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Mutual Funds: Pros and Cons

Over a period of time Mutual funds have become a very popular investment vehicle in India. The reasons for the popularity of mutual funds among investors are many: 

Professional Management

Qualified Professionals manage the Mutual Funds and attempt to maximise the returns and minimise the risk within the stated objectives of the Mutual Fund Scheme. 

Diversification

This is the biggest advantage of investing in a mutual fund, especially for a small investor. This ensures that the investor is not exposed to the risk of a single sector and is not dependent on the performance of one company.

INNUMERABLE ADVANTAGES

Low Costs

An investor can get exposure to professionally managed Mutual Fund investments for as low as Rs. 500. They can get exposure to big tickets investments(like some Fixed income instruments) through Mutual Funds. Also, SEBI has capped the maximum amount that can be charged as an Expenses to the fund based on the fund size.

Liquidity

Mutual Fund Schemes held by an investor are very liquid. They can be redeemed at the NAV of the Scheme which is declared every day and the redemption proceeds are received by the investor in T+2 days i.e. within two days of the date of redemption. 

Choice of schemes

An investors can make a choice from a large number of Schemes so that the investments match with his objectives and goals. 

Flexibility

Within Schemes, investors are provided with a number of options like Growth Option, Dividend Option, Reinvestment Option, Systematic Investment Plan (SIP), Systematic Transfer Plan (STP), Systematic Withdrawal Plan (SWP), etc.

Mutual Funds have come out with a number of innovative products like Trigger facility, transfer of equity gains to a debt scheme, etc. to satisfy the needs of the investors. 

Transparency

This has increased the confidence of investors in the Mutual Fund Structure. Information is available to investors through fact sheets, offer documents, annual reports, periodic investment statements, etc. on a periodic basis.

Taxation

Dividends received from equity schemes of Mutual Funds (i.e. schemes with equity exposure of more than 65%) are completely tax-free. Equity schemes held for more than one year do not attract any capital gains tax on redemption. 

Well Regulated

SEBI Regulations govern the mutual funds industry and protect the interest of investors. This also ensures transparency in the operating of the Mutual Fund. 

DISADVANTAGES

Though very less compared to the advantages, Mutual Funds suffer from the following disadvantages:

(a) In case the manager does not perform well, the fund may give returns lower than the index.

(b) The investor has to pay a management fees and other expenses even if the fund gives negative returns. Returns are not guaranteed.

(c) Investors have no say in their portfolio as the same is managed by the AMC as per the scheme objectives and customisation for an individual investor is not possible.

Investments / Mutual Funds - 10/03/2018
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Understanding a Mutual Fund

A Mutual Fund is a TRUST that pools the savings of a number of investors who share a common financial goal.

The money collected is then invested in capital market instruments such as shares, debentures and other market securities. The investments of the mutual fund are driven by the investment objectives of the scheme.

The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them after recovery of the management expenses.

Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. 

About MF_1

FLOW OF FUNDS

The following are the parties to a Mutual Fund: 

Unit Holder: is a person who is holding the units in a scheme of a mutual fund. The term is comparable to shareholder in case of a company. Unit holder can be a resident individual, HUF, company, NRI, partnership, society etc. 

The Mutual Fund: As stated, the Mutual Fund is the legal entity in the form of a trust which holds investments of its Unitholders. 

Sponsor: A sponsor is the promoter who sets up the Mutual Fund, appoints trustees and the AMC in accordance with the SEBI Regulations. Generally the sponsor and the AMC are part of the same business house. 

Trustee: A trustee is appointed by the sponsor. The trustee holds the property of the mutual fund for the benefit of the unit holders and is responsible to the investors of the fund. The trustee is vested with the general power of superintendence and direction over the AMC.

About MF_2

INTER RELATIONSHIPS

Asset Management Company(AMC): AMC is the business face of the mutual fund as it manages all the affairs of the fund. Investment professionals employed by the AMC determine which securities to buy and sell in the fund’s portfolio, consistent with the fund’s investment objectives and policies. In addition to managing the fund’s portfolio, the AMC often serves as administrator to the fund with the support of the R&T agent and the Custodian. 

