Reliance Mutual Fund has introduced the first of its kind "ATM" card linked to Mutual Fund Folios in association with Visa. This is a new concept with regard to Mutual Fund investments and this may ultimately take us closer towards Investment accounts with Cheque book facility.
In this new product, Reliance Mutual Fund would issue ATM card, which you can use like any other bank debit card and it is accepted across 30 million outlets. The ATM card holder should be holding units in Reliance Money Manager Fund or Reliance Liquid Fund - Treasury Plan schemes.
At this stage, we have limited information on this product but we see the following benefits:
1. Flexibility in monetising the mutual fund investments and the ability to carry the value of your liquid investments in an ATM card would be very useful.
2. Possibility to earn higher interest on the liquidity funds as compared to savings bank account. With the recent de-regulation of savings bank interest rates, the difference on yields between savings bank accounts and MF liquid fund investments are reduced.
Clarifications required in the following areas:
1. The modus operandi on the reduction of the units for the usage on the ATM card. What is the expected lead time before the number of units would be reduced?
2. Do they block the equivalent number of units as and when a transaction takes place?
3. Does this service involves any additional charge to MF investors?
These are early days but I think we require new and innovative products like this to liven up the financial services space. We can expect a slew of launches on the same lines from other Mutual Fund players in the coming months, if not in the coming weeks.
Will post more as we are able to lay our hands on additional information.
Showing posts with label Mutual Funds Ideas. Show all posts
Showing posts with label Mutual Funds Ideas. Show all posts
Wednesday, November 30, 2011
Thursday, June 18, 2009
PAN requirement for Mutual Fund investments through SIP may go off
The Finance Ministry is set to issue a new set of guidelines for SIP investments upto Rs50,000 in Mutual Funds relaxing the need to produce Permanent Account details. PAN was required under the Prevention of Anti-money Laundering Act (PMLA) to establish the identity of the person making the investment. As Systemtic Investment Plan transactions are routed thorugh the Banking channels, the identity of the investor can be easily established.
Dhirendra Kumar of Valueresearchonline.com feels that this is a positive development for the mutual fund industry particularly at a time when everybody is talking about extending financial services to the "bottom of pyramid" population and would also open up the Mutual fund avenue for more than 100 crore Indians who don't have a Permanent Account Number.
As more and more people are interested in investing in the stock markets using the Mutual Fund route and with the advent of products like Micro SIP's, where the monthly contribution can be as low as Rs50, this is definitely would give a fillip to the Mutual Fund industry in augumenting the funds under management.
As per Economic Times, KYC process would still be enforced for Mutual Fund Investments.
Please note that this relaxation is still not official as AMFI India, the umbrella organisation of Mutual Funds in India is yet to receive the Government order.
Dhirendra Kumar of Valueresearchonline.com feels that this is a positive development for the mutual fund industry particularly at a time when everybody is talking about extending financial services to the "bottom of pyramid" population and would also open up the Mutual fund avenue for more than 100 crore Indians who don't have a Permanent Account Number.
As more and more people are interested in investing in the stock markets using the Mutual Fund route and with the advent of products like Micro SIP's, where the monthly contribution can be as low as Rs50, this is definitely would give a fillip to the Mutual Fund industry in augumenting the funds under management.
As per Economic Times, KYC process would still be enforced for Mutual Fund Investments.
Please note that this relaxation is still not official as AMFI India, the umbrella organisation of Mutual Funds in India is yet to receive the Government order.
Tuesday, July 15, 2008
Fund Investing in Volatile Markets
In 2008, the equity markets have seen a high amount of volatility. After reaching a high in early January, the markets have been on a downward trend. A variety of global and local events including oil prices, sub prime crisis, inflation etc has influenced the markets.
A common question we have is whether to continue investing in the markets now. Even those who invest through SIP plans in equity mutual funds face this dilemma. There is no shortage of advice either.
We question the logic behind the most common ones:
· Continue investment in the markets as they are for the long -term:
Every analyst worth his salt is downgrading earnings, reducing P/E multiples and predicting ever lower Sensex predictions. If the analysts are so sure that the markets are going down, then why should retail investors continue to invest now? Why cant they wait for the 10k Sensex levels predicted with such confidence by the same analysts to whom they hand over their money? While picking the bottom of a market is different, if there is an overall gloomy scenario and a strong downward trend, then why should invest put up their money now?
