the year, both the funds have grown by 12%. So, are you thinking that my investment in fund X would’ve made more profits for me? After all, I purchased 10000 units of fund X. Right?
Current NAV of Fund X = Rs. 16.80 (12% Growth)
Value of Investments in Fund X ( 10,000 * 16.8) = Rs. 1,68,000/-
Current NAV of Fund Y = Rs. 168 (12% Growth)
Value of Investments in Fund Y (1,000 * 168) = Rs. 1,68,000/-
Though I had 10,000 units of Fund X and just 1000 units of Fund Y, the profit I made is exactly the same because the two funds gave exactly the same 12% returns.
Unless the fund with the smaller NAV outperforms the fund with the larger NAV (by better investment choices) there is absolutely no reason on why you should choose either fund by merit of just its NAV.

39. If mutual fund scheme is wound up, what happens to money that people invested?

In case of winding up of a scheme, the mutual funds pay a sum based on prevailing NAV after adjustment of expenses. Unit holders are entitled to receive a report on winding up from the mutual funds which gives all necessary details.
This is similar to a situation where all the investors simultaneously want to exit the fund on one fateful day.

40. I am holding XYZ Fund. Its NAV is down. Should I continue to hold this fund or exit it?

Your decision to retain or sell the fund should not be based on market volatilities. The stock market is volatile and the day to day ups or downs can be quite dramatic in the short-run. Impulsive decisions are never a good idea and in the case of the stock market it is probably the worst idea. If the fund is well managed, the fund manager will use the market corrections to buy stocks of good companies at discounted prices and by sticking on to your investment, you will get good profits in the future.
You should consider selling a fund Only If:
-        You need cash urgently
-        The fund has consistently underperformed its benchmark index (At least for 1-2 years)
-        The Fund’s investment objective or philosophy has changed
-        The Fund Manager has changed
You may also want to sell your units to rebalance your portfolio but this is not really considered selling because you will effectively be investing in another fund. Right?

41. What is a Fund of Funds (FoF) Mutual Fund Scheme?

A Fund of Funds mutual fund is nothing but a mutual fund scheme that actually invests in other mutual funds. This fund does not directly invest in stocks or bonds or other investment instruments. They buy mutual fund units of other schemes. For Ex: A diversified equity FoF will invest in various different diversified equity mutual fund schemes.

42. What is an Asset Management Company (AMC)?

The company that manages a mutual fund is called an AMC. Reliance, HDFC, ICICI Prudential, Franklin Templeton, Birla Sun Life etc are all popular AMCs in India. An AMC may have several mutual fund schemes with similar or varied investment objectives. The AMC hires a professional fund manager, who buys and sells securities in line with the fund's stated objective.

43. What is Systematic Investment Plan or SIP?

A Systematic Investment Plan is nothing but a regular commitment from an investor wherein the investor agrees to invest a predetermined amount of money regularly (Usually every month) for a predetermined period (Usually 1 year or more).  Simply speaking, a Mutual Fund SIP is like a Bank Recurring Deposit with a difference that, the Mutual Fund will invest in the stock market while the Bank does not do so. 
Every month, units corresponding to the amount invested by us (At the prevailing NAV on the date of investment) are credited into our MF Account.

44. What is the Benefit of taking the SIP Route to Investing? 

SIPs are most useful when the stock market isnt on a steady upward trend. In the current economic scenario, the markets are extremely volatile and you never know when the market will go up or down. So, if we choose the SIP route, it gives us the benefit of "Cost Averaging". In other words, since you are investing every month, you can take advantage of any dips in the stock market and accumulate additional units. This way, at the end of the SIP Period, you will end up with more units that what you would have accumulated if you had invested in one shot. 

More importantly, parting with Rs. 5000/- every month may not look that difficult, but if you are asked to cough up Rs. 75,000/- in one month that will sound like a lot, wouldnt it? That is exactly why SIPs are easier than one time investments. 
If you want to understand more about SIPs and how they can be beneficial to you, check this article:

45. When will the investor get the certificate or statement of accounts after investing in a mutual fund?

Mutual funds are required to dispatch certificates or statements of accounts within six weeks from the date of subscription on the scheme. Depending on how you invested (Via paper form or DEMAT), how you get the statement may vary. For example, investors choosing the DEMAT route may get email statements while investors who chose the traditional paper based route, would get paper based statements by post.

46. Why should you monitor and review your fund performance?

Having made an investment in a mutual fund, you should monitor it to see whether its management and performance is in line with stated objectives and also whether its performance exceeds or lags your expectations. Unlike individual stocks and bonds, mutual fund reviews are required less frequently, once in a quarter should be sufficient.
A review of the fund’s performance should be carried out with the objective of holding or selling your investment in the mutual fund. A simple check could be – is the fund able to meet the performance/returns of its benchmark Index? A fund that is based out of BSE Sensex should be able to at least meet or beat the % returns generated by Sensex every quarter. If it is not able to do this and misses the target during consecutive quarters, you may need to consider exiting the fund.