R&T Agent: The Registrar and Transfer Agent (R&T) helps investors with the purchase of units in the Mutual Fund schemes, redemptions and switches, change of address and bank details and resolving related queries and complaints. CAMS and KARVY are the key R&T agents in India.

Custodian: The securities which form a part of the mutual fund’s portfolio are usually held by an authorized custodian. The custodian is like the mutual fund’s demat account.

Distributor: A distributor acts as an intermediary between the mutual fund and the investor. He helps the investor choose the right fund as per the investor's objectives. Mutual fund units can be distributed by only AMFI registered, certified distributors. 

AMFI: The Association of Mutual Funds in India(AMFI) is a body dedicated to developing the Indian Mutual Fund Industry on professional, healthy and ethical lines and to enhance and maintain standards in all areas with a view to protecting and promoting the interests of mutual funds and their unit holders. 

SEBI: SEBI is the market regulator in India which, apart from other functions,  overseas the functioning of the entire Mutual Fund industry with the objective of protecting the interest of investors.

Investments / Mutual Funds - 10/01/2018
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Should you invest in Sectoral Funds?

First of all, what is a Sectoral Fund?

A Sectoral Fund is a Mutual Fund that restricts its investments in stocks of a particular sector. For example: Reliance Pharma Fund invests only in stocks of Pharma companies. UTI Banking Sector Fund invests only in Banks.

An extension of a Sectoral Fund is a Thematic Fund that invests in stocks based on a  particular theme. For example: Birla Sun life GenNext Fund invests in companies that are expected to benefit from the rising consumption patterns in India, which in turn is getting fueled by high disposable incomes of the young generation (Generation Next).

Sectoral and Thematic Funds are generally referred to as a single category. Some of the Sectoral funds available in India include Banking, Pharma, IT, Technology, Infrastructure, FMCG etc.

The reason Mutual Funds launch such schemes is that they believe a particular sector will outperform the broader index and generate higher returns.

 

Risk/Return Profile of Sectoral Funds

Sectoral Funds fall in the 'High risk' 'High return' category of funds. If the particular sector does well, then one can expect higher than market returns. The same is true vice versa.

For example: Franklin Infotech Fund invests in stocks of only IT companies. On April 30, 2011 the fund had an exposure of over 50% of the fund portfolio to Infosys Technologies and over 25% to TCS. When the March '11 Quarter results of Infosys did not meet market expectations, its stock price fell and the value of this fund also fell be over 8% in just two days!

Sectoral Fund: The Pawn or the Queen?

Should you invest in Sectoral Funds?

Sector Funds add a flavour to your portfolio and hold the possibility of increasing the returns of your overall portfolio if they do well. Some of the best performing funds in the last five years have been Sectoral Funds in the Banking and Pharma space.

You should take exposure to Sectoral Funds only if you have the higher risk appetite. Again, you must ensure that investments in Sectoral Funds do not exceed 10% of your total portfolio.

Points to be kept in mind before investing in such funds

Firstly, you need to understand the objective of the Mutual Fund scheme properly. For example: Some Sectoral Funds invests only up to 65% of the portfolio in the stated sector. This can dilute your exposure to a sector.

What is included in the definition of a sector/theme also varies from fund to fund. For example: As on date, DSP T.I.G.E.R Fund and ICICI Infrastructure Fund have significant exposure ICICI bank. The logic being, as infrastructure grows, banks are going to be directly benefited by increased lending. This also needs to be studied.

Secondly, you need to check the exposure of your investment portfolio to a particular sector. For example: Most diversified equity funds already have a good exposure to the banking sector. One must take this into account before taking additional exposure to the banking sector through sectoral funds to avoid over exposure.

Thirdly, you must understand that the fund manager of a sectoral fund is restricted in his investment options and will have to continue to invest in a particular sector even if that sector is not doing well. A diversified fund manager has no such restriction and can easily make a switch.