· Invest in mutual funds and do not pick stocks directly as one should leave it to the professionals in such tough times:
As of today (15th July 2008), as per Value Research, the diversified equity mutual funds have delivered a 1 year return of – 16%. Add 2.5% administrative expenses and 2.25% entry load, the total return in a year stands at – 21%. Against this the Nifty has a – 10% return over one year. That is a huge difference of 10 % over a year. Why should I hand over my funds to a professional who doubles my loss, when I can stick to an Index ETF with better returns?
· Invest in five star funds recommended by the fund distributors/Value Research:
Currently ICICIDirect wants investors to switch to Sundaram Select Focus and HSBC Equity based on one year performances. Out of curiosity I checked their fund recommendations in 2007. Of course neither fund figured there.
One more curious fact – I have never seen any distributor/MF rating firm put a Sell on any fund. And all these switching of fund portfolios will earn them fresh entry loads. Coupled with the fact that they keep changing their preferred funds every few months, it is difficult to build a long term portfolio using this information.
Summary
So what we need to do in this market – Do not follow any general advice – there is no free lunch!!
In this market it is best for each investor to carry out his own analysis, determine his/her risk apetite, holding period before you decide on MF investments. Remember, asset allocation is the key. When we buy/sell a fund we need to consider the impact on our portfolio.
Today a multitude of options are available (In this blog we have spoken about arbitrage funds, international funds, liquid plus funds etc.)
Building a long term mutual fund portfolio which provides superior returns requires clear understanding of the expected returns and the risks in such portfolios, and it does not help with frequent churning of the funds.
A common question we have is whether to continue investing in the markets now. Even those who invest through SIP plans in equity mutual funds face this dilemma. There is no shortage of advice either.
We question the logic behind the most common ones:
· Continue investment in the markets as they are for the long -term:
Every analyst worth his salt is downgrading earnings, reducing P/E multiples and predicting ever lower Sensex predictions. If the analysts are so sure that the markets are going down, then why should retail investors continue to invest now? Why cant they wait for the 10k Sensex levels predicted with such confidence by the same analysts to whom they hand over their money? While picking the bottom of a market is different, if there is an overall gloomy scenario and a strong downward trend, then why should invest put up their money now?
· Invest in mutual funds and do not pick stocks directly as one should leave it to the professionals in such tough times:
As of today (15th July 2008), as per Value Research, the diversified equity mutual funds have delivered a 1 year return of – 16%. Add 2.5% administrative expenses and 2.25% entry load, the total return in a year stands at – 21%. Against this the Nifty has a – 10% return over one year. That is a huge difference of 10 % over a year. Why should I hand over my funds to a professional who doubles my loss, when I can stick to an Index ETF with better returns?
· Invest in five star funds recommended by the fund distributors/Value Research:
Currently ICICIDirect wants investors to switch to Sundaram Select Focus and HSBC Equity based on one year performances. Out of curiosity I checked their fund recommendations in 2007. Of course neither fund figured there.
One more curious fact – I have never seen any distributor/MF rating firm put a Sell on any fund. And all these switching of fund portfolios will earn them fresh entry loads. Coupled with the fact that they keep changing their preferred funds every few months, it is difficult to build a long term portfolio using this information.
Summary
So what we need to do in this market – Do not follow any general advice – there is no free lunch!!
In this market it is best for each investor to carry out his own analysis, determine his/her risk apetite, holding period before you decide on MF investments. Remember, asset allocation is the key. When we buy/sell a fund we need to consider the impact on our portfolio.
Today a multitude of options are available (In this blog we have spoken about arbitrage funds, international funds, liquid plus funds etc.)
Building a long term mutual fund portfolio which provides superior returns requires clear understanding of the expected returns and the risks in such portfolios, and it does not help with frequent churning of the funds.
Wednesday, April 30, 2008
Arbitrage funds – a good place to park money for short term
Arbitrage funds are the funds floated by Mutual Funds with an aim to take advantage of arbitrage opportunities that exist between the cash and the futures market to generate a steady income for the investors. The arbitrage funds take advantage of the mis-pricing between the cash and derivatives market.
How arbitrage funds work?
