HOW TO JUDGE A FUND’S PERFORMANCE

Investing in mutual funds has an inherent risk assumed upon the ownership. However, performance of the mutual funds can be quantified with the mathematical calculation of the historical returns. The correlation of the potential risk and the potential returns constantly put forth the opportunities to invest in mutual funds and drive maximum potential returns with minimum underlying risk.

First, classify the mutual fund to determine if it fits within your scope. For example, if you are seeking a mutual fund that provides steady income, a mid-cap value fund will leave you very disappointed. You can find all the basic facts about a mutual fund and have access to tools that further help you evaluate the fund. In your categorization of the mutual fund, also identify a few peers, or comparable funds from other fund companies, to compare your chosen fund.

Next, review the historical performance data and compare your chosen mutual fund with a few of its peers. Look at the risk-return trade-off for each fund and determine whether it meets your risk tolerance. if a fund assumes a greater risk than average. Ideally, select a fund that assumes low risk but still produces good returns. The balance between the two depends, again, on your risk tolerance and investment objectives.

Quality of stocks in the portfolio is reflected in its ability to drive superior returns on capital invested for a specific period of time. It is wise to check the industry leadership position of the mutual fund. Quality of the stocks in the portfolio would reflect in returns hence in the performance. Qualitative statistics and historical performance of mutual funds would help evaluating the performance.

Track record and competence of the fund manager – Your fund manager is an important person who makes investment decisions and stock selection in the portfolio. Understand your fund manager’s competence according to his/her fund management knowledge and ability. Your fund manager’s past performance would be a good parameter to track his/her record and could turn to be of a great value for your investment

Finally, take a look into the fund’s expenses and fee structure. Active mutual funds that have heavy trading or are very actively managed have higher annual expenses. Factor in these costs as they directly affect your performance. While a fund that charges higher management fees is not necessarily better or worse because of the fees, still be cognizant of reasonable fees for the type of fund you choose. Again, comparing the fund with its peers can reveal whether the fees are reasonable.

Planning to invest in mutual funds? The earlier the better!

One of the most important factors to consider while drawing a financial plan is fixing the time period, especially if you are a beginner. The thumb rule is, the earlier you start, the greater the chance of achieving your financial goals.

Everyone has some goals and responsibility in life, some want to buy a new car and some are planning to retire rich so that they can enjoy their post-retirement life. We all have many dreams, but are we really investing that much time and money on building the corpus to achieve these goals. It is time tested that if one starts investing early, the percentage of building the corpus for one’s desired future financial goals is higher as compared to those who start very late in their life.

Investing according to financial goals.

Identify and priorities goals:

The first step in goal based investing is identifying and prioritising goals by segregating them into needs and wants – needs are essentials and hence get precedence over wants, which are desires and aspirations. Once decided, align your needs/wants to the time horizon.​

Holding Duration

As a young investor one should know the holding duration of any MF categories (for e.g., liquid funds, debt funds, equity funds, hybrid funds, etc.) while investing their money in mutual funds against any financial goal.

Explore the systematic method of investing in mutual funds​

​​Investors can also benefit from the systematic plans offered by the mutual funds. For instance, a systematic-investment plan (SIP) is used for wealth accumulation. A systematic-transfer plan (STP) helps in transferring wealth from one asset to another, in safeguarding the portfolio against volatility, and in adapting to the changing risk appetite with age and increase in responsibilities. Lastly, a systematic-withdrawal plan (SWP) is useful in deriving a regular income from the created wealth created.​​​​

Power of Compounding

Young investors have an advantage in investing since the longer you stay in the market, the less risky your investment becomes and the more corpus you can generate over a period of time. This happens because of the compounding effect and the rupee cost averaging benefit you get over a long term.

Once you are done with prioritizing your financial goals of life, quantify them, that how much amount you may need to achieve those goals and based on that choose mutual fund schemes. So give wings to your dreams and start investing in something each month to achieve your goals without any burden of heavy debt on your shoulder.

ADVANTAGES OF LIQUID MUTUAL FUND

Liquid funds are open ended schemes that invest in debt and money market instruments with maximum maturity of up to 91 days only. Liquid funds can help us earn much higher rates than what the savings deposits offer without compromising too much on how quickly we can get our hands on the cash. Liquid fund have credit ratings which make them safe i.e. less risky for investors.

