MISCONCEPTIONS ABOUT LIFE INSURANCE

One of my friends sent me this mail. I thought this should be useful to you as well.


One of my friends sent me this mail. I thought this should be useful to you as well.





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Tax Saving Schemes (ELSS) doubts clarified

Q Can I change the option chosen in an ELSS investment?
A A change between the growth and dividend option amounts to a redemption and then re-investment as the NAVs are different for each of the options. Since there is a lock-in on the investment, redemption is not possible and as such a switch between the growth and dividend option is not permitted. However, you can change the option chosen between the dividend and the dividend re-investment since the NAVs for both the options are the same and the switch has no financial implications.

Q I have invested in an ELSS through an SIP. Will the lock-in apply from the date of the first instalment?
A No. Each instalment of the SIP would have a lock-in of three years from the date on which the investment was made. So if you start a monthly SIP on 5th Jan, 2008 for 12 months, the first instalment will be locked-in till 4th Jan 2011, the second till 4th February 2011 and the last instalment till 4th December 2011.

Q I have invested in an ELSS jointly with my husband. Can both of us claim sec 80(c) benefits for the investment made?

A The benefit of Sec 80(c) for investments made in an ELSS is available only to the first holder. Both the holders cannot claim the benefit. When investments are being made jointly, the investor who wants to claim tax deduction must be designated as the first holder.

Q What will be the tax on the redemption of units in an ELSS ?
A ELSS units can be redeemed only on completion of the lock-in period of three years. The redemption amount will include the principal invested and capital appreciation/loss. While the principle is exempt from tax, long-term capital gain tax will apply on the component of capital appreciation. Currently, long-term capital gains from equity funds (including ELSS) are exempt from tax. Therefore no tax is payable on redemption of units.

Q Can I continue to be remained invested in an ELSS even after the lock- in of three years is over or should I compulsorily redeem the units?
A You can continue to hold the investment in ELSS even after the lock-in of three years from the date of investment is over. Investments held beyond this period will not be locked-in and investors can redeem units at any time.

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Seek your suggestion

Hi srikant,

Lalitesh here (hope u still remember me ) ...First of all let me wish Belated Merry Christmas and Happy new year in Advance !!!!

I understand that you would be too loaded with work ..but still I seek your kind help (suggestion) regarding the investment I had discussed with you and Aslanshu, because I have registered for the funds and its almost started working.

You might remember the mail I have sent you for the investment
regarding the home down payment which i need after 3 yrs and the fund i need is around 10L (atleast), and as per your valuable suggestion i have enrolled for the below funds :


Port1 (24k)
Amt
Name Date1 Date2 Date3
HDFC T200 N/A N/A 1,000
Sundaram Sel Foc N/A N/A 1,000
DSPMLT100 N/A N/A 1,000
UTI Spread LTP(G)2,000 1000 1000
HSBC MIP -RP(G) 2,000 2000 2000
DSPML Balanced 2,000 1000 2000
Kotal Floater LTP(G)2,000 1000 2000
Investment Amount
:: 24,000/months

Time Horizon
:: 3 yrs

As of now i have selected to invest for next 1 yrs only.

Objective
:: to acheive >10L corpus by next 3 yr.

I had submitted the form of UTI Mahila fund also for 7k/month but as per my agent, it was rejected becuase only females can only invest in this fund. so will be choosing some other fund soon and register for the same . Final plan is to have 31k/month plan.

Could you please suggest me if this portfolio looks fine of it need any modification. Similarly i have created few other portfolio for my future needs but since its still under registration so haven't share the same here.

I'll be seeking your expertise to comment on those portfolio as well, once i send you the details. Finally, can i have your suggestion on my this 24k portfolio.



Regards.

Lalitesh.

SRIKANTH SHANKAR MATRUBAI Replies :
Dear Lalitesh Kumar,
I am happy to see your mail again. And I am particularly more happy
to see that you have not ignored my suggestion and have avoided All your
investment into Debt Fund and have also considered Equity Funds.
You seem to have chosen your funds well, going by the fact that a good number of them have a solid performance track record.
However, I have concern that you seem to have invested just a bit on the higher side in DSPML Balanced Fund. Given the nature of your goal and time limit, you can consider switching to DSPML Savings Plan (Moderate) with a Equity Exposure of 20% (compared to 65% equity exposure in DSPML Balanced Fund).
DSPML Balanced Fund has had a good track record but the current market appreas to continue remain volatile and may not the recent highs in a hurry, and moreover the Debt Funds due to Falling Interest Rates should easily give you upwards of 12% return in next 6-9 months.
Your agent is ignorant. Any person (male or female) can invest in UTI Mahila Fund. Only the name is Mahila. Sure, go ahead and invest. Its small Corpus is 82.46 makes it manageable. The Fund is rated 5 Star by ValueResearch.
Though the Fund has had a bad 2008 with a return of negative 8%, the 3 years return continue to impress at above 20%. And the Fact that the Fund has only 12% in equity and with falling interest rates, the Fund should give you good returns.

Even as recently as Novermber 2008, the Hindu Businessline had given a "Invest" Recommendation on the fund. You can find the same in the link

http://www.thehindubusinessline.com/iw/2008/11/23/stories/2008112350591000.htm
You can also consider investing the additional 7k in UTI Spread itself.

NOTE : AS YOU INTEND TO WITHDRAW WITHIN 1 YEAR, YOU WILL BE CHARGED WITH EXIT LOAD IN SOME SCHEMES, ENQUIRE ABOUT THE SAME BEFORE INVESTING.

Best of luck,
Srikanth shankar Matrubai

See the earlier query by Lalitesh Kumar on

http://goodfundadvisor.blogspot.com/2008/08/10-lakhs-in-3-years.html




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Gold: The Glitter Is Back

Our oil-rich friends in the Middle East are scared. How do I know? Because they are buying gold like crazy!

First, we got the news that Saudi investors spent $3.47 BILLION on gold in a recent two-week period. On a ratio-to-GDP basis, that's like investors in the U.S. spending $131 BILLION.

Why are they doing this? The only explanation I've heard is that the Saudis are turning to gold as a safe haven in the midst of the global financial crisis. And since the financial crisis kicked into high gear in August ... something must be scaring them quite a bit more right now.

Second, Reuters reports that Iran is converting some of its foreign currency reserves to gold. Iran has $120 billion in foreign currency reserves ... there's no details on just how much was shoveled into the yellow metal.

Third, gold dealers in Dubai reported running low on gold during the recent Indian holiday, the Festival of Lights, a traditional time for Indians to buy gold. More than 50% of the population of Dubai originally comes from India. And about 20% of the world's gold is traded in Dubai.

The world is in the grip of economic hard times — over 40 countries are officially in a recession. Japan just joined that unhappy club. And the euro-zone nations are already there. We also know that the forces moving the market now seem to be deflationary, not inflationary. That means the value of the U.S. dollar is going up, and the price of gold is trending lower.

But could our friends in the Middle East be thinking beyond the current deflationary spiral? Gold is traditionally a hedge against calamity. So I ask again, what are the oil sheiks afraid of?

While gold prices are going lower in the short-term as deflationary forces tighten their grip, there are also longer-term forces that are quite bullish for gold ...

Chinese investors' demand for gold is rising. Investment demand hit 38.4 metric tonnes in the first nine months of this year against 24 tonnes for the whole of 2007.

Demand for gold jewelry in China reached 241.6 tonnes in the first nine months of 2008, compared with 302 tonnes for all of 2007, when gold jewelry demand grew by 26%. China is the world's second-largest gold consumer.

Sources in the Indian market and preliminary data on Indian imports point to a strong revival in Indian jewelry demand during this year's third quarter.

In South Africa, gold mining output plunged 17.7% in September compared to a year earlier.

Global mine production of gold declined by 4% year-on-year in the second quarter to 590 tonnes, bringing output in the first half the year to 1,133 tonnes, 6% below the same period a year earlier.
Still, this long-term good news is cold comfort when prices are trending lower in the short-term. So it must be other things driving the Saudis and Iranians into gold.

There are plenty of good reasons people might want to buy gold. Sure, deflation is putting downward pressure on gold ... on paper. But just try buying physical gold anywhere near the paper price.

Pricing in a Government Default?

While gold is traditionally a haven of safety, that's not how it played out over the past couple months. Instead, we saw risk-adverse investors dump gold along with other asset classes and flee to the safety of cash.

Maybe the mighty dollar has more upside. But remember that the U.S. dollar is backed by "the full faith and credit of the U.S. government." Do you have a lot of faith in the U.S. government? I'd say the faith of the world has been shaken by recent events.

And apparently I'm not the only one who thinks that. Take a look at my next chart, which shows the 10-year credit default swap spread on U.S. Treasuries — a form of insurance contract against issuer default.

The cost of insuring against a U.S. government default is soaring. And similar trends exist in the bond markets of Germany and Britain.

I think this is because investors are pricing in the massive bailouts that central banks are throwing at their markets. For instance, the U.S. bailouts will add enormously to our country's already staggering national debt.

According to CNBC data, the cost of all the bailouts that have been going on for months has now hit a total of $4.2 TRILLION!

In fact, Morgan Stanley recently estimated that the 2009 fiscal deficit in the U.S. would reach 12.5%. That's more than twice the previous record of 6% set in 1983.