For example, an arbitrage fund may buy Infosys shares @ Rs1800/share in cash market on 01 April. At the same time, it will sell Infosys shares in the futures market, which would be quoting at about Rs1815. This existing difference is called "cost of carry" in financial parlance.
Let’s say the price of Infosys on the expiry date of the futures contract (last Thursday of every month) is Rs1900. Thus, the fund will make a profit of Rs100 per share in the cash market (Rs1900- Rs1800) and loss of Rs85 in the futures market. (Rs1815 – Rs1900). Here, the important assumption is the cash and futures price remains the same on the date of expiry. The net gain per share is Rs15 after setting off the loss on the futures market.
In case the price of Infosys share drops to Rs1700 on the settlement day. The fund will make a loss of Rs100 per share in the cash market and profit of Rs115 in the futures market. Again, the net gain will be Rs15 per share. This way, the arbitrage funds makes money in all the situations.
Tax Implications for Arbitrage funds:
For tax purposes, arbitrage funds are treated like equity funds. There is no dividend distribution tax, no long term capital gains tax and the short term capital gains tax is at 11.33% compared to the applicable slab rate for debt funds.
Dividend distribution tax – NIL
Long Term Capital Gains tax – NIL
Short Term Capital Gains Tax – 11.33%
Securities Transaction Tax – 0.25%
Return expectations:
The arbitrage funds have given a return of around 9.25% p.a. in the last 6-12 months compared to 7.5% returns for floating rate funds and 7.9% for liquid plus funds. The tax treatment is also favourable compared to the debt funds. The Arbitrage funds are the only equity related funds which have given positive returns over the last 3 months or so.
Risks associated with these funds:
Of course, there is couple of them. First, it is possible that the arbitrage opportunity may not be available for the fund to take advantage off. In those cases, we understand it would act like a liquid fund. The second one is that the logic of the cash and futures price of a stock matches on the contract expiry date may not materialize. In addition there is always a possibility of fund manager not capitalizing on the opportunity and the lack of liquidity to execute arbitrage contracts.
Popular Arbitrage funds in the market:
The following are some of the popular arbitrage funds in the market:
JM Arbitrage Advantage fund, SBI Arbitrage Opportunities funds, Kotak Equity Arbitrage Fund, Standard Chartered Arbitrage Fund Plan B. Each of these funds has given a return of above 9% in the last 12 months.
Suitability of the product:
The Arbitrage funds are suitable for people who want to park funds for a short term of 12 -18 months with reasonable degree of safety and return.
How arbitrage funds work?
For example, an arbitrage fund may buy Infosys shares @ Rs1800/share in cash market on 01 April. At the same time, it will sell Infosys shares in the futures market, which would be quoting at about Rs1815. This existing difference is called "cost of carry" in financial parlance.
Let’s say the price of Infosys on the expiry date of the futures contract (last Thursday of every month) is Rs1900. Thus, the fund will make a profit of Rs100 per share in the cash market (Rs1900- Rs1800) and loss of Rs85 in the futures market. (Rs1815 – Rs1900). Here, the important assumption is the cash and futures price remains the same on the date of expiry. The net gain per share is Rs15 after setting off the loss on the futures market.
In case the price of Infosys share drops to Rs1700 on the settlement day. The fund will make a loss of Rs100 per share in the cash market and profit of Rs115 in the futures market. Again, the net gain will be Rs15 per share. This way, the arbitrage funds makes money in all the situations.
Tax Implications for Arbitrage funds:
For tax purposes, arbitrage funds are treated like equity funds. There is no dividend distribution tax, no long term capital gains tax and the short term capital gains tax is at 11.33% compared to the applicable slab rate for debt funds.
Dividend distribution tax – NIL
Long Term Capital Gains tax – NIL
Short Term Capital Gains Tax – 11.33%
Securities Transaction Tax – 0.25%
Return expectations:
The arbitrage funds have given a return of around 9.25% p.a. in the last 6-12 months compared to 7.5% returns for floating rate funds and 7.9% for liquid plus funds. The tax treatment is also favourable compared to the debt funds. The Arbitrage funds are the only equity related funds which have given positive returns over the last 3 months or so.
