A reliable mid- and small-cap fund

By Larissa Fernand |  14-10-16 

Franklin India Smaller Companies had a bad run in 2007 and 2008, but went on to redeem itself. It has beaten the category average every year since and matched it in 2011.

The fund is currently topping the chart in the YTD return of the Small/Mid Cap category. But at Morningstar, we never recommend that an investor considers such a short time frame or scouts for the latest chart topper.

The trailing 5-year returns are impressive too. The fund again stands out with an annualized return of 25%, second to DSP BlackRock Micro Cap. In the 3-year time frame, the fund finds itself in the top quartile with an impressive annualized return of 39%, but not a chart topper.

True to its name, the fund has a strong focus on smaller fare. But the funds that compete with this one, in terms of performance, all have differing tilts towards mid-, small-, and micro-cap stocks. Naturally, this changes the complexion of the individual fund portfolios. Yet, all of them fall under the same category.

For instance, according to the latest disclosed portfolios, DSP BR Micro and Sundaram S.M.I.L.E. have massive exposure to small-cap stocks, while Reliance Small Cap bets heavily on micro caps. Mirae Asset Emerging Bluechip has a strong bias to mid caps while Canara Robeco Emerging Equities is fairly equally tilted towards mid and small caps.

Hence, when narrowing down on funds in this category, one should make it a point to understand the nuances of the investment process and the fund manager’s investing style.

Senior fund analyst Himanshu Srivastava has given Franklin India Smaller Companies a ‘Silver’ rating.

Here are four points he makes:

Fund manager Janakiraman joined the fund house in May 2007 and assumed the role of a lead manager for this fund in February 2011. He has extensive research experience in the small/mid-cap segment.The fund has performed impressively under Janakiraman’s watch (February 2011 through September 2015). Under him, the fund gained 25% annualised to the CNX 500 Index’s 9% and the category’s 20%. It also delivered a noteworthy performance on the Morningstar Risk-Adjusted Returns front, outperforming 95% of the category peers.Janakiraman selects companies that can generate consistent and sustainable earnings growth over a business cycle, have low leverage and reasonably high returns on equity. He is not very rigid on valuations, so long as the company fulfills his investment criteria. The process is robust and Janakiraman can make it work.Janakiraman is flexible while constructing the portfolio. In order to accommodate the fund’s burgeoning size, he increased the number of holdings in the portfolio from 40-50 stocks to 60-70 stocks. Additionally, he also lowered the concentration in its top 10 holdings.

A fresh look at two intermediate government bond funds

By Morningstar Analysts 

Birla Sun Life Government Securities Long Term Growth

This fund invests in a combination of central and state government papers and seeks to add value by managing duration efficiently. While the duration of the fund can change significantly based on management's views on interest-rate directional movements, fund manager Prasad Dhonde also pays heed to the relative spreads between government securities and state development bonds while investing.

There is a lot of focus on the liquidity of the underlying instruments when it comes to G-Secs. While they did not invest in over-20-year securities until 2015, the fund currently has an exposure of around 36% in a single long-dated paper. SDLs, on the other hand, are viewed as tactical investments that are actively traded and can vary significantly in terms of exposure.

Overall, we're impressed with the investment team’s disciplined approach and believe the investment process is well-defined. Our confidence in the strategy has been hampered by its average long-term performance. While the execution has remained satisfactory, the fund could be positively affected by the manager’s ability to efficiently allocate across yield curves rather than trading within similar maturity buckets. The higher expenses on this fund are another concern; its consistently high TER could be a headwind to performance.

Analyst Rating: Though led by a strong team and backed by strong in-house processes, there are a few gaps in its overall showing. A high expense ratio and a mediocre showing in terms of the fund’s long term performance result in a 'Neutral' analyst rating.

Expenses: 1.75%. Significantly higher than the other offerings in the category.

Turnover: 897%

Minimum Investment:  1,000

Credit Quality: High

Interest Rate Sensitivity: Extensive

Performance: The fund’s performance has remained erratic over the long term; higher expense could be a headwind.

Category: Intermediate Government Bond

Two funds from SBI Mutual Fund to watch

By Kavitha Krishnan |  13-10-2016

The schemes from SBI Mutual Fund have gained a lot of positive traction in the recent past. This is no flash in the pan but a result of the magnitude of changes that have been undertaken by the fund house.

The fund house witnessed a lot of flux within the investment team in 2008. That was the very same year Sanjay Sinha quit and Navneet Munot moved over from Morgan Stanley Asset Management to assume the role of chief investment officer. In 2009, R Srinivasan joined as senior fund manager (equity).

They structured and streamlined processes within the fund house and built templates that were designed to be followed for individual funds, based on their individual mandates. This created a clear differentiation across their funds.

The most important outcome of these changes was the ability to consistently adhere to processes, which resulted in better execution of strategies that eventually got reflected in performance.

We recently analysed two funds managed by Sohini Andani.

SBI Bluechip 

The fund follows a relative return strategy that seeks to outperform the benchmark and its peers on a consistent basis and uses in-house templates and processes that are key to the execution of the strategy.

The fund largely maintains an orientation towards growth stocks and is run as a benchmark-aware strategy with an internal sector limit of 8% and a stock limit of 5% versus the index.

Andani tends to invest in mid-caps with a relatively higher market capitalization and currently has an exposure of around 11% to mid caps. This is well within the fund's mandate of limiting the mid-cap exposure to 20% of the portfolio.

Under Andani’s helm (October 2010 - June 2016), the fund returned 13.31% (annualised) versus the large-cap category average of 8.96%, beating 96% of its peers and falling in the first quartile in terms of performance.

SBI Magnum Midcap

While we have a positive view on the fund’s strategy and believe that the process should hold the fund in good stead, we’d like to see the trend continue over a long term before we can build more conviction on this fund.

Magnum Midcap follows an absolute return strategy that invests in high-conviction ideas. While the fund can invest up to 20% in large-cap stocks, most of the existing large caps in the portfolio are mid caps that have grown in size. In a positive light, this gives the fund a cushion in terms of additional liquidity. Worth noting is that the fund has grown over 8x in size over the past two years. This has led to an increase in the number of holdings and resulted in a more diversified portfolio. The latest portfolio sports 53 stocks with the top 10 cornering 33% of the portfolio.

The team evaluates a company’s management and focuses on stocks that are able to meet their threshold in terms of CAGR and a consistent ROCE over a three- to five-year horizon.

Given the manager’s focus on bottom-up stock selection and investing in growth stocks for the long haul, the team tends to overlook short-term aberrations in favour of fundamentally strong companies that are able to deliver positive longer-term returns. Sharda Corpchem is a stock that typifies this approach.

While Andani invests in initial public offerings, or IPOs, these investments are based on a long-term view and in depth research given the relatively higher risks.

The fund's performance has not been very consistent. In 2013, it was 13.57%, streets ahead of the mid- and small- cap category average (2.31%). It delivered a below average performance the very next year and picked up again in 2015. But it's 1-, 3- and 5-year returns put it in a good light.

The fund analyst rating

Both funds are led by an experienced stock-picker, backed by a stable process and an experienced team that has been trained in-house. However, we would like to witness a sustained winning streak over a longer period. Hence, we have assigned a Bronze rating to each. 