As a percentage of GDP, the U.S. national debt should pass 70% next year. That's lower than the 122% at the end of World War II. Yet we aren't fighting World War II, are we? That ended rather abruptly — this crisis won't. And the odds are our fiscal picture will get worse, not better.

Under the circumstances, maybe investors in Saudi Arabia and Dubai may just be ahead of the curve. Maybe having some gold — the ultimate safe haven against troubled times — is the right thing to do.

I'm not saying the U.S. government is going to default ... I'm saying the possibility of that happening could be priced in more ways than one. And that's the kind of environment where gold could really shine.

Consider Buying Gold on Dips ...And Hold for a Wild Ride



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Bullish View on GOLD continues.....

For thousands of years, gold has been valued as a global currency, a commodity, an investment and simply an object of beauty. A growing number of financial advisors are speaking out about the benefits of owning gold. Gold can be a good tool in developing a strong portfolio and reaping greater profits.
In an attempt to understand what is happening to the gold market and where it is heading in the near future, this interview gave me a lot of insight and thought it could be useful to you. Keyur Shah, Associate Director, World Gold Council (WGC) had this to say…..
Taking the long term perspective, will gold continue to stand as a safe haven for investments?
Gold has always been a time-tested safe asset class giving a reasonable rate of return in the long run. This intrinsic quality of gold gets highlighted during turbulent economic times such as now. At present amongst all asset classes, gold is the best performer. Hence, most analysts say that 10%-15% of ones portfolio should be allocated to gold.
What solution would you suggest against high volatility in gold market?
Price volatility is now market reality and one cannot wish it away; however it will not adversely affect investors with a long term view.
What is your take on gold exchange traded funds (ETFs)? How do you think ETFs affected gold prices?
While ETFs have taken off very well in western countries, in India it is growing at a slow rate. This could be because of cultural mindset of Indian consumers who would rather touch, feel and control their own gold instead of owning it in dematerialized form. It’s a myth that ETFs affect the gold price. Data shows that a major portion of investors in ETFs are sticky retail investors with a long term view.
Where do you think the Indian gold market is likely to head in the next few years?
In the past few years, India has been consuming an average of 700-800 tons per annum and we expect the same trend to continue and even improve especially in the light of current economic meltdown at a global level (consumer confidence in gold becomes stronger during such turbulent times).
What is WGC’s role in the promotion of consumption of gold jewellery in India?
India is the world’s largest consumer of physical gold and a very mature/ time-tested gold market. In India, WGC promotes consumption of gold jewellery via long-term strategic (brand building, development of youth segment, retail transformation) and short-term tactical (shopping festivals, promotion of festive occasions) activities.
What kind of a demand graph can we look forward to as we are nearing 2009? What factors will trigger a northward trend in the demand for gold?
While we are yet to collate the October-December 2008 figures, as per the last report released by us, India witnessed a 29% year-on-year rise, in tonnage terms, in the July-September 2008 period. Looking forward, we believe the uncertainties in the financial markets will continue, therefore driving investors towards gold because of its safe haven characteristic.




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Student's dilemma on Diversified Funds or Balanced Funds?

From: Akhil Sharma

Hi! Mr.Advisor

hi.
I'm a student.My age is 23.i love to save my money.it's been a year that i've invested in various equity diversified funds like
ICICI pru infra
Reliiance diversified power

Sundaram capex
Reliance RSF equity
Kotak indo world infra
I've invested Rs.5000 in each of them.As the last year has been bad for the markets...i've lost 50% of my investment.Now i want to invest again but not in diversified as i now want to have different type of funds in my portfolio.

I wanted to know if DSP black rock balanced fund,UTI mahila unit scheme and Reliance banking fund would be a good deal to invest or not and should i go for lumpsum or i should go for SIPs!
Any of your suggestions for me are welcome.

Thank you!
You're doing a great job!.....cheers to ur blog!!
Akhil sharma


SRIKANTH SHANKAR MATRUBAI replied :
Dear Akhil sharma,
First of all, thank you for your kind words on my blog.
You have started your invested at the peak of the Bull Market and hence it is no surprise that your investment value is down by 50%.
Alas, your investment has all been in Infrastructure Funds which only adds to the downswing of your investment value.
Thankfully, I am happy to note that you have not lost your heart and ready to invest again. Yes, as you yourself have admitted, you need to diversify your investment horizon. The funds you have selected for investment are all Balanced Fund. And at your age, you can go for Diversified Funds as these funds typically give you more return than Balanced Funds over a longer periods of time.
you can consider one among the following funds for your future investments.
Birla sunlife Equity fund
Fidelity Equity Fund
HDFC Top 200 fund
Reliance Growth Fund
Sundaram Select Focus Fund.

If you are still considering Balanced funds, you can think of HDFC Prudence Fund which has an excellent Track Record since its inception.
Preferably, go for SIPS.
Best of luck,
Srikanth Shankar Matrubai,
Bangalore



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KINGFISHER AIRLINES - PROMISING GOOD TIMES

Kingfisher Airlines Limited Formerly known as Deccan Aviation Ltd. The Group's principal activity is to provide commercial passenger airline and a private helicopter and airplane chartering services in India.
After the Annual General Meeting, I had a chance to talk with the “King of Good Times”, Dynamic Chairman of Kingfisher Airlines, Dr.Vijay Mallya.


He announced “the worst is over for the Airlines Industry. Kingfisher Airlines Fundamentals is getting stronger by the day and we will start to break even from this month itself.
“I think the worst is over and there’s no reason why private equity investors who had expressed interest when oil was at $100 a barrel shouldn’t be more interested when oil is $36 a barrel,” Mallya said

SEE VIDEO OF DR.VIJAY MALLYA HAVING LUNCH WITH WE, THE SHAREHOLDERS ;
video

He said once the Govt brings the ATF under the ‘Declared Goods’ category, Kingfisher Airlines will immediately reduce fares.
“We can pass on pretty much majority of the savings and that would be good for the industry, make air travel even more affordable and stimulate an industry that has slowed down considerably,” claimed Mallya.
.
"Kingfisher will be the biggest airline in India by 2010 not only in terms of market share, as others claim. In all the aspects, it will be the biggest. Wait and you will see," he said, dismissing all related questions. Hyperbole? Like the man says, we will wait and see.

MY TAKE :
At least in Near Short Term of upto 1 year, things are looking much much brighter than it was in anytime of the Kingfisher’s history. The operations costs are lower and there are no visible signs of going up, and, the Airfares are not being reduced and surprisingly, the load factor is going up, which should all add up to “Good Times” for the Kingfisher Stock. Can expect an upside of at least 40% from here and expect the Stock to reach at least 50-55 by June End 2009. Buy in Small quantities as “Contra” Pick. The stock could be the Dark horse of 2009.







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EXTRAORDINARY OUTLOOK FOR GOLD

Dear All,
I received an interesting article on Gold today morning from Kotak Mutual Fund and you have to read it. It is very very interesting.
The damage caused by the financial excesses of the last quarter century was forcing the world's authorities to take steps that had never been tried before.



This gamble was likely to end in one of two extreme ways: with either a resurgence of inflation; or a downward spiral into depression, civil disorder, and possibly wars. Both outcomes will cause a rush for gold.



Find below an extremely interesting link which details why gold prices have been depressed and why dollar has been outwardly biddish despite deteriorating fundamentals. All along the article are very interesting snippets from industry veterans and analysts on their outlook on the current happenings and its impact on gold going forward..

The link is :
https://www.golddrivers.com/dispatches/tgdrall/ShowArticle.aspx?id=b0c7762f-5e47-4e99-b621-5581b484c167

So a good moment to get in gold stocks now?

According to Frank Veneroso, a well known gold market strategist, yes, he recently said:

I think gold might have a very explosive upside in the current environment. Gold stocks are now extremely cheap relative to the price of gold with the commodity bust, gold mining costs are falling. I think money managers should now be buying gold stocks.

So, dear investors,, can you ignore investing in DSPBR World Gold Fund or AIG World Gold Fund?. Obviously not.
Think again and invest at least a portion of your investible surplus is Gold Funds.
Best of luck,
Srikanth Shankar Matrubai


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BUY GOLD NOW BEFORE IT BECOMES EXPENSIVE

Dear all,
The Global Financial Crises we are witness to today is unprecendented and many Economies, (even Developed ones) are on the brink of an looming impending Recession. In response, Central Banks, with US leading from the front, are pumping in tonnes and tonnes of money by printing more and more Dollars. But the disaster waiting to happen is, that this Oversupply of Paper Currency is not backed by any Real Assets such as Gold. Which means, that the Currency that the US Govt is pumping is only a Paper churned out from Printing Presses.
What this creates is, that Gradually the Confidence in US Dollar will reduce and its VALUE too decrease (Remember Zimbabwe?).