It is considered as the least risk category in mutual funds, as it does not invest in long term bonds and does not get affected by interest rates movements. The reason that this is considered as a safe bet is because it is generally related to the government sector which can be considered to have a consistent performance. These liquid funds also do not take a long time to mature and can be redeemed in liquid in a single day. People even park their money in a liquid scheme for as less as 2-3 days’ time.

Advantages of liquid funds:

• No entry or exit loads applicable.
• Easy redemption. Takes less than 24 hours.No lock-in period
• Investment in short-term debt securities minimizes the interest rate risk.
• Includes plans like daily, weekly and even monthly dividend plans.

The last one year return of these funds has been in the range of 7%-8% so one can expect such returns in future. Liquid funds come with different plans like growth plans, daily dividend plan, weekly dividend plans and monthly dividend plans. Growth plans don’t declare any dividend, and appreciation of fund is reflected in higher unit value. In liquid funds with dividend plan one get a tax relief on dividend payout.

Mutual funds are answer to your every investment requirement so one need to invest properly. Just know your priority well and only then park your funds wisely.

 

Evaluation of mutual fund factsheet

When one wish to invest in mutual funds schemes; it is important to know as much as possible about the fund house, about the schemes, where your money will be invested etc. Most Asset Management Company (AMCs)  usually publish monthly reports (also called factsheets) that contain critical information related to the portfolios, at times a roundup on debt and equity markets from the fund manager and performance details of the schemes managed by the AMC. However, in many cases, factsheets are not up to the mark leaving much scope for improvement and even standardisation.

Here are the 4 key points of evaluating mutual fund factsheet:

• Performance: The past performance is not the parameter to decide the future performance; however it gives you a rough idea about how that particular scheme may perform in the future. So the first is to illustrate if a scheme has been there for 3 or more years. Compare the funds return with its benchmark index and with the market return.

• Asset allocation: The factsheet can hint certain insight into the fund management approach. Consider the top 10 stocks in the fund’s portfolio to determine the diversification. Fund should follow not more than 5% asset allocation in single stock ensuring its top 10 stocks are well diversified along with sectorial diversification. The asset allocation table tells you how the fund’s net assets are diversified across stocks, current assets/cash. An equity fund’s allocation to cash should be noted. Being in cash could work in the fund manager’s favour if the market crashes, but a higher cash allocation works against the fund during a rising market.

• Expense ratio: Expense ratios are mandatory to be stated in the factsheet as they can significantly affect returns. It is the cost of running and managing a mutual fund scheme which is charged to the investor. A fund with a solid track record but a higher expense ratio (regulations cap this at 2.50% for equity and 2.25% for debt funds) may be better than one which charges less but gives poor returns.

• Fund manager: It is mandatory to know who takes decision of managing your money. Understand the expertise of your fund manager and find out their track record which helps you worry less about your investments. Over the long-term, it is better to have your money managed by a group of fund managers, rather than a single fund manager.

DEMAT FACILITY FOR INVESTMENT IN MUTUAL FUND

Demat account facility is available for investing in mutual funds but there are questions in the minds of investors as to when these should be used. The demat option to investing might complicate the matter further for investors as it would bring in a new route for investing that might work demat option can be used for holding mutual fund units.

If there is already a demat account that is being held and used for the purpose of buying stocks then the costs for the maintenance are difficult. This is the reason why attention should be paid to the issue of the conditions under which already being incurred. In such a situation the investor just has to look at the extent of the transaction costs that would be incurred and then make the decision. Thus if there is a demat account already present then it would ensure that a part of the costs would not be additional and hence it would be prudent to use this.

The investor having investment in stocks as well as units benefits the investor to be able to buy and sell the units from the single account with much less efforts. The investor should be able to buy the units and get them credited to their demat account because if the investor does not have access to this it is tougher to operate. Another benefit is that units can be freely transferred to the accounts of nominees or legal heirs, except in case of tax-saving funds, which have a three-year lock-in. However, transactions through brokers involve approximately demat fee of Rs 300-500 on annual basis and a brokerage every time you transact. The brokerage could be more than 0.05 per cent per transaction.

Knowledge of the manner in which the investor would be able to transact and buy and sell the units is important for them to complete the investment process. But if there is a need for consolidation of the holdings for easy management then the demat route is the way to go.