SBI Bluechip makes a mark

14.10.2016
SBI as a fund house had been witnessing a lot of positive views from investors and their funds seem to be coming into the limelight over the last couple of years. The fund house witnessed a lot of flux in 2008 as there were a lot of changes within the investment team. However, Navneet joined the AMC in 2008 and R Srinivasan in 2009 and the duo are credit with having turned around the fortunes of the company. They structured and streamlined processes within the fund house and built templates that were designed to be followed for individual funds, based on their individual mandates. This created a clear differentiation across their funds.
In our view, the most important aspect of these changes was their ability to consistently adhere to their processes. These changes resulted in better execution of strategies at the fund house and reflected a better performance on their funds. SBI is a fund house that has risen like a phoenix from the ashes and we’d like to witness it sustain its winning streak over a longer period.
The SBI Bluechip Fund stands out on multiple fronts: a consistent performer led by an experienced stock-picker, backed by a stable process and an experienced team that has been trained in-house. We’d like to see a steady current and the ripples smoothed out over the long term. While the fund house can afford no further mistakes, the positive aspects lead us to assign a Morningstar Analyst Rating of Bronze on this fund.
The fund is a relative return strategy that seeks to outperform the benchmark and its peers on a consistent basis and uses in-house templates and processes that are key to the execution of the strategy.

The fund largely maintains an orientation towards growth stocks and is run as a benchmark-aware strategy with an internal sector limit of 8% and a stock limit of 5% versus the index.
Despite being a large-cap fund, the mandate allows the manager to invest up to 20% in mid-caps.
Andani tends to invest in mid-caps with a relatively higher market capitalization and currently has an exposure of around 11% to midcaps.
The fund has had a structural overweighting to the pharma sector and has been increasing its exposure to cement, auto, and auto ancillary sectors given the manager's view of a cyclical recovery in these sectors.
Under Sohini Andani’s helm (October 2010 - June 2016), the fund returned 13.31% (annualised) versus the category average of 8.96%, beating 96% of its peers and falling in the first quartile in terms of performance.
While we have a positive view on the fund’s strategy and believe that the process should hold the fund in good stead we’d like to see the trend continue over a long term before we can build more conviction on this funds.
Category: Large Cap Fund manager: Sohini Andani
Analyst rating: Bronze Star rating: 4 stars
Portfolio role: A benchmark-aware strategy that seeks to invest in stocks with high risk/reward ratios.
Process: A research-intensive approach that aims to identify and invest in high-growth companies.
Performance: A consistent top-quartile performer with an impressive track record under its current manager.
Expense ratio: The fund’s expense ratio is significantly higher than the other offerings in its category.

Is Mutual Fund Retirement Plans suitable for you

by Dwaipayan Bose

What is Mutual Fund Retirement Plans

Retirement or Pension plans offered by Mutual Funds do not get as much of mention compared to the other retirement planning solutions, e.g. PPF, life insurance pension plans etc. These schemes are essentially hybrid mutual fund schemes, i.e. they have both fixed income and equity allocations in their portfolios. Investors can invest either in lump sum amounts or through systematic investment plans. Investments in Mutual Fund pension plans, in most cases, qualify for Section 80C benefits under Income Tax Act. Post retirement the investors can withdraw their corpus on a lump sum basis or through systematic withdrawal plan at a chosen frequency (e.g. monthly, quarterly etc.) for their regular income needs during retirement. The balance units post withdrawals in either case remain invested and continue to grow in value.
Benefits of Mutual Fund Retirement Plans

    With higher allocation to equities, some mutual funds retirement plans can generate superior returns in the long run compared to other products like PPF, life insurance plans etc. However, various plans under the National Pension Scheme can also generate returns comparable to, if not better than, mutual fund retirement plans.

    Some Mutual fund retirement solutions offers higher flexibility in terms of asset allocation options

    Charges of mutual fund pension plans are much lower compared to insurance products. However, they are higher compared to NPS

Disadvantages of Mutual Fund Retirement Plans

    The returns on investments are not tax free, unlike some other products like PPF

    There is not a wide array of choices available in the market

Mutual Fund Pension Plans in India

Looking at the assets under management of the different mutual fund retirement plans, it seems that they are not as popular compared to the other retirement planning solutions like PPF, life insurance plans etc. On the other hand, over the last 3 years or so, these funds have given 11 – 15% returns, which are much higher than what the more popular retirement planning solutions generated over the same time period.

UTI Retirement Benefit Plan was the first fund to be launched in this space in 1994, followed by Franklin India Pension Plan in 1997. After a gap of 15 years, Tata Mutual Fund came out with a retirement savings fund in November 2011. Earlier this year Reliance Mutual Fund launched the Reliance Retirement Fund.

The funds from UTI and Franklin Templeton have around 40% of their assets allocated to equity, while the balance is invested in fixed income securities. The equity portions of both these schemes investment portfolios are concentrated in large-cap stocks in the equity portion, whereas the fixed income has more of corporate bonds and long term government securities. The Tata scheme offers three options:

    Progressive plan in which the minimum equity investment is 85%

    Moderate plan in which the equity investment is around 75%

    Conservative plans offer equity exposure ranging from 0-65%

The scheme automatically switches from one plan to another depending on the investor's age. At age of 45, investments under the progressive plan automatically switch to the moderate option while at the age of 60 investments in the moderate plan are switched to the conservative plan.

    Wealth Creation.. Income Generation

In the wealth creation plan 93% of the investment portfolio is invested in equities, whereas in the income generation plan 80% of the investment portfolio is invested in debt and the balance in equities. One can opt for wealth creation or income generation plan, based on their age, risk profile and investment horizon.

The chart below shows the 3, 5 and 10 year trailing annualized returns of the three comparable plans, UTI, Franklin Templeton and Tata (Conservative plan). NAVs as on November 9, 2015.

3, 5 and 10 year trailing annualized returns of the three comparable plans, UTI, Franklin Templeton and Tata

Annualized returns of UTI, Franklin Templeton and Tata (Conservative plan) are shown. The returns of Reliance Retirement Fund are not shown because it has not completed a year yet.

    UTI Retirement Benefit Pension Fund: UTI Retirement Benefit Pension Fund is one of the earliest schemes, launched in 1994 and has nearly र 1,580 crores assets under management. The expense ratio is only 2.23%. There is no entry load. An exit load of 5% is levied if the investor exits within one year, 3% if the exit is between one to three years and 1% thereafter, until retirement. Manish Joshi and V. Srivatsa are fund managers. The portfolio mix comprises 38% equity and 62% fixed income / money market investments. This is a 3 star rated fund as per Morningstar.

    Franklin India Pension Plan: Launched in 1999 Franklin India Pension Plan has र 340 crores of assets under management. It has an expense ratio of 2.45%. There is no entry load. An exit load of 3% is levied if the investor exits before retirement. Anand Radhakrishnan, Anil Prabhudas, Sachin Desai and Umesh Sharma are the fund managers. The portfolio mix is 40% equity and 60% fixed income / money market investments. This is a 5 star rated fund as per Morningstar.

    Tata Retirement Savings Plan: Tata Retirement Savings Plan has र 110 crores, र 39 crores and र 86 crores of assets under management for the progressive, moderate and conservative plan respectively. The expense ratio of the Tata Retirement Savings Plan is a little over 3%. While the portfolio mix is heavily weighted towards equity at 95% in the aggressive plan, equity allocation is 75% in the moderate plan and only 27% in the conservative plan. This is a 4 star rated fund as per Morningstar.