This is where a proxy currency such as "GOLD" holds intrinsic value, since the supply of it is limited and which is not in control of any Central Bank. Gold has a unique characteristic of "storage value", vis-à-vis paper currencies. Paper currencies tend to lose value over a period of time due to inflation (loss of purchasing power) caused by over supply as it leads to a situation where more and more currency is required to buy the same amount of goods.
Another shocker is that the Gold Reserves held by US, UK and other Developed Countries on threshold of depression has fallen considerably. While the ratio of Gold to Currency was 141.2 tonnes to 1bn$ in circulation, now it is ONLY 10.7tonnes to 1bn$ in circulation. This shows that More paper Currency is in circulation backed by Less Gold. To correct this analomy, the US needs to increase its Gold Reserves by MORE than 13 times!!!!
This will only Fasten the process of Falling Confidence and Faith in the US Dollar and hasten the image of Gold as the Saviour to protect over the Long Term.
Citigroup, in a recent report has said that gold will touch US$ 2,000 per ounce. That's 2.5 times the current price of the yellow metal at US$ 800. The firm believes the measures taken to tackle the financial crisis will not stabilise the global economy. Instead they will lead to a painful depression. As per the bank, the financial system has tripped beyond recovery, towards depression. In this scenario, there will be a flight towards gold. In fact, according some reports, China plans to add nearly 6 times its current gold reserves of 600 tonnes in a move away from foreign paper currencies.


With the financial crisis not over yet and the recession looming large, central banks would continue to inject more and more money into the financial system. Thus the debasement of the currencies will continue making Gold more and more attractive as a hedge against the dwindling purchasing power and the loss of faith and confidence in paper currencies.

Gold is seriously undervalued.

Buy gold before it gets expensive.

On where to invest, you can visit http://goodfundadvisor.blogspot.com/2008/12/dspbr-and-aig-world-gold-funds.html
http://goodfundadvisor.blogspot.com/2008/09/buy-gold-now.html
http://goodfundadvisor.blogspot.com/2008/09/is-dspml-world-gold-fund-good-buy.html
Best of luck,
Srikanth Shankar Matrubai


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DBS CHOLA TAX ADVANTAGE FUND - AVOID

DBS Chola Mutual Fund has launched DBS Chola Tax Advantage Fund – Series 1. The fund is a 10 - year close ended equity linked
saving scheme, subject to a lock in for a period of three years from date of allotment.

The fund which opened December 19, will close on March 19. The objective of the scheme is to seek to generate long-term capital growth from a diversified portfolio of predominantly equity and equity-related securities and also enabling investors to get income tax rebate as per the prevailing Tax Laws and subject to applicable conditions. The fund, benchmarked against BSE 200 Index would invest between 80- 100% in Indian equities and equity related securities and 0% to 20% in money market instruments / debt securities instruments.

Sanjay Sinha, chief executive officer, DBS Cholamandalam Asset Management said, "this fund will follow 'value investing strategy'. Current market conditions favour this strategy as it limits the downside potential of these stocks. In addition to the tax benefit, a 3 year lock-in allows investors to realise a better potential for their investment."

The minimum amount for application during the new fund offering period will be Rs. 500 and in multiples of Rs. 500 thereafter.

MY TAKE :
Though the Fund House has been in existence for quite some time, it has just been an also ran with none of its schemes ranking among the Top 10. Sure, it has Sanjay Sinha in its rank who joined recently, but he will have a tough job ahead to prove himself in these volative times.
The Fact that your fund is locked in for 10 years also goes against this fund. You are better off by investing in Existing Proven funds rather than Putting in an Unknown Specie yet to prove itself. It is like a Known Devil is Better than an Unknown Angel.
AVOID.

Best of luck,
Srikanth shankar Matrubai
Bangalore


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Invest in Kotak Short Term bond

I recieved this letter from Kotak AMC and found it very interesting. May be it will be useful to you also. Here goes......
Dear All



“Opportunity does not knock, it presents itself when you beat down the door”. This seems to be the case in the Indian bond markets as well. The flight
for safety factor has led to government securities rally across the world reaching all time lows. The treasury rates across the world – esp developed countries like the US, Japan, UK, EU are so low (practically 0 in some cases) that the investor. The investor looking out for some yield on his/her investment has now started looking out for some quality assets - not as safe as sovereign though high grade assets in the corporate bond segment. US treasuries have rallied from 3.75% to 2% in 6 weeks !!! (currently at 2.17%). Global investors are increasingly buying into the view that in such a financial climate it would be safer to own a companys bond than its shares. BHP Billiton shares were down 5% on a trading day last week, but BHPs bond was trading marginally higher on the same day. With companies deferring dividend payment and preserving cash to pay its debt in time, global money has started chasing yields – albeit in a small manner



In India during the interest rate rally in 2000-2003, spreads between the 5yr corporate bond and 5 yr gsec had touched a low of 30 bps…Likewise for a 3 yr segment, the spreads had touched a low of 15 bps !!!!!



Case for investment in Kotak Bond Short Term



The above factors form the plinth for investment in our Kotak Bond Short Term. The fund is positioned to reap the benefits of carry as well as spread compression in the corporate bond segment of the fixed income market. The current spreads are at 300 bps in the 3 and 5yr segment – which is significantly higher compared to the spreads we witnessed in the previous rate rally. While we do agree that there is general risk aversion in the credit segment – quality credit (combination of PSU and Pvt) does pose a huge investment opportunity. Most PSU are either partly or wholly owned by the Govt of India and therefore quasi sovereign entities. The spreads therefore present an imminent compression theory going forward. While the spreads may not come off in a hurry, in the initial phase, these would act as high carry on the portfolio. Also the 2,3 and 5 yr yield are largely flat (yielding the same). With expectations of reverse repo cut going forward and easy liquidity in the system, this curve could steepen .i.e shorter end could rally at a faster pace than the longer end, leading to a curve steepener.



This is what we endeavor to capture in bond short term, where corporate bonds varying from 2-5 yr maturity is held. The average maturity is capped at 3 yrs, with 25% allocated to cash for trading calls and positioned at the shorter end of the yield curve. This combination makes it ideal for being recommended from a 1 to 3m perspective.



Investors having beyond 3 month horizon should continue to look at investments in long term gilt and bond funds



The top holdings of Kotak Bond Short Term are :- ACC – 9.5%, IDFC – 9.37%, Grasim – 9.28%, REC (Rural Electrification Corporation) - 9.25%, EXIM – 9.16%, IRFC – 9.93%. Current avg maturity is at 2.50 years with a portfolio yield of 9%. The fund is rated mfAAA by ICRA *


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I WANT RETURN ABOVE SAVINGS RATE.......

One Guest wrote,

want to park some of my money into liquid funds.
Are "ICICI Pru Gilt - Investment Plan - PF Option" and "Canara Robeco Income (G)" are liquid funds? Can I put my money in these funds? I only know that liquid funds are similar to Savings Account but with more % returns.
These above 2 funds have 5 stars in MC and they have given nearly 25-30% return in a year.
some of my other queries regarding liquid funds are as below:
+ What are tax implications on liquid funds?
+ Difference between liquid and liquid plus funds
+ If I have parked my money in liquid plus and due to some emergency I need some money how can I get it? I mean do I have to fill some form to redeem and submit at AMC? And when will I get the money in my hands?
Please help me in this.

SRIKANTH SHANKAR MATRUBAI replied :
Canara Robeco Income (G) fund is a Bond fund & ICICI Pru Gilt - Investment Plan - PF Option is a Gilt fund.
anyone of above fund is not a liquid or liquid plus fund. ur understanding regarding returns of Liquid funds is right.
+ What are tax implications on liquid funds? - Growth option treated as debt fund, so STCG & LTCG r taxed accordingly. Dividend option- div. option in ur hand is tax free but DDT is 28.325%. From taxation point of view, the DDT (div. distribution Tax) is higher in Liquid funds & at the same time due to higher maturity period of underlying securities of Liquid plus funds`, returns r on higher side in Liq. + funds, it make sense to park money in Liquid + funds.
+ Difference between liquid and liquid plus funds - The maturity period of underlying securities is slightly higher in plus funds & also the DDT is 14.15% only in case of plus funds.

U can get money on T+1 day basis. If u have opted direct trasnfer to ur acct. option while investing, the money `ll be credited to ur acct. directly. As there is no entry or Exit load in case of Liq.. & Liq. + funds, it`s better to invest in these funds thru ur online broker acct. - like Icici direct, Sharekhan, Indiabulls, .....


Selection of Growth & Div. option `ll depend upon 2 things -
1. Ur current Tax slab - as in all probability there `ll be STCG on investment in these funds which `ll be added to ur income & `ll be taxed at ur slab rate.
2. Ur time duration - if u r using these funds either to park surplus money for some better earning on ur liquid cash or u r using these funds as transfer vehicle for investing in Eq. funds under STP mode.

In case of Liq. + funds & `ll use for parking of surplus funds as well as emergency funds, the DDT `ll be 14.15% only, so if u r in 20.6% & higher Tax slab it makes sense to invest in Div. option to minimise Tax outgo.

In case u r using it for STP in Eq. funds, it`s better to invest in Growth option for easy calculation of STCG Tax.

The reason to get the nearly 25-30% return in last 1 year was due to the an inverse relationship between interest rate and prices of securities. And this gets reflected in government bonds first, so if the interest rate goes down, the prices of bonds rises and vice-versa.
On any fixed income investment, whether it’s a gilt or a corporate bond or even a fixed deposit in a bank, there are three types of risk. These are credit risk, liquidity risk and interest rate risk. A high credit risk means that a borrower wouldn’t be able to pay back an investment at all. In government securities, this risk is generally considered to be zero. In other types of f ixed income investments, this risk is higher. In any economy, government securities are considered to be of the lowest risk. Therefore Gilt fund has stood as a far safer investment avenue than others.

Gilt funds could be opportune investment for risk adverse investors particularly when interest rates are likely to go down. I think you can expect return between 8-11% on Gilt funds from now.