RETIREMENT WITH MUTUAL FUND

Retirement and pension are synonymous to each other. Investors have started feeling that buying pension plan will only take them to a secure retirement. Retirement planning is the selection of products become easy.

Retirement planning has three steps – accumulation, preservation and distribution. In accumulation stage you invest in different investment products based on your risk profile and time horizon towards retirement. Preservation and distribution stages go parallel to each other and these stages come after getting retired. Pension plan works on the concept of preserving wealth accumulated and incur retirement expenses. Mutual funds are very tax efficient compared to pension plans and flexible investment instrument offered by mutual fund helps to plan retirement more efficiently.

In accumulation stage of retirement planning one just have to decide which mutual fund scheme they should select and the asset allocation that they want to go with and they can also make a combination of equity, debt, gold and real estate depending on their risk profile and time period. As retirement savings are generally of very long term nature so one can select among diversified equity funds which may include a combination of Large and Mid-cap funds, also in case of debt allocation they may also go for long term debt funds.

At the preservation and distribution stage one need to go for more of a conservative side following a defensive approach with investment in short term debt fund, fixed maturity plan etc. Herewith one should also look for regular income generation, so one can go for systematic withdrawal plan or dividend pay-out options offered by various fund houses.

Here are the top 4 mutual fund schemes for retirement planning.

1. Franklin India Pension Plan
2. UTI Retirement Benefit Pension
3. TATA Retirement Saving Fund
4. ICICI Pru Pension Plan

BENEFITS OF INVESTMENT IN MUTUAL FUND VERSUS DIRECT STOCKS

Mutual fund is a financial instrument which pools the money of different people and invests them in different financial securities like stocks, bonds etc. Mutual funds are managed by asset management companies (AMCs). AMCs appoint fund managers to manage different mutual fund schemes and ensure that the scheme investment objectives are met.

Here are 5 major benefits of investment in mutual fund.

·        Risk Diversification: The biggest advantage of investing in mutual funds versus stocks is risk diversification. Every stock is subject to three types of risk – company risk, sector risk and market risk. Company risk and sector risk are unsystematic risk, while market risk is known as systematic risk. Even if company performs well the stock price might still fall, when the market falls.

·        Smaller Capital -Investors will require a large capital outlay to build a diversified portfolio of stocks. Whereas mutual funds work on the basis of pooling of money, mutual fund investors can have the beneficial ownership of a diversified portfolio of stocks with small amount of capital.

·        Range of Product Offerings- Mutual fund are designed considering investors risk profiles and investment objectives. Apart from equity funds there are also balanced funds, debt funds, monthly investment funds, liquid funds etc.

·        Disciplined Investment- Share prices are highly volatile and can induce the investor to buy or sell in short time periods due to fear or greed.Many investors fail to build a substantial investment corpus because they are not able to invest in a disciplined way. Systematic investment plans helps investors to take emotions out of investmentand manage disciplined investment at regular intervals.

·       Investment Expertise- Many retail traders have lost their money because of poor trading knowledge and expertise. Mutual fund is managed by professionals who are experts in picking right stocks to manage risk profile of portfolio of an investor.

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ELSS MUTUAL FUND SCHEME

Equity Linked Saving Scheme is an open ended fund that have no restriction on number of shares issued and are diversified by allocating in different asset classes which reduces risk of the portfolio by mitigating losses offered through various mutual fund schemes.

Investors invest in Equity Linked Saving Scheme (ELSS) to save tax under section 80C of tax law. However one can use this ELSS to build their financial goals if invested for longer duration.

The primary objective of ELSS is to grow capital for long term and to save tax. The growth of capital can be achieved by the power of compounding which works only in longer duration when reinvestment is made at regular intervals.

However while investing in ELSS one can avail a maximum deduction of  Rs. 1.5 lakh assuming falling under maximum tax slab. These schemes have well past performance track record and least lock in period. The major aim should be of investing and creating wealth rather than saving tax.

Further, if Dividend payout scheme is chosen for investment  it will help earn tax free payout during a financial year before maturity of the scheme. ELSS also gives good liquidity since the lock in period is just for 3 years as compared to pension provident fund where the lock in period is 15 years.

 If investment is made in Systematic Investment Plan (SIP) in ELSS which provides disciplined invests and reign better control on tax saving investment and future wealth creations.

Top five ELSS schemes are:

• Axis Long Term Equity Fund.
• Birla Sun Life Tax Relief 96.
• Franklin India Tax shield Fund.
• ICICI Pru Long Term Equity Fund.
• DSP Blackrock Tax Saver Fund.