    Reliance Retirement Fund: The Reliance Retirement Fund has र 230 crores and र 63 crores of assets under management for the wealth creation and income generation plans respectively. The expense ratio of the Reliance Retirement Fund is a little over 3%. While the portfolio mix is heavily weighted towards equity at nearly 95% in the wealth creation plan, for the income generation plan the equity allocation is around 20%. Sanjay Parekh, Anju Chajjer and Jahnvee Shah are the fund managers.

Tax treatment of Mutual Fund Retirement Plans

Investment in Mutual Fund Retirement Plans is subject to tax deduction under Section 80C of Income Tax Act for most mutual funds retirement plans. However, the maturity proceeds of retirement plans are not entirely tax free. Non equity oriented mutual funds, i.e. the mutual funds where equity allocations are less than 65% are subject to debt fund taxation. Long term capital gains for non equity mutual funds are taxed at 20% after allowing for indexation benefits. Indexation benefits allow you to adjust the acquisition price of units by the ratio of cost of inflation index in the year of redemption and the year of purchase. As a consequence, while the long term capital gain for income tax purposes is not tax free, it is lower and hence the tax obligation is also lower compared to many other fixed income investments, e.g. fixed deposits etc. You should note that, for debt funds the minimum holding period for long term capital gains to apply for debt funds is 36 months.
Can we construct a mutual fund portfolio that gives better returns than retirement plans

Yes, it is possible. However, it calls for a certain level of investment expertise, which you can build, if you educate yourself about personal finance and investments. While, the retirement planning solutions currently available in the mutual funds space offers limited options, you can build your own portfolio comprising of diversified equity funds and income funds that meets your target asset allocation requirement. Such a portfolio will also be more tax efficient from the point of view of capital gains taxation at the time of your retirement. Let us understand this with the help of an example. Let us assume that you invest र 500,000 in a debt oriented hybrid retirement fund over a 20 year investment horizon. For the purpose of our example, the pre-tax compounded annual return of the retirement fund is 12%. Over 20 years, with a CAGR of 12%, your investment value will be a little over र 48 lacs. The long term capital gains will be र 43 lacs, which will be taxable as per the debt fund taxation norms explained in the previous section. Can you construct your own portfolio with diversified equity and income funds to generate the same returns as the retirement fund over a 20 year investment horizon? Yes, you can. If you invest र 1.5 lacs in a diversified equity fund giving 15% annualized returns and र 3.5 lacs in a long term income fund giving 10% annualized returns, you could have got the same returns as the retirement fund.

However, the post tax returns will be very different. In this case, the long term capital gains from the diversified equity fund will be र 23 lacs, which will be entirely tax free. Only the र 20 lacs capital gains from the debt fund will be taxable, as per the debt fund taxation norms. Therefore, if you construct your own retirement planning portfolio, with diversified equity and income funds, there is the potential to generate higher post tax returns. However, you should monitor the performance of your portfolio on a regular and make suitable adjustments based on your portfolio performance. Also, you should rebalance your portfolio from time to time to make sure that you have the most optimal asset allocation based on your retirement planning goal.

Summary

In summary, while on an absolute basis the returns of these pension plans is not as attractive as equity funds or even balanced funds, their performance is much better than a lot of other retirement solutions available in the market. Higher equity market returns over the long term make these products an effective inflation hedge for retirement. The UTI Retirement Benefit Pension Fund and Templeton India Pension Plan are suitable for investors with conservative risk profiles, while Tata and Reliance Mutual Fund offers variety of options for investors with different risk profiles. You can also create your own retirement planning portfolio by investing in diversified equity and income funds through Systematic Investment Plans. You should consult with your financial advisor with regards to the retirement planning solution that is best suited for your needs.

Financial Planning in the Thrilling Thirties

by Priyanka Chakrabarty

In this 5 part series, we discussed about financial planning in your 20s in our last article - Financial-Planning/Financial-Planning-in-the-Tantalizing-Twenties

Thirties are a thrilling decade of your life. The life that you were leading in your twenties may have felt clueless. The advent of thirties brings with it a sense of direction. You feel sure about where you stand in life and in which direction it is headed. If you had already started investing in your twenties then returns are beginning to pile up and the investments are slowly reaping benefits. Thirties bring in a sense of surety that allows you enjoy life without constantly being worried about your dwindling bank account. Financially, you find yourself in a better place and hopefully things are looking promising for you. If you have played your twenties right then thirties will be an easier decade. If not, then the early years of this decade are probably the last chance for you to fix your financial future. It all boils down to your future visions and how motivated you are to fulfil that.

Review your Portfolio

All investments that have been made in your twenties are starting to churn substantial returns. However, you need to assess that are the investments generating the desired returns? You need to identify the underperforming investments and review them periodically. It may not be too late to start making fresh investments to make up for probable underfunding as time is still on your side. Underfunding for a goal in later years can be fatal as the deficiency increases with every passing year. Identifying it at an early stage reduces future financial burden.

Make New Investments

Make new investments for any new goals that you may have added. If you have started a family, maybe it is time you started investing for your child's higher education. Or the house you wanted but could not invest in twenties. You could invest lump sum into already existing schemes if they have been performing consistently and generating high returns. Fresh investments might also be a necessity to bridge the gap between the present value and the future value. Rs. 25 lakhs that might be needed today to afford an education in a foreign university will not be enough 18 years down the line. Assuming inflation steadily raises at 7.5% per annum the expenses will be as high as Rs. 92 lakhs. Hence, your investments have to generate the future value.

In case you have underestimated the need for a retirement account earlier, it needs to be an investment priority. Start exploring options such as Equity Funds for long term investments and National Pension Scheme for retirement corpus. Financial planners and experts stress on the need for a retirement corpus because all the other goals can be fulfilled by means of external borrowing but one cannot borrow for retirement. It is this factor that makes early investment for retirement a crucial factor.

Increase the Life Insurance Cover

Late twenties and early thirties are the peak time to get settle down and start a family. During such changes in personal life, one needs to have adequate life insurance cover. A life insurance cover should at least be ten times your yearly income. Ideally, you should keep increasing the life insurance as the numbers of dependents grow and also as your income grows. If you have saved in your twenties to start an entrepreneurial venture in thirties then even this move calls for an increased life cover. Life insurance forms the financial cushion in case of your untimely death. It also becomes a means of income in case when the term expires and a lump sum is provided by the insurer.

Have an Emergency Fund

Growing family, ageing parents and living amidst a whirlwind of uncertain times, having an emergency fund is a must. It is a financial cushion that will save your family during the worst of times. An emergency fund should ideally be 6-9 months of your income. In case you do not want it to stagnate in savings bank account accumulating a meagre 4%, you can invest in short term debt fund or liquid funds which will allow access to these funds with ease. Check for exit load of the fund if redeemed before a year. There are also flexi deposit accounts in banks, where any sum above a specified limit flows into a fixed deposit to earn higher interest. Your money will earn the interest applicable to fixed deposits and will be available to you whenever you need it.

Manage and Eliminate Debt

Debts are the leakages that cause your savings to erode. Start paying off debts that you took in your twenties, structurally. Try not to pay off a big amount at once because that dwindle your savings. In case you are planning to take a big loan for a car or home, then it is better that all other debts and credit payments are cleared. This will allow you to make a clear judgement of your financial standing and how far you can stretch the loan amount. In case you are planning to take a home loan in your late 30s, this comes with a tax rebate of Rs. 1.50 Lacs under sec 80C and Rs 2.00 Lacs under Section 24 as interest deduction, during a financial year (these rates are effective from last FY 2014-15). Such a loan might be doubly beneficial as it allows you to purchase your home and provides tax exemptions too.