However, regarding the fund choice to invest, I would prefer
HDFC Income Fund and Birla Income Fund, especially the former. I have gone through the portfolio of the HDFC Income Fund throughly, and I can with some confidence, that the fund could give a return of at least 14% in the coming year inverse relationship between interest rate and prices of securities.
gilt Funds can give you somewhere between 7-9% and
debt funds should give above 12% comfortably.

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Shall I withdraw FD and invest in Debt fund?

An old Guest, Mr.Ajay Kumar from Hyderabad, wrote again :

Hi Sir! as per ur advice i started two SIP's in HDFC TOP 200 =
1000/mth and Sundaram SELECT FOCUS = 500/mth from october 2008 and
finished 3 SIP installments,also i have a FIXED DEPOSIT of 15000 with
a interest rate 9.75/year = 16462 . as u can see FD is not getting me
huge returns,i want to shift that money in GILT / INCOME / DEBT FUNDS.
The latest news i heard that GILT funds are going to give good reurns
in short term as the interest rates and inflation are slashed down.
so, plz give any advice on my 15000 rupees .thank u

SRIKANTH SHANKAR MATRUBAI replied :
Dear Ajay Kumar,
It is always a pleasure to recieve your mails. I am extremely pleased that you are following my advise and starting investing in HDFC Top 200 and Sundaram Select Focus.
Regarding your FD, yes you are right, you are not getting much returns from the same. You can consider switching the funds to HDFC Income Fund which, considering Falling Interest Rates, easily give you return in excess of 12%. Do invest in this fund with a time period of at least 1 year. Instead of any GILT fund, among Debt/Income Funds, my choice is HDFC Income Fund.
Also, while investing in Income Funds, go for Lumpsum and not via SIPs. I have gone through the portfolio of HDFC income Fund, and it looks quite attractive. Go for it.
Best of luck,
Srikanth Shankar Matrubai,
Bangalore
www.goodfundadvisor.blogspot.com




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BHARTI AXA TAX ADVANTAGE FUND

Yet another NFO, yet another Tax Scheme. The Bharti Axa AMC, which began operations in September 2008, has launched Bharti AXA Tax Advantage Fund, an open-end equity linked savings scheme.

This will be a diversified multi-cap fund. The fund won't be biased towards any sector or market capitalization. It also has a leeway to invest up to 20 per cent in debt and money market instruments.

MY TAKE
The fund house, being a new player, has a long way to go to prove its worth. At this point of time investor's have been extremely choosy about their investments. You can as well look at existing Well Performing Schemes Like Sundaram Tax Saver, Birla Tax Relief 96, etc.

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JP MORGAN INDIA TAX ADVANTAGE FUND

JPMorgan Asset Management India on Thursday launched its open-ended equity linked savings scheme (ELSS) – the JPMorgan India Tax Advantage Fund, which is benchmarked against the BSE 200 Index. The new fund offer opens on 18 December and will close on 16 January 2009.

The scheme is essentially an equity fund with a three-year lock-in period. The investment objective of the scheme is to generate income and long-term capital appreciation from a diversified portfolio of predominantly equity and equity-related securities.

The scheme is eligible for tax deduction under section 80 C of the Income Tax Act.

Minimum initial application costs Rs. 500 per application and in multiples of Rs. 500 thereafter.
The fund is also the first green launch by JPMorgan Asset Management in the country. The attempt will be to minimise the use of paper by encouraging prospective investors to download all applicable literature from the website and print only as per specific requirement so as to ensure minimum wastage of paper.

Said Krishnamurthy Vijayan – CEO & whole-time director, JPMorgan Asset Management, "In a typical NFO, lakhs of application forms and other material is printed & distributed and less than probably 0.5% of them get utilised.

Imagine the number of trees we cut to run just one NFO. We must all become more conscious about this destruction. With this in mind, we decided that the JPMorgan India Tax Advantage Fund would be a green NFO."


MY TAKE :
JP Morgan has a unique way of assigning fund managers to its equity schemes. The AMC assigns four managers to each scheme. And like its previous two equity diversified funds, this fund will have four managers as well.However, looking at its existing schemes performance, this has not really worked well. And the brief history of this equity fund house does not make this new offer a compelling choice as it is difficult to ignore the existing 32 open-end tax saving funds, some of which have impressive track records.



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UTI DIVIDEND YIELD FUND - Not Just For Conservative Investors

First and foremost, UTI Dividend Yield Fund is a diversified equity fund. Thus, capital appreciation potential is the most important aspect while selecting a stock along with the expected dividend income. The highlight of the Fund is that it has a Good Performer not just in Market Downturns but even in Bullish times.
The Fund Manager, Swati Kulkarni, believes in sustainablility of cash flows and growth opportunities. She says, " We also look at the scalability of the businesses and management quality. Then of course we have to consider valuations to ensure that we buy stocks that have capital appreciation potential in the long term. Thus we take a complete view.

Our investment processes make it mandatory to meet the management of the company and maintain contact on a quarterly basis. So, certain small cap ideas, where we may not be able to have any regular contact with the management, will not be able to figure in our portfolio. "
The dividend yield is a criteria used to sharpen the focus by narrowing the investable universe to leave out certain opportunities which are risky at this point in time or not very attractive from a valuations perspective. The fund is essentially a bottom-up fund and it cannot really have a predominant top-down approach.
After staying underweight for the last three years, this fund has started increasing exposure to FMCG and pharmaceuticals. It is underweight on technology right now due to the concerns on the volume growth and impact of cross currency movements.In terms of large-cap exposure, there has been a conscious shift, given the risk aversion and rising impact costs, especially with respect to mid-cap stocks. It has a Large Cap allocation standing at more than 50 per cent.


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Can minors invest in Mutual Funds?

Can minors can invest in a mutual fund? My son's maternal grandfather wants to give him a sizeable sum of money. He is a minor. I would like to invest it in an equity-based mutual fund for over 10 years. And I want to be the guardian for future transactions on behalf of my son.

- Sudhindra

Yes, minors can invest in a mutual fund, but only through a guardian. An adult, being a parent or a lawful guardian of the minor, can hold units of a mutual fund and deal with them on behalf of the minor. You need to furnish the asset management company (AMC) with a proof of age of your son and your capacity to hold and deal with the units.

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DSPBR AND AIG WORLD GOLD FUNDS - BEDAZZLING BEAUTIES

The equity market has finally seen a ray of hope and so have equity-linked mutual funds (MFs). After staying in negative territory for months on
Gold
end, the trailing one-month returns of most schemes have finally entered the positive zone.

While a majority of the equity schemes generated one-month trailing returns in the range of 1-6 % as on December 17, ’08, there are a few schemes whose returns are as high as 10-11 % for the same period.

However, the biggest gain during this period has been observed in the case of world gold funds. Currently, there are only two such funds in the country — DSP BlackRock World Gold Fund and AIG World Gold Fund — and both these funds have shown an outstanding recovery. While the former’s one-month trailing returns stand at a handsome 43%, the latter has managed to generate 35.2% during the same period.

These gains can be attributed to the outstanding recovery seen in the stock prices of gold mining companies across the globe. Over the past one month, the stocks of many of the gold mining companies in which these gold funds invested have generated high returns ranging from 48-70 %. These include stocks like New Crest Mining, Barrick Gold Corp, Newmont Mining, Lihar Gold and Randgold Resources, among others. The FTSE All Gold Mines Index and S&P 500 Gold Index have both returned about 65% during the period.

Gold funds are different from gold exchange-traded funds (ETFs) and should not be confused with the latter. Gold funds are MFs that invest primarily in the stocks of companies that are actively into mining of gold and other precious metals like platinum, silver and also diamonds. Gold ETFs, on the other hand, invest solely in pure gold. Since gold funds invest in equities of gold mining companies, their correlation with the equity market is much higher than that with gold bullion, and hence, they are known to move in tandem with the equity market.

Both gold and equity have gained momentum in the past month, despite the commonly known inverse relationship shared by these two asset classes. While on the one hand, the BSE Sensex has gained about 12.7% since November 18, ’08, on the other hand, gold prices in India have risen about 10% since then. If one were to analyse the returns on a global scale, international gold prices have gained about 17%, while the Dow Jones has increased about 5% over the same period. Hence, it is interesting to see these two asset classes moving in sync with each other, even though they had a high negative correlation over the past one year, at -0 .5.
While it has not been long since the first gold fund was introduced in India, its performance over the past one year throws up some interesting
Gold
trends. The country’s first gold fund gained immensely in the beginning of the current calendar year, when equity markets across the globe had begun to slide.

Gold funds and gold ETFs had both gained immense popularity then, as they were among a handful of products which generated positive returns in a highly negative terrain. However, the financial crisis that gripped markets across the globe also enveloped gold funds, indicating that gold funds are influenced more by movements in the equity market than by gold prices.

However, the two gold funds in India are not active schemes, but rather the feeder funds. Thus, instead of investing directly in stocks, these funds invest in mining companies through another fund, which is the parent fund incorporated outside India.

While DSP BlackRock’s gold fund is more than a year old in India, AIG’s fund was launched in the current calendar year and has just completed about six months. However, the parent funds of both fund houses are more than a decade old. While BlackRock Global Funds — World Gold Fund was launched in 1998, AIG PB Equity Fund Gold was initiated way back in 1992.