Target Investment Plan

TIP is an innovative additional to mutual fund scheme. It is like a SIP i.e. investing opportunity for a determined period on a regular basis with a set target. TIP helps you to invest with target set plan and time period. Financial goals like buying a house, car or educations of child, can be achieved through this TIP.

TIP key principle is that “TIP invests less when prices are high and invest more when prices are low” which helps in averaging the investment value. The longer the period of investment the better is the opportunity of achieving the target.

Some of the key features of TIP are:

• Plan goal to be achieved, its target amount and its time period.
• Set an average monthly investment amount details and additionally offers for providing a maximum amount.
• Investing more when prices are low and investing less when prices are high.
• TIP often tends to give more returns as compared to SIP (SYSTEMATIC INVESTMENT PLAN).

Suppose you have a house to buy after 7 years assuming its fees to be paid is Rs 1cr, you can start your target amount as Rs 1cr.

TIP Dates	Opening Portfolio RS	Monthly Installment Rs	Closing Portfolio Rs	Remarks
7th June 2017	0	77,000	77,000	This is the first installment.
7th July 2017	70,000	84,000	154,000	Portfolio Value went down hence the monthly installment went up.
7th August 2017	170,000	61,000	231,000	Portfolio value went up hence the monthly installment went down.
7th September 2017	220,000	88,000	308,000	Portfolio Value went down hence the monthly installment went up.
7th October 2017	320,000	65,000	385,000	Portfolio Value went up hence the monthly installment went down.

One can cap their maximum installment in TIP. The first investment amount will be equal to average amount of investment.

Thus TIP establishes target portfolio value by calculating the investment amount periodically and bridging the gap between target value and actual value.

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Knowing Your Mutual Fund Product Better!

When a mutual fund creates an investment product, it offers it for the first time to the investors as a new fund offer (NFO).  A new product is first approved by the trustees, and features are described in a detailed offer document that is filed with SEBI.  After SEBI approves that the document carries all the necessary disclosures in the interest of investors, the mutual fund makes its new fund offer to investors.  Key information about the products is also made available to investors who like to buy units of an open‐ended fund on an on‐going basis. SEBI’s regulation prescribes that information about the fund and the product be disclosed in two sections ‐ Scheme Information Document (SID) and Statement of Additional Information (SAI).  The regulations define specifically all the information that needs to be provided and the format in which this information has to be provided.

The SID contains information that is relevant to a specific mutual fund scheme. Information in the SID includes the type of the scheme, its investment objectives, maximum and minimum allocation to different types of securities, the risks associated with the scheme and the strategies that the fund manager intends to deploy. The fees, expenses and loads that will be charged to the scheme are also given. The document gives details on the operational features such as, such as dividend and growth options and facilities such as switch and systematic investments. The SID also contains information on the price at which the units are being offered, the dates of opening and closing of the NFO, the minimum application amount and the points of acceptance of the application. For investors in the scheme after the NFO, the SID contains information on the past performance of the scheme, the method for calculating the price for purchases and redemptions, the cut‐off time within which the application has to be submitted and the minimum application amount.

The SAI contains information that is common to all schemes of a fund house. This includes information on the constitution of the mutual fund, the details of the constituents such as the trustees and the AMC and their roles and responsibilities. Information on service providers such as the custodian and R&T agent and their contact details are provided. The rights of the unit holders in the mutual fund are mentioned in the document. Information contained in the SID or the SAI may change. Changes in the fundamental attributes of the scheme, such as the type of the scheme or the investment objective, has to be updated in the SID immediately. In case of other changes, the mutual fund will issue an addendum which will be attached to the existing SID. Material changes in the SAI will be updated and uploaded both on the mutual fund and AMFI’s website. The SID and the SAI will be updated once every year and the information in the addendums will be incorporated into the document.

A condensed version of the SID and the SAI called the Key Information Memorandum (KIM) is attached to every application form. It gives brief details about the scheme and its features, loads and expenses that will be charged to the investor and the past performance of the scheme. Investors who require information in greater detail can ask for the SID and SAI. Correct, relevant and timely information is essential for investors to make the right investment decisions. Mutual funds provide the information in a simple and readily available form for investors to access and use.