However, if you have piling credit card bills where the rate of interest can be as high as 36-48% you are putting unnecessary pressure by borrowing more from your future income than you can pay off. This has the potential to adversely affect you financial future. Try and make the minimum payments on time to avoid late charges which adds to the borrowed money.

One of the ways you can balance the inflow and outflow of cash is by having a SIP in mutual fund which will reap the same amount as the total outflow of cash. For example - if you have taken a home loan of Rs. 75 Lacs for say 30 years then your total outgo would be as follows

You could generate this total outflow in 30 years by just investing Rs. 4,167 through a monthly mutual fund SIP in a diversified equity fund. See the table below and imagine how the power of compounding through a SIP investment balances out the total inflow and outflow of cash.

Have a Balanced Portfolio

Twenties is the time when you step into the financial world. You are still learning the tricks of the trade and making small investments to test waters. Thirties is when your portfolio starts to take shape and what you do now determines how it will turn out to be in the long term. Your portfolio should be holistic while you are allocating your assets. You can still afford to incline on equities for returns as you have a long investment horizon. However, importance has to be given to the security provided by debts. Your portfolio should be generating expected returns and also have a debt management system where your debts can be paid off without putting pressure on investment for various goals.

As an investor it often gets confusing the extent to which one should invest in debts and equities. As we discussed, some of the key goals for you in your 30s could be, saving for a house, planning for child's higher education, create a contingency fund and planning for your retirement. Based on that, the following asset allocation could work for investor in their 30s –

Equity funds – 75%

Bond Funds or other Debt investments – 15%

Liquid Funds – 10%

The apportioning of investments often determines the returns of the portfolio based on age, risk and the investment horizon keeping in mind the individual goals. The goals might vary from one investor to another; therefore, your exact asset allocation will depend on your personal goals, financial and family situation, number of kids and your earning level. It is advisable always to take help of a qualified financial advisor who should work in your best interest.

Conclusion

The thirties are called thrilling for a reason. The reason is that you enjoy life with a certain sense of purpose and security which was missing in your twenties. Financially, this is the last decade where you can start making investments for the long term, if you have not started before and yet generate hefty returns. It is also the decade where you are fulfilling some of your short term or intermediary goals and that leaves you with a sense of fulfilment. This ensures that you make saving and investing a priority as you have already realized saving and investing early can start to make your life easier. While you have a thrilling ride in your 30s, let your financial advisor take care of your investments and help you reach your financial goals.

Market correction from near all time high: Technical Perspective

by Dwaipayan Bose

Source: Yahoo Finance
Over the last few days the Nifty corrected from its 52 week high of 8,969 to 8715 (as on September 9, 2016). This 250 point (approx) correction may have come as a surprise to some investors, but to readers who have followed our technical analysis blog over the past few months it should not have come as a surprise. Levels from which prices correct after a rally are known in technical analysis as Resistance Levels, whereas levels from which prices rise after a correction are known as Support Levels.

As the name Resistance and Support suggests, Resistance levels prevent asset prices from going up, while Support levels prevents asset prices from going down (please see our post from two years back, Support and Resistance levels: Technical resistance for Nifty at 8000 to 8100). While technical levels are meant to be breached eventually, but they can influence short term prices. Nifty made an all time high of around 9,100 in March 2015 and then corrected 25% from that level in about 12 months. Nifty level of 9,000 or thereabouts was, therefore, a technical resistance. Markets have memory and therefore, it was expected that prices will correct, once the market reaches its all time high. Therefore, it is only to be expected that prices would have corrected from 9,000 or thereabouts on the Nifty.

In our technical analysis post in mid February (Where will the stock market bottom out: A technical perspective) charts showed us that, the market may bottom out at around 6,800 and it did. In our post Budget article in early March (Understanding the post Budget market rally: Will it be sustainable) technical indicators showed us that, the market could rally to 8,000 if it breached the 7,500 – 7,600 resistance levels and it did. In our early June post, Nifty is now back above 8000: Is it time to be bullish or cautious, we discussed that 8,400 – 8,500 and 8,700 were the resistance levels and should it breached, Nifty was headed higher. We also discussed in that post that, technical indicators were signalling a bullish bias in the market.

The Nifty did breach 8,700 and rallied to almost 9,000. Investors and traders must understand that technical analysts are not oracles; they cannot foretell the future. Technical analysis is stochastic and not deterministic (in other words, technical analysis can never claim to be 100% accurate). Technical analysis is based on three foundational assumptions:-

History repeats itself
In this post, we will not get into an intellectual discussion on whether these are good assumptions or not, but history has shown that, technical analysis does a good job at predicting short term to intermediate price movements. We had discussed earlier in our technical posts that, in technical levels from which prices have reversed historically act as support or resistance levels. As such, it was only to be expected that, levels of 9,000 or thereabouts on the Nifty would act as a resistance level, which it did over the past 3 – 4 days.

Now that we have seen a correction of 250 points from the 52 week high of the Nifty, in this post we will discuss what the key support levels for Nifty and also simple technical indicators, which can indicate trend reversal. But at first, let us discuss the intermediate term trend of the Nifty. In this post, we will focus purely on technical analysis and will refrain from a discussion on the economic factors affecting the market now. Readers should note that, the technical analysis concepts, discussed with respect to the Nifty are equally applicable for individual stocks.

DMAs and Intermediate term direction of Nifty

In our previous technical posts, we had discussed DMAs and their importance with respect to trend in prices. For benefit of readers who are not familiar with the concept of DMAs, DMA is the daily moving average of the asset prices over a certain rolling period. For example, the 50 DMA of Nifty is the daily moving average of Nifty over the last 50 days. The DMA itself is not as important as its trend is. The trend of 50 DMA will give you the short term direction of the market. The 100 DMA and 200 DMA will give you the longer term direction. The market is bullish in the short term if the 50 DMA is above the 100 DMA and in the moderate term if 100 DMA is above the 200 DMA. Let us now look at the 2 year daily price chart of Nifty.

In the chart above, you can see that the 50 DMA crossed over the 100 DMA and 200 DMA in May / June. The 100 DMA crossed over the 200 DMA in July / August. These are bullish crossovers, and therefore this signifies the intermediate term trend in the market will be bullish. If you have an intermediate term investment horizon, you should pay attention to 50, 100 and 200 DMAs.

MACD and Market Momentum

Moving Average Convergence Divergence (MACD) is a momentum technical indicator (we had discussed how MACD is calculated in our post, Where will the stock market bottom out: A technical perspective). It is typically shown as a histogram in the bottom portion of the most technical charts (you can find technical charts of Nifty and stocks on Yahoo Finance and many other finance websites). MACD histogram oscillates above and below the zero line. Positive MACD histogram (positive divergence between MACD and signal line or 9 day EMA) means upside momentum is increasing, which negative MACD means downside momentum is increasing. Let us now look at the 2 year daily price chart of Nifty and the MACD oscillator.

You can observe that, the MACD histogram crossed over into the bullish territory (above zero) in early March 2016, and as such we have had a rally since then. The MACD oscillator still indicates bullishness in the market. This confirms the bullish crossovers and trends of 50, 100 and 200 DMAs. We can therefore say that, the intermediate term trend of the market will continue to be bullish. However, readers can ask, if MACD oscillator has been bullish, why did we have a 250 point correction in the last 3 days? We had discussed earlier that, technical analysis is not an exact science. In technical analysis, different indicators can give different signals. When different technical indicators give conflicting signals investors should be cautious. In the past few days, while MACD oscillator was bullish, the RSI oscillator was signalling an over-bought market.