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BIRLA SUNLIFE INCOME PLUS - INVEST

A steady stream of lower-than-expected inflation numbers and falling commodity prices suggest that interest rates are likely to continue their descent from current levels. With the economy in slowdown mode, interest rate cuts may also be used to stimulate demand.

Investors seeking to take advantage of the appreciation in bond prices likely from the rate cuts should consider income funds for their portfolio. While the appreciation in gilt prices over the past few months may make gilt funds vulnerable to some price risk, bond funds may continue to benefit from the wide corporate bond spreads.

Investors looking for a one-two year investment can consider exposure into Birla Sun Life Income Plus, a long bond fund.

The fund invests in a mix of gilts and triple-A rated corporate bonds with a long maturity, offering both yields and trading opportunity. Birla Income Plus has consistently outpaced the benchmark over a three and five-year period.

Performance: The fund’s NAV appreciated by 8.7 per cent in the one-year period to November.

With the bond rally picking up over the past month, the fund’s one-year return has jumped to 23 per cent, outpacing the category average of 12 per cent, by nearly 11 percentage points. This sudden jump in return has lifted the three-year return (annualised) to 13 per cent and five-year return to 8.4 per cent.

Profile: The fund has been among the early ones to position its portfolio for falling interest rates.

With a change in manager in November 2007, the fund rejigged the portfolio to increase average maturity at the start of this calendar year. However, the subsequent spike in interest rates prompted the manager to reduce the maturity once again. Greater certainty about interest rate declines in recent months has allowed the fund to substantially lengthen its maturity profile to 11.55 years by November.

In the latest portfolio, government securities accounted for 67.8 per cent (maturity period 10-years plus accounted for 40 per cent) and other debt papers 26.5 per cent. Corporate debt paper was of high quality, with issuers such as Rural Electrification Corp, Power Finance and IRFC being the top exposures.

Fund facts: The fund was launched in October 1995. It has been managed by Mr Maneesh Dangi in the past year. The fund charges no entry load. There will be an exit load, however, of 0.75 per cent if investments are redeemed or switched out within 180 days.


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FIDELITY INDIA SPECIAL SITUATIONS FUND - INVEST

Investors with a high-risk appetite can consider buying in to units of Fidelity India Special Situations Fund. Our recommendation is underpinned by the fund’s adhered focus on investing in undervalued companies, with the key theme being selecting stocks that are out of favour or in special situations such as mergers, turnarounds and takeovers. However, the fund’s return will be highly dependent on the hit rate of each of those companies in ‘special situations’. This poses a higher risk than regular diversified funds.

As equity valuations have fallen significantly in recent times, leaving the stage ripe for the fund’s themes, an investment now could be a good entry point.

But given the fund’s contrarian and value-based approach, it may best serve as a good portfolio diversifier, as it may not be able to ape the returns of some of the large-cap-oriented diversified equity funds. And given the fund’s mandate to stick to ‘offbeat’ stock-picking strategy, it may also call for investors to have at least a three-year investment horizon, by which time the fund’s sector and stock bets may begin to yield returns.

Performance: Despite a prolific start in 2006, the prolonged fall in equities this year has pulled returns into negative territory. It has returned a negative 14.6 per cent since its launch, while its benchmark, the BSE 200, declined by 11 per cent in the same period.

But the fund’s one-year returns have been little better than its benchmark. It shed 52 per cent of its NAV during the period, mildly outperforming the BSE 200’s negative 54 per cent. This marginally superior performance can be explained by the fund’s portfolio, which mainly sports stocks of companies that hold either the ‘defensive’ or ‘value’ tag.

In addition, the fund’s disciplined stock-picking strategy, highlighted by the fact that despite the mayhem in the market it stuck to its sector, may also explain its performance. It has also bettered the benchmark even in the six-month and three-month time period.

Portfolio: The fund has throughout this year maintained its high aggregate exposure to sectors such as banks, software and pharmaceuticals. True to its mandate, the fund’s exposure to the otherwise favoured sectors such as capital goods and engineering has been quite low.

Large-cap stocks (of market capitalisation more than Rs 7,500 crore) currently account for over half of its portfolio value, while mid- and small-cap stocks make up 13 per cent and 27 per cent respectively. Further, its equity portfolio boasts many value and defensive picks.

Be it a high exposure to stocks such as SBI, Satyam Computers, ICICI Bank and Sun Pharmaceuticals or its 6 per cent exposure to the National Stock Exchange, the fund’s overall portfolio appears to leave sufficient scope for value-unlocking in the long-term.

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feel let down by your mutual fund investments?

Few would dispute that the year 2008 has been tough on investors. This holds especially true for first-time investors i.e. the ones whose tryst with equity markets only began in the last few years. After having seen the markets surge to record highs, the downturn has certainly caught several investors off-guard.

And the despondency is not restricted only to those who have participated in equity markets via the direct equity investment route. Even investors in equity mutual funds have borne the brunt of falling markets. As a result, several investors are in panic mode. Some are even contemplating redeeming all their mutual fund investments and instead making investments in risk-free avenues like fixed deposits and bonds.

But is that the right course of action? We don’t think so. To begin with, investors must conduct an honest appraisal of their risk profile and investment horizon. Also, they must candidly answer the question – why did I get invested in a given mutual fund?

If an investor truly believes that he can take on higher risk and is willing to stay invested for the long-haul (at least 3-5 years), then we believe there is no reason to panic. In fact, given the attractive valuations, investors should consider adding to their investment portfolios. As regards, the reasons for getting invested – if it was to achieve a predetermined investment objective, then it’s all the more reason to stay the course.

Conversely, if the answers are on the lines of ‘have a low risk appetite’, ‘wanted to make a quick buck’ or ‘to ride the rising markets for the short-term’, there is a cause for concern. Such investors got invested in avenues that were wrong for them or made investments for the wrong reasons. In either case, they would do well to work out an exit strategy in consultation with their investment advisors.

As for investors who have the requisite risk-taking ability, investment horizon and clearly defined objectives backed by investment plans, it’s a good time to evaluate if they are invested in the right avenues i.e. in this case, the right mutual funds. Even the best of plans will not deliver if poorly-managed funds are deployed to achieve them. However the evaluation process needs to be a proper one.

To begin with, investors would do well to understand the fund’s nature and investment style, before evaluating its performance. For example, an aggressively-managed equity fund that professes to take stock and sector bets should be expected to deliver above-average results in rising markets. On the other hand, when markets move southwards, such a fund is likely to be worse hit as well. This is keeping in line with the fund’s high risk – high return investment proposition. Comparing the fund’s performance on the downturn with that of a conservatively-managed equity fund would be unfair, akin to comparing apples with oranges.

Similarly, understanding the fund’s investment universe is vital as well. For instance, a professed mid cap fund would be predominantly invested in stocks from the mid cap segment. Expecting it to feature among the top performers at a time when large caps are rallying would be unfair.

Another common mistake is considering funds in isolation. Any advisor worth his salt will emphasise on the importance of diversification. Hence the norm is existence of investment portfolios, instead of investments in single funds in a standalone manner. The key to a well-constructed portfolio is that the downturn in an investment avenue can be offset by an upturn in another. Similarly in a mutual fund portfolio, the presence of diverse investment propositions and styles should help the investor’s cause. Broadly speaking, so long as the investment portfolio is on course to accomplish the predetermined investment objectives, investors should be fine.

Clearly conducting an appropriate evaluation is easier said than done. Hence investors would do well to engage the services of their investment advisors for the evaluation exercise. The next step is to take corrective measures.

Now depending on the specifics of each case, it could vary right from altering the allocations to various funds, exiting some funds and investing in new ones to doing nothing. Surprised? Don’t be. It’s possible that investors are already invested in funds that are right for them and in the right allocation as well. And it is not uncommon even for the best of funds to hit a rough patch. If no material changes have occurred in a fund’s investment proposition and its ability to deliver over the long-term is undiminished, keeping the faith and staying put wouldn’t be a bad idea.

The importance of the evaluation exercise, especially in testing times cannot be overstated. From an investor’s perspective, the key lies in striking a balance between pressing the panic buttons and being complacent. Also, engaging the services of a competent investment advisor is vital.




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Don't Blame Mutual Funds

“I invested my retirement monies in mutual funds in 2006. All my investments are showing a loss. I will never invest in mutual funds again”

“I chose mutual funds to create a corpus for my daughter’s wedding. The investments I made in 2007 are languishing at half the value. I regret investing in mutual funds”

These are some of the testimonials that routinely appear in newspapers and television shows nowadays. While the facts of each case differ, the underlying message is the same - mutual funds are to blame for all investor woes. Although slamming mutual funds (equity funds in particular) is in vogue at the moment, we believe there is a case for adopting a more pragmatic approach while evaluating mutual funds and the investment proposition they offer.

Simply put, equity funds offer investors the opportunity to invest in equity markets in a convenient manner. The onus of making investment decisions (which requires a fair degree of expertise and experience) is shifted to the fund house and the fund management team. And for availing the fund house’s investment expertise, the mutual fund investor bears a cost in terms of loads and fund management fees.

Mutual funds also offer investors the benefit of diversification. For instance, a diversified equity fund typically invests in several stocks from across market capitalisations and sectors. Hence despite investing in a single fund, the investor benefits from the presence of a number of stocks in his portfolio.