Lastly, compared to a diversified Equity Fund, a Sectoral Fund is not held in the portfolio for a very long time, say 10-15 years. When a Sector is expected to do well, one buys such a fund and exits the fund once it starts going out of favour. The tenure for such funds generally is 3-5 years. Some amount of timing is required to enter and exit such funds.

For example: The Infrastructure sector in India did very well till the markets crashed in 2008. Even though the markets recovered from the crash, the sector has grossly underperformed the broad index till date.

In conclusion, take an informed decision before investing in a Sectoral/Thematic fund.

Investments / Mutual Funds - 09/22/2018

Financial Discipline

The problem in today’s world is that everyone puts their entire efforts in earning money. Both the partners work hard to satisfy family needs from the financial perspective. In doing so we are compromising on various aspects like health, parenting, reading books, spend time on self etc. We are so stressed out that we do not think of anything else. We have huge monthly saving to invest but we don’t plan and we are not sure where to invest. Most of the time the money lies ideal in saving accounts or they are made to invest in real estate by by non professionals. Or some bank agent sees their bank balance and manages to sell them a ULIP or some other high commission product in the name of their child's future. By the time we realise that we made a bad investment, we would have already lost a lot of money in these products.
                                                                      To be a winner, you have to put efforts into something!!
We all are so busy doing so many things that regular financial planning takes a back seat. Further, lack of knowledge and enough information delays it even more. People don’t realise the importance of financial discipline. You make money, but do not put efforts to make the money you have made to make more money for you. If you channelize your savings properly you can easily achieve your dreams. With financial planning, you can do goal-based planning and ensure that you live the quality of life you always desired, ensure your children's future, plan and retire early comfortably, spend time with your kids etc. Financial discipline also includes proper tax planning and timely tax filling. There are various benefits available for an individual under the income tax Act which are considered while preparing a financial plan. However, many people just invest for the purpose of tax savings and nothing more or less than that. This is not enough, you must get more discplined, define your goals, understand your savings, reduce your expenses and invest accordingly. The main purpose of this article is to encourage individuals to inculcate financial discipline. In our other articles, we have discussed about how to convert a financial discipline into gains by investing properly.
Investments - 09/04/2018
SIP

Why a Systematic Investment Plan(SIP)?

SIPs have become the most favoured route of investments for not only the investors but also Financial Advisors in India. That is not surprising since they come with considerable benefits.

Become a Disciplined Investor

A SIP helps you discipline yourself. You can commit a fixed amount each month to investments, and the amount gets invested at the predetermined date. This ensures that money does not lie in your savings account @ a meagre 3.5% and there is no temptation to spend that amount as it is not there to spend.

Rupee Cost Averaging

Enormous sums of money have been lost by investors in a bid to time the market. But no one has been able to do it consistently. When experts have failed, what about a rookie investor. It is useless, even attempting to time the increasingly volatile markets. SIPs ensure that a fixed amount is invested irrespective of the ups and downs in the market and hence the cost of acquisition of investments is averaged out.

The timeless principle is "Buy Low Sell High". However, investors tend to sell out when there is a fall in the markets due to panic. A rising market tempts them to enter the markets at high levels. SIPs help to overcome this problem. 

Achieve your Financial Goals

Your future financial goals like buying a car, buying a house, child's education can be converted into the required monthly SIPs. For example, if you need INR 6 lakhs after 4 years to purchase a car. Assuming that your investments earn 15% per annum, you will need to save INR 9,198 per month to achieve a corpus of INR 6 lakhs. By converting your goals into monthly investments, you can view the achievability of your goals clearly and this also motivates you to stay on track with your investments.

Compounding Benefits

The biggest advantage of regular long term investments, Compounding Benefit. The investments made continue to grow year on year and the invested profits participate in growth in future years.

Effortless Investments

Once initiated an SIP can go on for as long as you want it to run with no further intervention required from your side. With a simple instruction, the SIP can be stopped at anytime.

Investments / Mutual Funds - 01/02/2018

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