RSI and trend reversal

Relative Strength Index (RSI) is, like MACD, a momentum oscillator or indicator. RSI is calculated by subtracting 100 divided by 1 plus the ratio of average gain to average loss of the stock from 100. The calculation of RSI is not so important, as long as you understand the technical significance of RSI. You can see RSIs in technical charts, like on Yahoo Finance or other finance websites.

Let us understand the difference between the MACD and the RSI oscillator. The MACD oscillator indicates price momentum on either direction. The longer the bars of the MACD histogram on the either side of the zero, indicates that the momentum on the buy side or sell side is strengthening. As the bars become shorter, it implies that, the momentum on either side is weakening. Zero line MACD histogram crossovers indicate bullish or bearish signals. However, MACD can give late signals; in other words, trend reversals can happen before the MACD crossover. The RSI oscillator oscillates from 0 to 100. RSI indicates whether an asset is over-bought or over-sold. If RSI is above 70, it indicates that the asset is over-bought; if the RSI is below 30, it indicates that the asset is oversold. RSIs can give quicker trend reversal signals than MACD. Let us see how RSI gave quicker signal than MACD using Nifty daily price chart.

As mentioned in the chart, the line graph at the bottom is the RSI, while the histogram just above the RSI is the MACD. You can see that, a few days back (as indicated by the red circle), the RSI was giving signal (above 70), while the MACD histogram was indicating bullishness. As it turned out, RSI was a more reliable indicator for short term price movement compared to MACD. If you traded on the basis of RSI, you would have lightened your long positions or even taken short position when RSI was near 70 and would have made very decent profits today (please remember, however, that this is purely from short term trading perspective). In our view, while MACD is a more popular momentum oscillator (which is why, we focused more on MACD in our previous posts), technical traders should look at both MACD and RSI. If MACD and RSI give conflicting signals, traders should exercise caution and maintain strict stop-losses.

Support Level for Nifty

Since MACD oscillator still indicated bullishness, we do not anticipate a very deep correction from the resistance level of around 9,000 on the Nifty. However, we should track the technical indicators of the market on a regular basis over the next few days and weeks to form a more informed view. Let us now, discuss the important support levels of Nifty. If you have read our previous technical posts you will know that, markets have memories and previous support levels continue to act as support when prices are falling. We had also discussed in our previous technical posts that resistance levels, when breached, become support levels in the future. Let us now look at the 2 year daily price chart of Nifty, to get a sense of the support levels for Nifty in the near term future.

Please focus your attention on the dotted line. You can see that prices reversed from the dotted line, a number of times in the past 2 years. The dotted line on the chart above, corresponding to approximately 8,700 on the Nifty, is, therefore, is a strong support level for the Nifty. Is it any surprise that Nifty closed around 8715 today? If you believe in technical analysis, the answer is that, it is no surprise at all, because 8,700 is a strong support level. Nifty may very well rebound from this level and again test the all time high. However, as an investor, you must remember that, market is not a slave of technical analysis and that is why technical levels are breached. Global risk factors and perceptions can cause 8,700 to be breached; what, in that case, is the next support level for Nifty? Let us now look at the 2 year daily price chart of Nifty, to get a sense of the next support levels for Nifty in the near term future.

Please focus your attention on the dotted line in the chart above. You can see that, below the 8,700 level on the Nifty, prices reversed from the 8,500 levels a number of times in the past 2 years. Therefore 8,500 is the next level to watch out, over the next few days and weeks, should 8,700 be breached convincingly on a closing basis over the next few days.

Nifty intermediate term trend

Nifty has been forming higher tops and higher bottoms over the last few months. Higher tops and higher bottoms imply that, as of now, Nifty is in an intermediate term uptrend. I have seen a number of investors, who made judgement calls that were contrary to the trend and were punished brutally by the market. Fund managers make contrarian calls and give great returns to investors, but retail investors must note that, making these calls require a considerable amount of experience, expertise and most importantly, patience to wait for the results. Focus your attention on the two dotted lines in the chart below. If you are not an expert in investing, then remember one of the most important mantras of technical is that, the trend is your friend. Trend-lines are very important in technical analysis and trading. The dotted line on the top connects the market tops, while that below connects the market bottom. In a range bound market, prices will trade between the upper trend line and the lower trend line.

You can see in the chart above that, the trend lines are upward sloping. Extrapolated to today, the upward trend line extends to above 9,000 while the lower trend line extends to around 8,300 – 8,400.

Conclusion

The trend lines, DMAs and MACD oscillator tell you that, short term volatility notwithstanding, the market has a longer term bullish bias. Therefore, if you are a longer term investor, you should use these corrections to tactically add equities to your asset allocation. Market experts tell us that, over the next few weeks, you will get further opportunities to take advantage of short term corrections, which you should take full advantage of, to get superior returns in the medium to long term.

Mutual Fund Investments are subject to market risk, read all scheme related documents carefully

Are you awarnes about Financial planning...

As investors you are often told that investments are done with the aim of fulfilling personal financial goals. This is often said with the assumption that you have a financial goal or goals to fulfill. The idea of having personal goals is not just about a list of goals you want to fulfill. It is because having goals serve as personal motivation to continue the investments, ending in financial fulfillment of the goal. However, financial goals are more than just a list of goals. Goals should be accompanied by a time period within which the investor seeks its fulfillment. The time period is crucial because it determines the amount to be invested and allows an investor to determine whether the goal is a long term, mid term or short term goal. You may often get bogged down to see so many investors investing for various personal goals while you are still trying to figure the goals and rank them in the list of importance. Let us take a look at some of the widely considered important personal goals that investors often invest for.

Staying Ahead of Inflation

Inflation slowly eats in to your investments making your accumulated amount look small compared to your needs. This is the most important of all financial goals because this goal dictates that your investments must generate inflation adjusted returns. It also ensures that an investor reflects upon the present and future cost of the goals. You must have heard your parents talk about the 'good old days' where they described how easily they could get things for 50 paise. Presently, we all are witnessing the absence of those 50 paise coins. This is because of the inflation what your parents could purchase for 50 paise we can purchase it for no less than र 50. The same applies to your goals. The amount that is enough for your household presently will not be enough 10 years down the line. Inflation affects the prices in the economy pushing it upwards with every passing year. Staying up with inflation could be an exasperating task in the present but it definitely is rewarding in the future. Let us see some possible future costs.

Retirement Goals

Retirement goals are one of the most important long term goals and also the most ignored goal for most investors in India. Retirement goal is the last in the last of personal goal, hence, it is ignored because of the long time horizon that exists between its investment and fulfillment. However, investors fail to take note of one factor and that is mostly all investments can be fulfilled by adjusting your monthly income or by borrowing from your future income in terms of a loan. However, no such provision is allowed for retirement because at this phase you cease to have a regular income. Hence, you will have to sustain with whatever exists in your corpus or find alternative means of income. So ignore the goal of retirement at your own peril. The sooner you start, you will have time by your side and you will be able to make the most of out of small pockets of investment. The magic of time of value of money is such that if you invest small sums for a long period of time you are bound to have more than lump sums invested for a short period of time. This is simply called the time value of money and possible because of the power of compounding. Do not believe me? See it for yourself.