So what went wrong?
Few would dispute that mutual funds offer investors an attractive investment proposition. So what went wrong? Nothing. While the investment proposition offered by mutual funds remains unchanged, market conditions have changed. After witnessing an almost secular bull run for nearly 5 years, the stock markets crashed sharply in 2008. From their peak in January 2008, markets have fallen by over 50% till date. Mutual funds being market-linked avenues have expectedly borne the brunt of the falling markets as well. For investors who became habituated to seeing their mutual fund investments clock attractive growth in a seamless manner, the crash in stock markets (and its severity) has come as a rude shock. As a result, mutual funds are being seen as villains and harbingers of misfortune.

At the core of this problem lies lack of complete and accurate understanding of the investment proposition offered by mutual funds. For instance, in several cases, distributors and investment advisors failed to impress upon investors the risks involved; instead, they were guilty of only emphasising on the returns aspect. Then there were instances of mis-selling as well. Investors with modest or no appetite for risk-taking were persuaded to get invested in equity funds and at times even in sector/thematic funds (which are typically suited for informed and risk-taking investors). Finally, investors need to accept a share of the blame as well, for having failed to make informed investment decisions.

Is it curtains for mutual funds?
Given the kind of doomsday scenario predictions that are doing the rounds, several investors are being led to believe that it’s the end of the road for mutual funds. Is that a correct assessment? We don’t think so. Let’s take a look at the performance of some well-managed diversified equity funds with a 5-Yr track record. From the diversified equity funds segment, we have chosen a motley mix i.e. large cap, mid cap and opportunities style funds.

Diversified equity funds: Long-term players
Equity Funds NAV (Rs) 1-Yr 3-Yr 5-Yr
DSP BlackRock Top 100 (G) 49.90 -46.1% 9.2% 20.4%
HDFC Top 200 (G) 90.17 -46.3% 4.8% 19.9%
Sundaram Select Midcap (G) 59.49 -58.4% 2.3% 19.8%
Sundaram Select Focus (G) 50.87 -52.5% 8.7% 19.7%
HSBC Equity (G) 58.64 -48.8% 5.0% 19.3%
ICICI Pru. Dynamic (G) 48.62 -46.2% 6.2% 18.5%
HDFC Equity (G) 107.92 -50.6% 1.1% 17.7%
DSP BlackRock Opp. (G) 39.44 -54.5% 0.9% 17.1%
Franklin Bluechip (G) 99.08 -49.1% 3.4% 16.4%
Sundaram Growth (G) 48.93 -57.2% 1.0% 15.2%
BSE Sensex -52.4% 2.0% 12.8%
(NAV data as on December 12, 2008. Growth over 1-Yr is compounded annualised)

Over 1-Yr, the performance of funds across the board leaves a lot to be desired. For instance, the ‘best’ performer has posted a loss of 46.1%; the worst performer’s NAV has fallen by 58.4%. The showing over 3-Yr is nothing to write home about either. However, the 5-Yr performance for all the funds is quite impressive. The entire peer group has delivered in the range of 15%-20% (on a CAGR basis). Notwithstanding the recent downturn, the performance of funds over longer time frames continues to be noteworthy. Over the long-term, well-managed diversified equity funds have commensurately compensated investors for the risk borne by them. This only reinforces that equity investments must be made for and evaluated over the long-term. While over shorter time frames equity as an asset class can expose investors to high risk, its ability to deliver over the long-term is undisputed.

What investors must do
To begin with, investors would do well not to panic and make any ill-advised investment decisions. Instead, they must conduct an honest evaluation of their risk appetite and find out if their investment portfolio is in line with the same. Investors who do not have the requisite risk-taking ability or investment horizon, and yet are invested in equity funds should consider making necessary modifications to their portfolios.

Investors who are convinced that equity funds should find place in their portfolios need to evaluate the chosen funds. They must ensure that the funds they are invested in are suitable for them; this in turn will entail understanding the investment proposition of the funds.

Finally, investors must engage the services of a competent investment advisor. Not only can the advisor help investors select funds that are right for them, he can also aid them in reviewing the portfolio which is critical to the investment exercise.




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BIRLA SUNLIFE FRONTLINE EQUITY FUND

Leading From The Front
With risk controls well in place, this large-cap-oriented fund needs to be on your buy list to gain as and when market recovers.
The markets are in doldrums. Economies, global as well as the Indian, have slowed down and estimates for corporate earnings look bleak for near to medium term. Although there is talk of recovery in the markets, it’s uncertain when it will happen. Also, instead of waiting for the markets to fall further and thereby trying to time entry points, Outlook Money has always advocated a staggered approach to investing. When markets move upwards, large-cap stocks are expected to be the early gainers. A large-cap fund that merits a place in your portfolio is Birla Sun Life Frontline Equity Fund (BFE).

Launched on 30 August 2002, BFE is an open-ended diversified fund with major exposure to large-cap stocks. The fund is benchmarked to BSE 200 spanning across leading sectors and keeping the exposure well diversified.

Performance. One of the things that a better managed fund does is limit the fall in its NAV. BFE is one such fund that has not only delivered when the going was good but also limited the damage during bad times. Last six months have seen BSE 200’s value erode nearly 46.90 per cent. BFE scores high on containing risk. It has superior risk-adjusted return and has managed to limit its fall by about 38.97 per cent during the same period. The outperformance, says the fund manager, is largely due to better stock selection and avoiding weaker companies that are over-diversified.

BFE has been a long-time performer and has outperformed its benchmark index over all time periods and since inception. As on 31 October 2008, when the BSE 200 was able to manage a compounded annualised return of 4.65 per cent over 3-year period, BFE has managed 11.29 per cent compounded returns. Not bad considering the present extraordinary situation that is seeing sharp corrections and massive fallouts of NAVs in a small time frame. Also, the fund has managed to deliver what equity as an asset class is expected to deliver over this time frame.

Portfolio. As on 30 September 2008, the fund had a corpus of about Rs 400 crore with 63 per cent invested in large caps while 10 per cent in mid caps. In September 2007, the figures stood at 75 per cent and 20 per cent, respectively. By trimming exposure in large- and mid-caps, BFE has opted to increase its cash levels throughout 2008. From nil (including money market funds) in September 2007, the cash level went up to 15 per cent by May 2008 and to 21 per cent by September 2008.

Over the last one year, exposure to Reliance Industries, Bharti Airtel and ONGC have been upped. The top 10 scrips form almost 50 per cent of the equity portfolio and hence their performance will largely shape the fund’s performance. An upward move in the market is expected to be largely on the back of large-cap stocks.

One fallout of the recent meltdown has been that few sectors have been fully dropped from the fund manager’s portfolios or exposure in them has been heavily pared. With BFE, banking, petroleum and telecom are the preferred sectors as of now while construction and capital goods are two sectors where the fund looks to prune its exposure.

Even when many stocks are available at attractive valuations now, BFE’s fund manager still prefers to stick to companies with growth potential available at reasonable valuations.

Long-term investors of the fund have benefited and with low valuations as of now, the time to enter the market with long-term view could be around the present levels. BFE has been able to deliver returns higher than or in tandem with the market and keep its risk levels in check. Over longer periods, it has beaten the benchmark by a wide margin. Choose the systematic route to widen the gains over the long term.




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RELIANCE REGULAR SAVINGS EQUITY FUND

Quick To Grab Chances
Having performed well in the troubled markets, the aggressively managed Reliance RSF-Equity is ready for an encore.
Despite being India’s largest fund house, Reliance mutual fund (MF) was conspicuously absent from the equity-diversified category, up till now. Its two most successful broad-based equity schemes were in the large-cap (Reliance Vision; RV) and mid-cap (Reliance Growth; RG) space, apart from a couple of well-performing sectoral schemes. But that’s changed now and Reliance RSF-Equity, which recently completed three years and is the latest addition in Outlook Money’s fund selection OLM 50, is an option that warrants your attention.

The scheme. Reliance RSF-Equity (RRSFE) is a diversified equity scheme that invests across all market capitalisations. Like RV and RG, this scheme is opportunistic and is quick to get in and out of companies. The scheme is benchmarked against BSE 100 index. Like all Reliance MF equity schemes, this one too uses cash aggressively. As per the October-end portfolio, 30 per cent of its corpus is in cash.

Returns. RRSFE has performed well over a longer period of time. In our latest fund rankings (The New OLM 50, 19 November) RRSFE is one of the toppers in the diversified equity category. Despite being aggressively managed, it kept its volatility in check and was among the least volatile in its category.

To check the scheme’s consistency, we looked at its rolling returns; an average of one-year returns over a three-year time period. With returns of 38.3 per cent, it topped the charts here too. Thanks to its aggressive management and its ability to pick the right mid- and small-cap scrips, RRSFE outperformed the category in 2007 with returns of 92.29 per cent against a category average of 57.24 per cent.

One of the reasons behind its performance is its corpus size. Although a small size is not as big a hindrance to a diversified equity scheme as it is to a typical mid-cap scheme, it does help as the fund manager can take small exposures in smaller-sized companies and still make a difference. At Rs 576.1 crore (the scheme’s current size), we feel it can continue its good performance over a longer period of time.

Portfolio. RRSFE prefers to maintain a crisp and tight portfolio in times when the fund manager feels that the markets would move in one direction, either up or down; it has consistently held 25 to 30 scrips on an average. In uncertain times, the fund manager reduces scrip concentration and broadens the portfolio.