Risks associated with these funds:
Of course, there is couple of them. First, it is possible that the arbitrage opportunity may not be available for the fund to take advantage off. In those cases, we understand it would act like a liquid fund. The second one is that the logic of the cash and futures price of a stock matches on the contract expiry date may not materialize. In addition there is always a possibility of fund manager not capitalizing on the opportunity and the lack of liquidity to execute arbitrage contracts.
Popular Arbitrage funds in the market:
The following are some of the popular arbitrage funds in the market:
JM Arbitrage Advantage fund, SBI Arbitrage Opportunities funds, Kotak Equity Arbitrage Fund, Standard Chartered Arbitrage Fund Plan B. Each of these funds has given a return of above 9% in the last 12 months.
Suitability of the product:
The Arbitrage funds are suitable for people who want to park funds for a short term of 12 -18 months with reasonable degree of safety and return.
Wednesday, March 12, 2008
Adding an International flavor to your investments through Mutual Funds!!
One of the fundamental principles of equity investing is diversification. Investing in an index fund for e.g. will help us diversify the portfolio away from specific stocks or sectors. With the Indian markets going through tough times does it make sense for us to invest outside? Today the investor is lucky to have opportunities to invest directly or through mutual funds. This post looks at Indian funds with direct exposure in International stocks.
Regulations:
The Indian government has allowed mutual funds to have international exposure of upto five billion dollars. In the second half of 2007 eleven overseas funds raised 2.2. billion dollars. Of course only a part of it will be invested outside. If the fund invests more than 35% of the assets abroad then it will not be considered to be an equity fund.
Advantages:
The advantage these funds offer is the chance to invest in foreign companies. They could have an emerging market focus or could be in large companies in the developed economies. In scenarios when the Indian market suffers a steep fall, there will be a cushion. Also investing in specific themes is possible. For e.g. DSPML World Gold fund invests in gold mining and producing companies. The mechanism is being followed is to invest in Merrill Lynch International Investment Funds - World Gold Fund (MLIIF -WGF). According to September portfolio of the fund, the top three companies where the fund invested are Australia-based Newcrest Mining, Canada-based Barrick Gold and China's Zinjin Mining.
Disadvantages:
The downside is lack of understanding of the markets and the mechanism for investing. The transparency levels are lower. While some funds invest directly in foreign companies, other invest in indices. This is popular with International fund houses. For e.g. Principal invests in PGIF Emerging Markets Equity Fund as a vehicle. This could also lead to conflict of interest issues. The investor also takes on currency risk as he is exposed to exchange fluctuations.
Performance:
Most of the funds have a short track record of less than one year. The oldest funds in the Indian market in this category are Templeton India Equity Income and Principal Global Opportunities Fund. A quick review of the returns reveals that they have outperformed their category in the past three months. However over a one year period, the Indian indices outperform the Principal fund. What this reveals is these funds offer greater protection during downside in the Indian markets.
A look at the portfolio of the Templeton fund reveals that it has invested in stocks like Anglo American PLC (USA), Ternium SA (South Africa), United Micro Electronics Corporation (Taiwan), Samsung Heavy Industry (Korea) etc. The fund has outperformed the Indian Indices since it’s inception. The DSP Gold Fund has delivered returns comparable to Gold ETF’s in the market.
Conclusion:
International funds have a definite part to play in our portfolios. While they need not be core holdings, it is worthwhile investing in them through the SIP route. We like the Templeton India Equity fund. A good track record, greater transparency and an emerging market focus are favorable pointers. The fund manager, Mark Mobius has proven expertise in investing in emerging markets. The fund has a decent corpus of Rs 1500 crores, available for investment. It would be a good long-term addition to a portfolio.
Regulations:
The Indian government has allowed mutual funds to have international exposure of upto five billion dollars. In the second half of 2007 eleven overseas funds raised 2.2. billion dollars. Of course only a part of it will be invested outside. If the fund invests more than 35% of the assets abroad then it will not be considered to be an equity fund.
Advantages:
The advantage these funds offer is the chance to invest in foreign companies. They could have an emerging market focus or could be in large companies in the developed economies. In scenarios when the Indian market suffers a steep fall, there will be a cushion. Also investing in specific themes is possible. For e.g. DSPML World Gold fund invests in gold mining and producing companies. The mechanism is being followed is to invest in Merrill Lynch International Investment Funds - World Gold Fund (MLIIF -WGF). According to September portfolio of the fund, the top three companies where the fund invested are Australia-based Newcrest Mining, Canada-based Barrick Gold and China's Zinjin Mining.
