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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