Lifestyle Goals

Lifestyle goals are those goals for which we do not plan for, for example eating out with your family in restaurants or a weekend trip to the countryside resort or buying a big car or a foreign holiday. These are often unplanned for and you pay for them with your present funds or your monthly income. Then they are forgotten till another expense comes up. Lifestyle is one of those aspects that often put even the richest in debt because there is no end to what you can aspire for to satisfy your materialistic needs. These goals are often the reason we have piling credit bills and pay interest as high as 36% to 48% per annum and a major reason why we are also unable to save or invest to build a financial future. Hence, beginning of every year, it would be advisable to have a budget for these expenses and try not to exceed those. Have a lifestyle plan like you plan your retirement and start investing a stipulated sum. If you are prone to using credit cards, then remember to pay the bill amount within the given date to avoid late charges, fines or hefty interest. Remember, the aim is to build a sound financial future and not live in an inflated bubble of credit.

Education Goals

Your personal goals have to incorporate the education goals of your children beginning from the rising private school expenses to the college and professional course fees. You need to start thinking even earlier if you wish to send your child out to get a foreign education. There are certain ways in which today's children are different from what you were when you were a child. You probably did not grow up viewing laptop, gaming console and tablets as a necessity. However, the fortunate or unfortunate truth is your child will view these as necessities. Hence, if you wish you provide these gadgets which are in no way inexpensive, maybe you need to include these in your planning as well. Compared to the goals you are planning for these may look insignificant but a little planning can always take a long way. You can invest an amount as small as र 500 in SIPs for a short period of three to five years ensuring your entire child's miscellaneous needs are met.

Medical and Life Goals

We live in an increasingly complex world. If there is one thing we do not account for, it is our health. While we may take excellent care of it we could still find ourselves surrounded by medical bills and prescriptions. We live in an increasingly stressful world and taking chances with one's health is not an option. Hence, your personal goals should include a medical insurance along with life insurance. Select a term plan which you can afford and give yourself a cover for at least till 70-75 years. Get the adequate medical insurance so that best care does not remain unaffordable to you. You can always increase the insurance cover once your income increases or you grow older for better protection.

Emergency Expenses Goals

This is one of the most ignored goals because one might complain that after spending, and investing there are simply no funds left. However, it is better to have an emergency fund that you might need during extenuating circumstances that looking for money to borrow during pressing situations. Family emergencies, health emergencies, urgent fund needs, we could be bogged down by possibly everything. Investments which you are planning to redeem will interfere with your personal goals and it could take a while for the money to come to your account as well. Hence, have an emergency fund and put small sums of money. Invest that in liquid mutual funds where you could redeem anytime by earning returns and paying no exit loads. This will allow your emergency fund to gather some returns and be well within your reach.

Conclusion

Financial Planning is no child's play and requires your utmost attention. Hence, have a list of goals and do not invest without any purpose in mind because that will not motivate you enough to stay invested. Personal goals could definitely vary from what has been written as it is largely based on an individual's needs. Hence, talk to your financial advisor regarding all your various financial goals and how you could possibly channelize your income to fulfill them and lead a good life. Remember no matter how big or small your goals are you have enough. Just have faith, plan, keep investing and remain invested till goals are achieved.

Are you ready to invest in equity mutual funds?

By Shivani Bazaz
Many individuals start investing in stocks when they get to know that someone they know - it could be a friend, colleague or a relative - has made fantastic returns from stocks in a short period of time. These investors typically get anxious when the market gets into a prolonged bad phase. Several of them sell their investments and run away from the market. Most of them get spooked so badly that they never think of investing in stocks ever again. Such stories are common because some people focus only on eye-popping returns and overlook other aspects of investing in stocks. The situation can be avoided if investors spend a little time to familiarise themselves with the basic concept of investing in stocks. Are you ready to invest in equities? Read on to find out.

1. Always take the help of equity mutual funds

It is tempting to invest in an obscure stock that is supposed to give 300 per cent returns. However, the trouble is that it is not very easy to find such stocks in the market. By the time you get to know about a stock that is poised to offer stupendous returns, it might have already passed the half-way mark. Even otherwise, a regular nine-to-five worker would find it extremely difficult to research stocks, track them regularly, and execute buy and sell transactions on a regular basis. The solution is to hand over the job to a qualified professional and pay a small fee. Equity mutual funds do just that. You pay a small fee to get a qualified fund manager who would take care of investing your hard-earned money.

2. Invest in equity mutual fund only if you have at least five-year horizon

Equity mutual funds can be extremely volatile in the short term. If you are investing in equity with an investment horizon of a few months or a year, you may find that the investment has lost its value considerably when you need the money. You can avoid such situations only if you invest with a long term investment horizon of over five or seven years. Many studies have proven that stocks have the potential to offer superior returns than other asset classes over a longer period.

3. Don't let volatility scare you

Stock markets catch cold easily. A small development anywhere in the world could drag it down or prop it up. The result: stock prices yo-yoing and major indices swinging wildly to the tune of domestic or overseas news. A slightly extended period of volatility makes new investors extremely anxious. They constantly worry about the value of their wealth. This is not a great strategy to build wealth. It is also not good for your health. The solution: remind yourself that you are in for the long haul. Such volatile periods usually do not have a significant impact over a long period.

4. You can't avoid equity if you want to multiply wealth

Most of us typically have at least half a dozen financial goals. Sadly, we have one stream of income to fund all of them. This is exactly why you shouldn't let short-term volatility scare you away from the stock market. You should remind yourself that you must have to make inflation-beating returns to meet all your financial goals. This is especially true for those who are investing a modest sum. Investing small amounts regularly over a long period in equity schemes is the best way you build a nest egg to take care of your long-term financial goals like retirement, child's education, etc.

5. Equity offers tax-efficient returns

We just discussed how it is imperative to invest in equity to generate inflation-beating returns to meet long-term financial goals. Add to that tax efficiency of returns from equity. Apart from small saving schemes like PPF that offers tax-free returns, equity is the only asset class that qualifies for tax-free returns. Investments in equity mutual funds held over a year qualify for long-term capital gains tax which is zero at the moment.

Giving your Mutual Fund SIP a market timing kicker

by Dwaipayan Bose

Most investors who have invested in mutual funds through Systematic Investment Plan (SIP) over a long period of time vouch for the wonderful benefits of systematic investing. Even a small monthly auto debit from your bank account, which very often you do not even notice in your bank statement, over a period of time, creates substantially large corpus, often many times larger than the cumulative investment amount. Our readers know the two big benefits of SIP, namely disciplined investing and rupee cost averaging. We have discussed the importance of disciplined investing a number of times in our blog; suffices to say that, discipline is of critical importance in meeting your long term financial objectives. We have also discussed the benefits of rupee cost averaging a number of times in our blog. Equity markets are volatile and SIP helps investors take advantage of the volatility by averaging out the purchase price of units, which over a period of time, helps investors get superior returns.

Volatility is essentially price fluctuation depending on demand and supply in capital markets. One problem, however, with the concept volatility is that, it ignores the direction of price fluctuation. Both rising asset prices and falling asset prices cause volatility. However, from the investor's perspective, one is desirable, while the other, is not. When you invest a fixed amount every month in purchasing units of mutual fund schemes, you are buying units both when prices are rising and when prices are falling. The direction of price movement notwithstanding, SIP is beneficial to the investor because, even if you are buying units at a higher price in rising markets, over a sufficiently long period of time, you will also be able to invest in the market downsides. However, if investors had an option of investing only in market downsides, surely they can get superior returns vis a vis the regular SIP. In our post, Is Mutual Fund Systematic Investment Plans really the Best Mode of Investing, we had discussed that, a valuation based approach to SIP can generate superior returns than the plain vanilla monthly SIP.