Disadvantages:
The downside is lack of understanding of the markets and the mechanism for investing. The transparency levels are lower. While some funds invest directly in foreign companies, other invest in indices. This is popular with International fund houses. For e.g. Principal invests in PGIF Emerging Markets Equity Fund as a vehicle. This could also lead to conflict of interest issues. The investor also takes on currency risk as he is exposed to exchange fluctuations.
Performance:
Most of the funds have a short track record of less than one year. The oldest funds in the Indian market in this category are Templeton India Equity Income and Principal Global Opportunities Fund. A quick review of the returns reveals that they have outperformed their category in the past three months. However over a one year period, the Indian indices outperform the Principal fund. What this reveals is these funds offer greater protection during downside in the Indian markets.
A look at the portfolio of the Templeton fund reveals that it has invested in stocks like Anglo American PLC (USA), Ternium SA (South Africa), United Micro Electronics Corporation (Taiwan), Samsung Heavy Industry (Korea) etc. The fund has outperformed the Indian Indices since it’s inception. The DSP Gold Fund has delivered returns comparable to Gold ETF’s in the market.
Conclusion:
International funds have a definite part to play in our portfolios. While they need not be core holdings, it is worthwhile investing in them through the SIP route. We like the Templeton India Equity fund. A good track record, greater transparency and an emerging market focus are favorable pointers. The fund manager, Mark Mobius has proven expertise in investing in emerging markets. The fund has a decent corpus of Rs 1500 crores, available for investment. It would be a good long-term addition to a portfolio.
Thursday, March 6, 2008
Liquid Plus funds – a better option to park your short term funds!!
One of the most common issues faced by all of us is how to efficiently manage short term liquidity. Normally we leave the funds lying in our Saving Bank account which earns a low interest rate of 3.5% that too, on the lowest balance in the month. One of the efficient ways of managing short term funds is to park it in "Liquid mutual funds". Liquid mutual funds have emerged as an attractive alternative to park funds needed at short notice. The post tax returns are better than savings bank accounts.
Liquid mutual funds park their assets in debt securities which earns interest in relation to the prevailing interest rates in the economy. There are two types of liquid funds, namely, Liquid Funds and Liquid Funds Plus. Liquid funds cannot have debt securities with more than 1 year maturity. Liquid Plus funds can hold debt securities in their portfolio with more than 1 year maturity.
In the 2007 Union Budget the dividend distribution tax (DDT) for liquid funds was increased from 14.03% to 28.30%. For liquid plus funds the DDT remains at 14%. This has made liquid plus funds more attractive. This has lead to the announcement of a flurry of liquid plus funds by different fund houses. Redemption is possible in a couple of days. The tax treatment for liquid funds makes it attractive to opt for a regular dividend payout option.
Returns:
In terms of returns, liquid plus funds compare favorably with category returns of 8.31% over the last one year. Of the available options, funds like Canara Robeco Liquid Plus Retail and HDFC Cash Management Saving Plus Retail have a good three year track record. Due to favorable returns, these funds have seen significant inflows. Reliance Mutual Funds liquid plus funds manages a total corpus of more than Rs6000 crores. Amongst the top twenty mutual funds (by AUM), there are four liquid plus funds.
Suitability of the product:
They are suitable for investors with surplus short-term funds and not sure when it would be required. A liquid fund provides excellent opportunity to park your short term funds at a higher rate compared to savings bank account. It also provides you with the flexibility to break the investment partially without compromising on the returns based on your funds requirement. It is also tax efficient compared to bank deposits which are taxed at a higher rate (say at 30% for income in excess of Rs2.5 lakhs for Financial year 2007-08).
However please note that the time for redemption of a liquid plus fund is a week. They also attract marginally higher administration charges (around 20 basis points) than liquid funds.
For parking short-term funds, we can also look at other categories of funds like arbitrage funds, which we will discuss later.
Liquid mutual funds park their assets in debt securities which earns interest in relation to the prevailing interest rates in the economy. There are two types of liquid funds, namely, Liquid Funds and Liquid Funds Plus. Liquid funds cannot have debt securities with more than 1 year maturity. Liquid Plus funds can hold debt securities in their portfolio with more than 1 year maturity.