            We have had numerous articles in the past that covered the topic of Mutual Funds in great detail. Some of the useful articles which you can refer to now would be:

Hope you found these questions useful. If you have more questions use the comments section and I would be happy to answer them.

Happy Investing!!

Saturday, February 7, 2015

Should You Be Investing in the PSU Disinvestments?

Over the past few years, Dis-investments or Share Sale by Government Owned Public Sector companies of India has been a preferred route for raising funds by the Indian Government. Many popular or should I say large & profitable PSUs shares have been sold in the stock market by the Government by the OFS (Offer for Sale) route with a 5% extra discount for retail investors.
Are you one among the many people who are considering investing in such PSU OFS Issues? If so, read this article and share it with your friends.

Should You Be Investing in PSU OFS Offers?

There are many reasons why people are attracted to such PSU Disinvestment options. Some of the key reasons include:
-        They are owned by the government so, they are risk free
-        The 5% extra discount
-        These are profitable companies
-        Everyone else is subscribing
-        Etc…

If you ask me for my One Word Answer to this Question – I would say, NO.
Yes, you read it right, I am saying, No, I would not be interested in subscribing to such PSU Disinvestment Offers. 

You may be wondering, I am crazy but let me explain in detail on the Why part. There are 4 main reasons why I feel, we shouldn't be subscribing to these offers right now…

Reason 1: Just because they are PSU Stocks, it doesn't mean they are Risk free or even Low Risk

Any stock that is out there, being bought and sold on the stock market carries a lot of risk. There is always a chance the price of your stock will go down on any given day. This is not a “Bond” or a “Fixed Deposit” where you can find solace over the fact that the government owns/issues this Bond/Deposit and hence will pay you, no matter what. A Stock/Share is not like a Bond. It has no Intrinsic or Default value.

If you buy the shares of XYZ PSU today at Rs. 300/- per share and it is selling at Rs. 100/- 6 months now, nobody is going to offset your loss of 200 rupees per share.

Reason 2: Timing of the Issues (NOW – In 2015)

Right now, the stock market is riding a wave of momentum fueled by the popularity of our Honorable Prime Minister and the trust the International Investors have on his ability to fuel India’s growth. As a result, our stock markets are at an all-time record high. Yes, many companies have benefited greatly from this Indian Growth Story and warrant the spurt in their stock prices but many more companies are growing (in just stock price) without reasons. With the stock market at the current levels, the room for error is that much lower. Even if there is a 2 or 3% correction in our markets, we will end up with significant losses.

Reason 3: 5% Extra Discount

Yes, the 5% extra discount is a great idea to woo the common/retail investor. I cannot really say anything negative about this except for the fact that, 5% is not that big a deal when you are potentially looking at double digit profit or loss. By keeping your money in your savings account (doing nothing) you can make 4% returns so, this 5% isn’t much of a motivating factor unless we know that the stock we are buying is actually primed to grow…

Reason 4: Everyone else is Buying – The Offers are a Super-Hit

Of the 4 reasons, this is probably the biggest reason why I am skeptical of these issues. If you review the Investment pattern for these PSU Disinvestments, one thing is clear, it is fully subscribed.  However, if you take a step further and look even closely, you will be able to see that another Government Owned PSU (Life Insurance Corporation of India) has been one of the main subscribers to these Issues. LIC bought about 84% of the Issued Shares during the ONGC Disinvestment, similarly it bought about 71% of the shares issued during the SAIL Disinvestment. For Coal India, the % was 45%.

Of course, others too are investing but seeing LIC as the biggest investor for such issues, it is obvious that many of the big investment houses (Esp. Mutual Funds) are staying clear or at least not investing all their money in such issues. As retail investors our threshold for losses or ability to bear losses are very low. A company like LIC can afford to lose 5 crores today and another 5 crores tomorrow but if you or I lose Rs. 50,000 – get the picture??

Some Last Words:

Firstly, I am not saying that we should ignore such PSU Disinvestments altogether. Buying PSU Stocks is a good idea to form a core stock portfolio for the long run. Well Managed Indian PSUs have given superb returns if we consider a 5 or 10 year track record. However, most investors who made a profit are ones that bought when the market was low not when it was at its peak. Secondly, if you are still interested in buying such PSU offers, invest only 5% of your portfolio in each issue. Do not over-expose your portfolio to any particular PSU stock and invest only your long-term savings here. If you plan on exiting in about 1-2 years, then you should stay away.

Hope you found this article useful. If you did, please share with your friends.

Happy Investing!!!

Disclaimer: This is only my personal view of these PSU Disinvestments based on the current circumstances. When the market situation or offer price or any other factor changes, the same may not hold true. Please consider your own personal risk appetite before making investment choices.

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