In a valuation based approach, we invest in equity funds when the valuation (P/E ratio of market benchmark) is low and invest in low risk debt fund when the valuation is high; we also switch from debt to equity funds when valuation is low. While this strategy is a little more complex than your regular SIP, it is fairly obvious that this strategy will beat the plain vanilla SIP, because you are buying when prices are cheap; in other words, you are timing the market. But implementing this strategy will require you to devote some time and effort on a regular basis tracking the market and executing your transactions.

Edelweiss Mutual Fund has come up with a very innovative solution, Prepaid SIP, where you can invest in market downsides or time the market, without you having to track the market. In other words, with Edelweiss Prepaid SIP, you can automate market timing. The Prepaid SIP is like a Systematic Transfer Plan (STP) with an inbuilt simple market timing feature. Without making any complex structure of market valuations, it simply works on market falls, in the Prepaid SIP product, investors can invest in select source funds namely, Edelweiss Liquid Fund and Edelweiss Arbitrage Scheme, Edelweiss Absolute Return Fund, and switch pre-determined amount to the target equity funds namely, E.D.G.E Top 100, Edelweiss Emerging Leader Fund, Edelweiss ELSS, Edelweiss Prudent Advantage Fund and Edelweiss Absolute Return Fund, based on specific investment triggers:-

0.5% day on day drop in Nifty 50 or Nifty Free Float Midcap 100

1% day on day drop in Nifty 50 or Nifty Free Float Midcap 100

2% day on day drop in Nifty 50 or Nifty Free Float Midcap 100
Any amount can be invested in the source scheme on each trigger maximum amount of Rs 1,99,000 instalment /switch can move to target schemes. Investor continues to earn returns of source scheme till such time a switch is triggered by fall in Nifty 50 or Nifty Free Float Midcap 100. The investor can select multiple trigger with differentiated switch value i.e. investor can choose on 0.5% fall, switch value of Rs 5000 where as on 1% he can choose Rs 15,000 switch and depending on fall %age higher trigger value will be switched. By investing in down market, the investor can capture a bigger upside potential of the target schemes. The investor has the option to transfer a prescribed amount from the source fund to target fund, each time the switch is triggered., each time Nifty 50 or Nifty Free Float Midcap 100 drops 0.5% / 1% / 2%, the investor can take advantage of prescribed amount on each opportunities on dip. The investor should select the switch amount based on the downside trigger selected by him or her. For example, if the investor selects a 0.5% drop in Nifty or CNX Midcap as a switch trigger, he or she should transfer prescribed amount of say 10000/-from source to target fund, because the investor will have more investment opportunities based on the trigger selected. On the other hand, if the investor selects a 2% drop in Nifty or CNX Midcap as a switch trigger, he or she should transfer Rs 20000/- from source to target fund, because the investor will have the opportunity to invest more in bigger corrections.

Prepaid SIP gives investors to switch from one or more source funds to one or more target funds. Investors can determine the proportion in which funds are switched from the source fund to different target funds. Let us understand how Prepaid SIP works by walking through an example. Suppose an investor invested र 100,000 in Edelweiss Liquid Fund and transferred 10% to target equity schemes if Nifty or CNX Midcap Index fell by more 1% from previous close. If Nifty fell by 1% or more, the investor opted for Rs 10000/- transfer from Liquid Fund to Edelweiss Absolute Return (ARF), E.D.G.E Top 100 (EDGE) and Edelweiss ELSS (ELSS) in the ratio of 40:50:10. If CNX Midcap fell by 1% or more, the investor opted for Rs 10000/-10% transfer from Liquid Fund to Edelweiss Select Midcap Fund (SMF). The table below shows how the Prepaid SIP worked, when the switches were triggered.
(Source: Edelweiss Mutual Fund)

You can see in the table above, how the funds are transferred to designated schemes in specified proportions whenever Nifty or CNX Midcap indices falls more than 1%. Investors may have often heard market experts advising them to buy on dips. Though buying on dips is simple to understand, it is often difficult to execute. The Prepaid SIP is the perfect example of buying on dips.

Conclusion

Back-testing of Edelweiss Prepaid SIP returns compared to regular SIP / STP returns have shown that Prepaid SIP is able to generate significantly superior returns compared regular STPs. As discussed earlier, this should not come as a surprise, because you are essentially buying on dips through Prepaid SIP. While you get the advantage of buying on dips, with the Edelweiss Prepaid SIP, you do not have to track the market and execute transactions on an ongoing basis.

By filling out a Prepaid SIP one-time mandate at the time of filling out the application form, you can, at your end, basically automate the process. You can also integrate Prepaid SIP in your regular financial planning, by topping up the target funds on a regular basis. Edelweiss Prepaid SIP offers investors the flexibility of investing as per their needs and preferences, by offering different trigger points, switch percentages, choice of source schemes and choice of target schemes. Investors should consult with their financial advisors, if Edelweiss Prepaid SIP is suitable for their investment requirements.

Investors can access Prepaid SIP Calculator here: http://edelweissmf.com/KnowedgeCenter/sip-calculator.aspx

Mutual Fund Investments are subject to market risk, read all scheme related documents carefully

The best tax saving investment: Should you invest in PPF or ELSS

by Dwaipayan Bose
Public Provident Fund (PPF) is still one of the best tax saving investments for risk-averse investors. PPF offers the triple benefits of tax saving, risk free returns and tax free returns. As per the provisions of the new Union Budget, investors can deposit up to Rs 1.5 lacs per annum in their PPF account, resulting in an annual tax saving of up to Rs 45,000/- for investors in the highest tax bracket. The PPF interest rate for the year 2014 – 2015 is 8.7%.

PPF is the best tax saving investment option for the risk-averse investor

Though some tax saving investments offer similar interest rates, the taxability of returns have significant impact on the actual returns to the investor. Public Provident Fund and Voluntary Provident Fund are the most tax friendly fixed income investment options under Section 80C. The table below shows the tax treatment for various fixed income investment options under Section 80C.

On a post tax basis PPF offers the highest returns among all tax saving fixed income investments. The chart below shows the annualized post tax return from various fixed income linked tax saving investment options under Section 80C.

PPF does not give fixed returns

Though the Government changed the PPF interest rate from time to time, for a long period of time it had been fixed at 8%. Traditionally investors expected a yield of around 8% from their PPF deposits. However, from 2011 onwards, PPF interest rate has been made market linked and pegged with the 10 year Government bond yield. The chart below shows the historical PPF interest rates.

The benchmark 10 year government bond yield is at 8.8%, which is nearly at its 5 years historical high. Debt market experts consider 9% as the inflection point, since rates usually soften from this point. Interest rate in India has been high for a long period of time now and many experts believe that interest rates will start softening from next year. While a benign interest rate regime is good news for equity investors, since PPF interest rate is linked with the 10 year bond yield, we may see lower PPF interest rates in the future.