In the 2007 Union Budget the dividend distribution tax (DDT) for liquid funds was increased from 14.03% to 28.30%. For liquid plus funds the DDT remains at 14%. This has made liquid plus funds more attractive. This has lead to the announcement of a flurry of liquid plus funds by different fund houses. Redemption is possible in a couple of days. The tax treatment for liquid funds makes it attractive to opt for a regular dividend payout option.
Returns:
In terms of returns, liquid plus funds compare favorably with category returns of 8.31% over the last one year. Of the available options, funds like Canara Robeco Liquid Plus Retail and HDFC Cash Management Saving Plus Retail have a good three year track record. Due to favorable returns, these funds have seen significant inflows. Reliance Mutual Funds liquid plus funds manages a total corpus of more than Rs6000 crores. Amongst the top twenty mutual funds (by AUM), there are four liquid plus funds.
Suitability of the product:
They are suitable for investors with surplus short-term funds and not sure when it would be required. A liquid fund provides excellent opportunity to park your short term funds at a higher rate compared to savings bank account. It also provides you with the flexibility to break the investment partially without compromising on the returns based on your funds requirement. It is also tax efficient compared to bank deposits which are taxed at a higher rate (say at 30% for income in excess of Rs2.5 lakhs for Financial year 2007-08).
However please note that the time for redemption of a liquid plus fund is a week. They also attract marginally higher administration charges (around 20 basis points) than liquid funds.
For parking short-term funds, we can also look at other categories of funds like arbitrage funds, which we will discuss later.
Sunday, February 24, 2008
Should we avoid Five Star Funds!!
Investing through mutual funds is inevitable now for all of us. One of the most commonly used selection tool is to go with the “Five Star” funds or “top rated” funds. Several websites (including Value Research, Mutual Fund India ), brokerage houses, mutual fund distributors extend this service of rating funds. Typically these funds would be established funds with a 3-5 year track record at least. Popular funds include HDFC Equity, Franklin India Prima, DSPML Equity, Reliance Gowth, SBI Magnum Contra, Sundaram Select Midcap etc.
However, we would like to take a contrarian view here and feel that fund selection should not be based only on ratings. For e.g. let us take a look at the top gainers as of today over a one year period.
Funds Fund Rating Nav (Date) 1 Year Return
Standard Chartered Premier Equity -- 23.18 (21 Feb) 65.56 |
Reliance Regular Savings Equity -- 25.24 (21 Feb) 62.69 |
ICICI Prudential Infrastructure -- 29.75 (21 Feb) 59.77 |
DWS Investment Opportunity 37.57 (21 Feb) 59.19 |
JM Basic -- 31.65 (21 Feb) 58.73 |
DBS Chola Opportunities 43.60 (21 Feb) 56.27 |
Magnum COMMA -- 24.11 (21 Feb) 54.85 |
Sundaram BNP Paribas CAPEX Opp.-D -- 20.39 (21 Feb) 52.51 |
Taurus Discovery Stock 24.72 (21 Feb) 52.50 |
(Source: Value Research)
The interesting point is that NONE of them is a five star fund!! Even given that the top funds are rated based on risk -adjusted returns, one would expect to find at least one star rated fund amongst the major gainers.
A few reasons why this might be the case
- A track record of three & five year returns is taken into account while rating funds. This takes into account the consistency of the fund. But often funds find it difficult to sustain such returns in the long run. The original strategy adopted 2/3 years back may no longer be relevant now.
- Safety lies in numbers - It is very difficult to criticize a distributor for having recommended popular funds like Sundaram Select Midcap. As a fund becomes successful it attracts a large set of investors. The increased asset base makes it difficult to generate high returns.
- Fund manager turnover contributes to this though it might not always be the case. Prashant Jain (HDFC Equity) and Siva Subramaniam (Franklin India Prima) continue to manage their funds for an extended period of time. Manager fatigue and lack of motivation might come into play.
So what is the solution? One approach might be to purchase ETF’s, which follow the major indices (large cap and small cap). We will discuss different approaches going forward, but please do refrain from buying into large established funds just based on fund ratings!!
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