The portfolio is aggressively managed. During the height of the market run-up, it had 58.2 per cent in small-cap scrips (with scrips less than Rs 3,000 crore market capitalisation). Its top scrip for many months at the beginning of the year was Pratibha Industries, an infrastructure sector company with a small market cap of Rs 101 crore. In December 2007, RRSFE had 13 per cent of its corpus in the company’s scrip.

The fund manager does not hesitate to churn the scheme’s portfolio. For instance, between June and December 2007, when the market jumped by 39 per cent, RRSFE had just five common scrips between its December 2007 and June 2007 portfolios out of a total of 25 scrips as per its December-end portfolio.

But the scheme’s aggression has paid off. For instance, it sold off its entire holding in L&T as early as September 2007 when infrastructure companies were trading at sizzling valuations. The fund manager believes that the worst in the capital goods sector may not be over yet as the order books of several companies in this sector may have to be scaled down. The fund’s top sectoral allocation is in banking, software and pharmaceuticals sectors.

The scheme is ideal for an aggressive investor looking for all-round action.

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Dividend Yield Funds

During a bull run, it’s very easy to ignore stocks with high dividend yields. After all, what could be more enticing than a growth stock? But in times of crisis, these boring ones tend to be the most sought after. The reason being that not only do dividends provide a cushion when the market is in the doldrums but such stocks also tend to fall less.

The lure of dividend yield stocks is not easy to ignore. These stocks offer capital appreciation as well as cash payments. But logically, any company that pays a substantial portion of its earnings in dividends is reinvesting less and, therefore, would grow at a slower pace. So the trade-off is between higher dividend yields for lower earnings growth.

On the other hand, companies with high growth potential and volatile earnings tend to pay less by way of dividends, if at all. Such companies would rather reinvest their earnings to sustain their growth. The capital appreciation of growth stocks is obviously higher than in dividend yield ones.

But it does not mean that every single stock that pays dividends is a worthwhile pick. Yes, high dividend yield stocks tend to be cash rich companies. After all, only those companies which are financially healthy can pay consistent dividends. But there could be some high dividend yield stocks that may be paying much more than they can afford.

So it would only be a matter of time before the dividends are cut. Or, it could also be that the dividend yield is up because the stock price has got hammered and not because dividends have risen.

Dividend yield is a function of the amount a company pays out over the trailing 12-months period divided by its share price. So if a company pays Rs 10 as annual divided and its share price is currently Rs 100, the dividend yield is 10 per cent. Yield, obviously, can fluctuate if a share price moves up or down or if the dividend amount increases or decreases. The trick is to find companies, which tend to generate lot of cash with modest, but steady growth.

Brokerage firm India Infoline conducted a study on dividend yield stocks in August 2008. Using a screening methodology to ensure that the results were not skewed towards small-cap stocks and to even out the risk-reward in the selection, they narrowed down on 25 companies from the BSE 500. These companies had dividend yields ranging from 3.5 per cent (Tata Motors) to 8.9 per cent (Bongaigaon Refinery).

According to the study, 14 companies were stable dividend payers, but to a great extent aided by the strong economic growth in the last few years. While 15 of them reported a significant YoY decline in profits in the latest quarter (April-June, 2008).

Investors need to study prospects and fundamentals of a company before taking any investment call, including dividend yield stocks. As dividend yield is based on the past performance, it is hardly an indication of the future profitability and sustainability of dividend. Investors must look at growth potential, quality of management, industry prospects and macro issues. For instance, given the current economic scenario, it would be wise to avoid companies with high debt or large capex plans even if the dividend yields are attractive.

One option for investors looking at such stocks would be to consider dividend yield funds. Here too the criteria would be the same. A good dividend yield fund would be one that does not focus solely on stocks with the highest dividend yield but aims at finding the best overall investments.

Typically, a dividend yield scheme would predominantly invest majority of its assets in a well-diversified portfolio of companies with relatively high dividend yield, which provides a steady stream of cash flows by way of dividend. Thus, dividends received from these companies are earnings for the scheme.

If you take a look at the six dividend yield funds available, what comes across is their own interpretation of what makes a stock a ‘high dividend yield’ one. Some are very specific, others are not (see: Each To Its Own).

EACH ON ITS OWN
Fund Allocation to High Dividend Yield Stocks (min-max)
Birla Sun Life Dividend Yield Plus 65% - 100%
Fortis Dividend Yield 65% - 100%
ING Dividend Yield 65% - 100%
Principal Dividend Yield 65% - 100%
Tata Dividend Yield 70% - 100%
UTI Dividend Yield 65% - 100%


While we have looked at all of them, three funds stand out. These are the ones that have been consistently appearing in the top performing list as equity funds continue to plummet. It’s not that the Net Asset Values (NAVs) of Birla Sun Life Dividend Yield Plus, ING Dividend Yield and UTI Dividend Yield have not fallen. It’s just that they are amongst the least unfortunate (in terms of 1-year returns).

However, all of them do not appear in the following analysis. We have looked at UTI Dividend Yield, Tata Dividend Yield and Birla Sun Life Dividend Yield Plus. Over time, these have proven to be the better bets.



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IDFC TAX FUND - AVOID

IDFC AMC which manages assets worth Rs 8,686 crore across 78 schemes (as on 30 November) has launched IDFC Tax Advantage (ELSS) Fund an open-ended equity linked saving scheme. This fund will invest in equity and equity related instruments
The IDFC Tax Advantage (ELSS) Fund with a minimum subscription of Rs. 500, will not only help investors avail of a tax benefit, but also seek to generate long term capital growth from a diversified portfolio of predominantly equity and equity related securities. The scheme will invest in well-managed growth companies that are available at a reasonable value and offer a high return growth potential.
Mr. Naval Bir Kumar, Managing Director, IDFC Mutual Fund says “We are happy to offer The IDFC Tax Advantage (ELSS) Fund to investors who are looking for a tax break as well as an easy and affordable way to take advantage of the growth potential of equity funds.” He continues, "The scheme will invest in well managed growth companies that are available at a reasonable value and offer a high return growth potential to investors,"
Idea distiller: IDFC does not have a tax plan as yet. As the last three months of a financial year see a lot of people rushing to invest in tax-saving schemes, it is an ideal time for IDFC to push an ELSS.
MY TAKE ON IDFC TAX FUND:
IDFC's equity funds have a rather brief history. Invest in this fund only if you want to go in for a low-cost NFO rather than an existing scheme with a higher NAV.
It is better to invest in a fund that has earned enough to reach a high NAV, some of them with compelling track record and a well defined portfolio characteristics and thus ensures dividends for the period that you are locked in, and has a fund manager who has excelled in managing assets across all cycles of the market.
In a nutshell, AVOID

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TEMPLETON INDIA PENSION PLAN (TIPP)

AUM: Rs 143.2 crore

Current NAV: Rs 41.40 (Dec 10, ’08)

52-Week High NAV: Rs 55.70 (Jan 7, ’08)

52-Week Low NAV: Rs 39.40 (Nov 20, ’08)

Fund Managers: Anand Radhakrishnan, Sachin Desai, Vivek Ahuja


Following in the footsteps of UTI’s pension fund, Franklin Templeton launched its pension scheme in March 1997 and till date, is the only private sector fund house to have launched such a scheme. The fund’s investment structure is similar to that of URBP with a 60:40 investment ratio in debt and equity, respectively.

PORTFOLIO:

Investors may find it surprising to see a debt-oriented balanced fund having an investment of over 30% in equities, despite the adverse market conditions. While the fund’s equity exposure has declined from 40% to 30% in the past one year, given the market volatility in ’08, even 30% equity exposure appears to be on the higher side. However, the management has aptly justified its strategy of having an adequate equity exposure.

Since the fund is meant only for longterm investors, the management feels there is no point in changing exposures to different asset classes based on short-term market movements. At the same time, the fund has ensured adequate liquidity and relative safety for its equity exposure by incorporating large-cap stocks in a very high proportion.

The fund’s equity investment in largecaps is more than 85% at any given point of time. As far as its debt portfolio is concerned, the fund focuses on nonconvertible debentures with minimum exposure to securitised debt.

PERFORMANCE:

If one compares the performance of this fund vis-à-vis URBP, over the long term, TIPP clearly has an edge over its competitor. The fund has a history of outstanding performances, beating the category average on almost all occasions since ’03, when it returned a whopping 42.2%, vis-à-vis the category average of 27.6%. While in ’05, TIPP’s 16.5% returns did lose out to URBP’s 21.8%, it recovered in ’06 by generating almost 19% returns, even as the category average stood at 14%.

TIPP continued its feat in ’07 as well. However, in ’08 so far, its performance has lagged that of URBP. Its year-to-date trailing returns as on December 11, ’08 stand at - 24.6%, against the category average of - 10.7%. In the past six months alone, the fund has lost about 13%.

A high equity exposure may be construed as one of the reasons for this decline. But since TIPP has a very long-term investment mandate, a healthy performance in future can sideline these short-term hiccups.

INVESTORS’ DIGEST:

Considering its long-term investment mandate, TIPP has stringent exit rules, which may be stricter than those of URBP. TIPP mandates a compulsory three-year lock-in period and while one can redeem investments post the lock-in period, investors have to pay a penalty of 3% as exit load.

The maturity period for the scheme is 58 years age and the exit load is waived off only if the investment is redeemed after attaining this age.