Importance of Mutual funds in Financial Planning

Few years ago, manufacturers of ready‐to‐eat Indian food were baffled with the poor response to their range of convenience foods.  Beyond young single people, the market refused to expand to families. Their research showed that families were looking at saving time spent in the kitchen.  What was going wrong?  Another research was commissioned, which showed that the woman of the household preferred to add her ‘touch’ however little it may be, before serving the meal. The market for gravies and mixes thus took off.   In managing our finances, several households tend to choose the do‐it‐yourself path, to their disadvantage. There may be a high in whipping up an exotic investment recipe for our households.  But it suffers the same risks that an amateur cook will bring, simply because the off‐the‐shelf solution did not appeal to the ego.

We can take a better approach.  We know our nutrition needs and design meals that cater to the specific needs of the family.  We can exercise our choices in bringing the meal to the table.  We could similarly take hold of the planning of our finances and our specific needs and use pre‐designed portfolios to meet those needs.  Mutual funds offer their portfolio management skills to help households build their portfolios, so that the family’s financial well‐being can be taken care of.  The job of choosing the product and deciding what works for us is still ours on which we could focus.

Financial planning is about taking charge of the long term well‐being of the family.  If we think our child needs a glass of milk a day, we do not indulge in nurturing a cowshed but buy packed milk off the shelves.  If the child needs funding for education and we know this means a large sum of money sometime into the future, we can choose to buy an equity fund that gives us long term growth.  If we think our nutritional needs change as we age, we can buy oats off the shelf.  We make that decision to switch to the oats instead of the craving for the parantha.   But we still pick that oats pack off the super market’s shelves.

 Mutual funds represent that range of pre‐packed products that enable us to implement our financial plans.  What they are made of and how they would contribute to our financial health is pre‐defined.  An equity fund will focus on growth and carry long term benefits and short term risk.  Our decision should be about how much of equity we need to have, given our need.  Just as we decide how many rotis the teenage son will eat, compared to his grandpa. Having made that decision, we buy a well-managed equity fund, rather than wasting our energies in creating an equity portfolio, share by share, on our own.  Mutual funds enable us to focus on our core planning needs, without frittering away our time doing elaborate chores that can be efficiently outsourced.

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Financial Goal Based Investing

When we take our family on a holiday, we make several plans – for travel, stay, sightseeing, equipment, food, and other expenses.   Many of these decisions however depend on a crucial factor – our travel destination.  If we travel to Ladakh we will carry woolens and trekking equipment; if we went to Goa we will pack sun screens and swimming costumes.   Our travel plan is defined by the destination.  Similarly, our investments have to be defined by our financial goals.

We may have a long list of things we like our savings to achieve.  Educating our children, getting them married, planning for a comfortable retired life, owning a home, re‐doing our existing homes, funding our holidays, and so on.  These large ticket items that cannot be met with our regular income require us to set money aside.  But saving alone may not be enough ‐ we need to plan about how to invest those savings, so that we are able to meet the goal we have in mind.  Such an approach is called financial goal‐ based investing, and is a useful way to plan and provide for several critical large expenses that we have to incur.

Consider for example, the education of the children.  We may begin to set aside some money for them when they are young.  But choosing an investment plan requires an understanding of three things.  First, we define the goal in terms of amount of money and time.  Assume that we like to save for the child to pursue a professional course, after 16 years.  We know that it costs, say, Rs.1 lakh a year today.  We need to consider the effect of inflation on this goal. Assume we estimate an inflation of 6%.  That is the minimum rate of return our investment must make, so that the amount grows at least to cover the effect of inflation.  Second, we need to understand how much we can save per year for this goal.  This depends on our income and expense patterns and our seriousness about this goal. Third, we have to choose an investment option that generates enough return to meet the goal.

We either increase the savings or we choose a higher return yielding investment, and balance the two.   Too high savings may be impractical; too high an investment return may be risky.  We therefore have to consider the time on hand.  Longer the time we have, greater is our ability to choose higher return and higher risk investments. If the return on our investment is high, the same goal can be met with lower amount of saving, freeing money for other goals.   A slow train will be less expensive, but take us time to reach.  A flight will reach us to the same place faster but costs more.  We have to make the same choice with our investments, based on the time we have.

Mutual funds aims to fund our financial goals by offering a range of products that help us earn income or achieve growth over a long period of time.   Goals give our investments a purpose and make it easier to choose our investment vehicles.

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