The fund also calls for a minimum investment of Rs 10,000 during the period of investment, failing which, the exit load can be as high as 10% at the time of redemption. But this load may be waived off under spe cial circumstances like serious illness, education requirement, housing necessity, financial
hardships, loss of job, bankruptcy etc, sub ject to submission of proper documents.

TIPP has been quite regular in paying dividends to those who have opted for the dividend option. It declares dividends annually by the end of the calendar year; it has already announced a dividend of 12% for ’08. Just like any other pension fund, TIPP is also eligible for tax benefits under Section 80C of the I-T Act.

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UTI RETIREMENT BENEFIT PENSION (URBP)

UTI RETIREMENT BENEFIT PENSION (URBP)

AUM: Rs 435.3 crore

Current NAV: Rs 17.90 (Dec 10, ’08)

52-Week High NAV: Rs 22.10 (Jan 7, ’08)

52-Week Low NAV: Rs 17.20 (Oct 27, ’08)

Fund Manager: Amandeep Singh Chopra


THE oldest fund house in the country can be credited for pioneering a pension plan that goes beyond the conventional 100% debt-based investment. Launched in December 1994, this fund is one of the oldest in the category of debt-oriented balanced funds.

Notwithstanding the fact that an average Indian investor seeks safety above all other parameters when it comes to saving for retirement, URBP was launched to provide both safety and returns — through an appropriate mix of equity and debt in the portfolio. Given its equity exposure, one can argue that this fund is slightly riskier than other conventional ‘retirement’ saving products.

However, investors can take relief from the fact that over the long term, it is difficult to lose money in an equity investment. And since this fund is aimed at pensioners, only investors with a horizon of at least 10 years are advised to put money
in this fund.







PORTFOLIO:

URBP’s allocation in debt and equity cannot exceed the ratio of 60:40 respectively. While the fund has often tried to maximise its returns by utilising its equity limit to the fullest, the recent changes in the stock market have forced it to rejig its portfolio.

Its equity composition is down from over 39% in December ’07 to 20% as in November ’08. Nearly two-thirds of its equity portfolio comprises large-cap stocks. Also, the equity portfolio appears to be highly diversified and currently has about 29 scrips.

On the debt front, the fund has exposure in government securities, non-convertible debentures and securitised debt. Since the fund manager is anticipating further reduction in interest rates, the fund has refrained from taking exposure in banks’ certificate of deposits, which are of a shorter duration.

Instead, it has increased investment in securitised debt. Its exposure in these papers has increased from 10% to more than 25% in the past one year. The fund is currently strategising its portfolio in favour of long-term securities to cash in on falling interest rates.

PERFORMANCE:

Since its launch, the fund has generated about 10% CAGR returns , which makes it an average performer among debt hybrid funds. After posting a commendable performance in ’05 with annual returns of about 22%, the fund slipped in ’06, generating just 9%. The average returns of debt hybrid funds were over 13% then.

But URBP managed to improve its performance in ’07, generating an annual return of 22.7% — a tad higher than the category average of 21.2%. URBP has been able to put up a better show in ’08 vis-à-vis its competitor TIPP, but has failed to beat the category average. The fund’s trailing year-to-date returns as on December 11, ’08 stood at -17 .5%, against the category average of -10 .7%.

INVESTORS’ DIGEST:

Investors who want to invest in mutual funds only to generate quick and high returns should keep away from this fund. URBP is meant only for those seeking some income, post retirement. Since the scheme targets only long-term investors, its exit load structure is designed to deter investors from redeeming their investments earlier.

Thus, exiting from the scheme within one year of investment will call for an exit load of 5%, redemption within 1-3 years from the date of investment will attract an exit load of 3%, while redemption after three years will attract a uniform exit load of 1%. The exit load is waived only if an investor redeems the investment after maturity, i.e. after attaining 58 years of age.

While most long-term funds declare regular dividends to give periodic sums of money to their investors, URBP instead declares bonuses. This is done with an intention to save on dividend distribution tax. The fund has declared bonuses in the past at intervals of a little over a year, but is yet to declare bonus for the current financial year. Investment in this scheme is also eligible for tax deduction up to Rs 1 lakh under Section 80C of the Income Tax Act.

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Retirement Target of 25000 per month

I am 27 years old, working in a knowledge process outsourcing (KPO) unit. Currently, I am the only earning member in my family. My aim is to create a retirement corpus that will give me a monthly income of Rs 25,000. I have attached my current investment details. I have deliberately not balanced or diversified my portfolio yet. I felt the need to first get it reviewed and obtain some guidance on that front. This should help me choose my future investments properly. Please suggest me some funds that I should choose to fulfil my goals. I would also appreciate some guidance concerning my investment strategies.

Existing Portfolio
Funds

Yearly Amt (Rs)
DSPBR Top 100 Equity Reg-G 12,000
HDFC Taxsaver-G 10,000
Kotak Opportunities-G 12,000
Magnum Taxgain-G 10,000
Reliance Diversified
Power Sector Retail-G 12,000
Sundaram BNP Paribas Taxsaver-G 12,000

ULIPS/Insurance/Mediclaim

Yearly Premium(Rs)
LIC Market Plus 20,000
LIC Profit Plus(Two) 20,000
LIC Jeewan Tarang(Two) 50,000
HDFC Unit Linked Endowment Plan 20,000

Government
Instruments Maturity
Amount (Rs) Maturity
Date
PPF 50,134 8/1/2023
Kisan Vikas Patra 100,000

11/19/2015
National Saving Certificate 16,010 1/25/2013
National Saving Certificate 24,015 2/23/2012
Post Office MIS 33,000 1/29/2009
Post Office MIS 13,200 2/28/2009


REPLY :

Your approach of investing 30 per cent of your income in various short- and long-term assets and keeping 10 per cent in cash for emergencies reflects a sensible and disciplined approach towards investing.

Let's look at each of them.

DEBT
Even though you are young, it is always important to have some amount of exposure to this asset class. Your investment in debt is in Kisan Vikas Patra (KVP), National Savings Certificate (NSC), Post Office Monthly Income Scheme and Public Provident Fund (PPF). All these are very safe since they are backed by the government.

Due to their fixed return and safety, they will provide the stability to your portfolio. Also, your investments in PPF and NSC will fall under Section 80C of the Income Tax Act, enabling you to use the tax benefit. But please keep in mind the tenure of the instruments and try and ensure that you will not need this money for the entire time-frame. For example, the NSC has a lock-in period of 6 years, while it is 15 years for PPF.

UNIT-LINKED INSURANCE PLANS OR ULIPS
We are not against insurance. And since you are the only earning member in your family, it is mandatory in your case. But we do not advocate mixing insurance with investments.

Currently, you have four Ulips in your portfolio and this is eating away a lot of money in the form of expenses. We did a simple comparison between a Ulip (LIC Market Plus) and a mutual fund scheme on the basis of chargeable expenses. We allocated Rs 20,000 annually for 20 years in both the instruments.

In the case of the Ulip, the deductible charges amounted to Rs 6,356, including the premium allocation, policy administration, fund management charges, addition to fund charges and other charges.

After deducting the chargeable expenses, we found that in case of the Ulip, the investable amount stands at Rs 13,644 and in mutual funds Rs 19,600. Looking at this as the annual investment for the next 20 years, the corpus in hand will eventually stand at Rs 11.41 lakh (Ulip) and Rs 13.80 lakh (mutual fund). This difference of almost 20 per cent is directly the result of expense charges. The commission paid to agents, which goes as high as 50-70 per cent of the premium, was not taken into account.

Currently, with four Ulips and two 'with-profit whole-life' plans, you are paying a heavy premium to get insured. For instance, your annual premium for the two LIC policies is Rs 50,000. But had you opted for a basic-term policy, you would be able to obtain a huge cover at a cheap rate. And you would be in a position to invest the balance amount elsewhere.

MUTUAL FUNDS
Your current portfolio is high on quality in spite of tax-saving funds, accounting for 57 per cent of the total investment.

In your mutual fund portfolio, you have eight schemes. You can make DSPBR Top 100 Equity and Magnum Tax Gain your core holdings. Both these funds are large-cap schemes with a strong track record.

From the remaining two -- HDFC Tax Saver and Sundaram BNP Paribas Tax Saver -- you can stay invested in any one of them. But do remember to sell only after the lock-in period. HDFC Tax Saver is a mid-cap-oriented fund, while the other is a multi-cap fund.

It would be wise to stay away from theme-based funds like DSPBR World Gold Fund and Reliance Diversified Power Sector Fund. You can take a minimum exposure to Kotak Opportunities Fund. For the debt allocation, do consider a debt fund like Kotak Flexi Debt and not just fixed-return instruments.

GETTING THERE
Our entire analysis is based on your need to create a corpus that will offer you Rs 25,000 a month. Let's make a few assumptions:

* You retire at the age of 57.

* Since you are 27 years of age, that will leave you with 30 years to invest.

* You live for 43 years after you retire.

To survive on a monthly income of Rs 25,000 for 43 years, you will require a corpus of Rs 1.30 crore when you retire.

To generate Rs 25,000 a month, you need to systematically invest Rs 9,000 every month for the next 30 years. This will allow you to sit on a corpus of Rs 2 crore, if we assume a compounded annual return of 10 per cent, quite moderate if the asset in question is equity.

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http://buycall.blogspot.com/
and http://indiahotelstariff.blogspot.com/