ELSS as a tax saving Investment

For investors with risk appetite, Equity Linked Saving Schemes (ELSS) is one of the most popular investments allowed under Section 80C. Investors can avail triple benefits of tax savings, capital appreciation and tax free returns in ELSS. An ELSS is essentially a diversified equity fund with a lock in period of three years from the date of the investment. From a taxability of returns perspective, both capital gains and dividends from ELSS are tax free. Over a long time horizon equities give much higher returns compared to other asset classes. However, since ELSS funds are market linked investments, they are subject to market risk and volatilities. Historically, good ELSS funds have given excellent returns. In the last ten years ELSS funds on average have given more than 19% trailing annualized returns. The chart below shows average historical returns of the ELSS funds category.

Comparison of PPF and ELSS returns

In the strict sense, it is not fair to compare PPF and ELSS. PPF is a risk free investment, whereas as ELSS is subject to market risks. For the sake of illustration we have shown the comparison of returns of Rs 50,000 annual investment in PPF and a good ELSS fund, over a long investment.

If you started an Rs 50,000 annual PPF deposit in 2002, your PPF corpus as on September 1 2014 will be Rs 11.4 lacs, with a cumulative investment of Rs 6.5 lacs. The chart below shows the PPF returns during the term of the investment.

If you had started an Rs 50,000 annual investment in a top ELSS fund like the ICICI Prudential Tax Plan in 2002, your corpus will be Rs 37.5 lacs. The chart below shows the returns from the tax saver fund during the term of the investment.

Should you invest in PPF or ELSS

Both PPF and ELSS have their merits and demerits. Your investment choice should be informed by your investment objectives and your risk tolerance level. Your risk tolerance level is based on several factors (discussed in our article Measuring Risk Tolerance of Investors). Age and financial situation are certainly two important factors that determine risk tolerance of an investor.

Investors with high risk tolerance should invest in ELSS, while investors with low risk tolerance should invest in PPF. Over a long time frame wealth creation potential is much higher with ELSS, as we saw in the charts above.

Young investors should opt for ELSS, since they usually have high risk tolerance and a sufficiently long time horizon to ride out the volatilities associated with equity investments.

If you do not have a PPF account and you are 15 or 20 years away from retirement, you should open a PPF account and start making regular deposits, so that you can accumulate a corpus by the time you retire. As you approach retirement, your risk tolerance goes down and PPF is a better investment option in such a situation.

Investors with moderate risk tolerance level can invest in both PPF and ELSS in accordance with their optimal asset allocation strategy. You can read about some general asset allocation guidelines in our article, Asset Allocation strategies for different age groups.

Salaried individuals are mandatorily required to contribute a portion of their salary to employee provident fund (EPF). The EPF interest rate is similar (slightly lower) to the PPF interest rate and the maturity amount is tax free. The EPF contribution of the employee goes towards the 80C tax savings. Therefore they should opt for ELSS, unless they are near retirement. Investment in ELSS through systematic investment plans (SIPs) over a long time horizon will help you both in tax planning and retirement planning.

Self employed individuals should make regular PPF deposits for their retirement planning. It is a good idea to extend your PPF even beyond maturity in blocks of 5 years, if you do not need the liquidity immediately. You can continue to make deposits to your PPF. Even if you cannot make deposits every year, you can stay invested in PPF and your accrued balance will continue to earn tax free interest.

Investment horizon is another important consideration, in deciding between PPF and ELSS. The tenure of PPF is 15 years with very limited liquidity during the term of the investment. If you have an investment horizon of 5 to 10 years for any specific financial objective, then you cannot rely on PPF. ELSS may be a good investment choice for a 5 to 10 year time horizon, provided it is suitable for your risk profile.
Liquidity Considerations

The tenure of PPF is 15 years and is extendable in blocks of 5 years. While liquidity of PPF is lower than other tax saving fixed income investments, PPF does offer limited liquidity options through withdrawals and loans, during the term of the investment. Withdrawals not exceeding 50% of fourth year balance or 50% of the balance at the end of the immediate preceding year, whichever is lower, are permitted after a lock-in period of 7 years. PPF also offers loan facilities from third year onwards under special circumstances. The loans can be availed between third and sixth year, and should not exceed 25% of the balance second immediate preceding year. Rate of interest of the loan will be 2% more than prevailing PPF rate and the loan must be repaid in two years. The withdrawal and loan facilities notwithstanding, PPF is essentially a very long term investment. Investors must be prepared to wait for at least 15 years to get the maturity amount.

ELSS has a lock-in period of three years from the date of the investment. In other words, investors will not be able to redeem their units for the first three years. If you invest in an ELSS through a systematic investment plan (SIP), each SIP investment will be locked in for three years from their respective investment dates. You can opt for both growth and dividend options. But you should not opt for dividend re-investment option, because the every dividend re-invested gets locked in for 3 years in an ELSS. So a portion of your dividend gets locked-in for ever. If you have opted for dividend re-investment in an ELSS fund, you can switch to the dividend payout option. Some mutual funds also allow investors to switch from dividend re-investment to growth option.
Conclusion

Both PPF and ELSS are wonderful tax saving investment options. However, their suitability depends on the financial objectives and the risk profiles of the individual investors. Investors should consult with financial planners or advisors to understand their individual risk profiles, and the most suitable tax saving investment options.

Which is a better mutual fund investment option: Lump Sum or SIP

by Dwaipayan Bose

Is Systematic Investment Plan (SIP) a better investment option than Lump Sum? This is an old debate and has been going on ever since SIPs were introduced in India. Most financial advisors argue in favour of SIPs and a large number of investors prefer SIPs. But some investors still prefer lump sum investment. Financial advisers and investors, who prefer SIP, argue that monthly SIPs help investors to average the cost of a unit and thereby the return is higher. Investors who prefer lump sum reject that argument on the premise that, while some units are a purchased at a lower cost in SIP, other units are purchased at a higher cost. Both arguments are true. In my opinion, comparing SIPs and lump sum investment is like comparing apples and oranges. In this article, we will try to address the debate of SIP versus lump sum investment objectively.

Lump Sum investments versus SIPs

Let us examine this with the help of an example. Mr Prasad started a monthly SIP of Rs 5000 in ICICI Prudential Focused Bluechip Equity Growth Plan on April 1, 2009. His friend, Mr Parikh invested Rs 3 lakhs lump sum in the same scheme on the same day. Till date, both of them have invested Rs 3 lakhs. Before we examine how Mr Prasad and Mr Parikh?s investments have done, let us how the fund has performed in the last 5 years. Please see the NAV chart of the ICICI Prudential Focused Bluechip Equity Growth Plan from Apr 1 2009 to Mar 31 2014.

As you can see in the chart, over the five year period the NAV of the scheme has increased almost 3 times. The annualized compounded return over the 5 year period between Apr-1-2009 to Mar-31-2014 was 23.3%. However, the rise was not smooth. There were periods of choppiness especially in 2011 and also in 2013. Units bought in the choppy periods enabled Mr Prasad to improve his returns.

Now let us see, how the investments of the Mr Prasad and Mr Parikh have performed. Please see the chart below, to see the returns on Mr Prasad?s monthly SIP investments over the 5 period. The SIP date has been assumed to be the first working day of each month. The blue line shows the SIP investments made by Mr Prasad and the red line shows value of his units. As on March 31 2014, the value of Mr Prasad?s investment is Rs 4.22 lakhs, while he invested only Rs 3 lakhs. The XIRR of Mr Prasad?s investment is 14%.

Let us now see how Mr Parikh?s investment has done. Mr Parikh invested Rs 3 lakhs in Lump Sum in the scheme on Apr 1 2009. The NAV of Apr 1 2009 was 7.6. Mr Parikh bought 39,474 units of the scheme. Please see the chart below, to see the returns on Mr Parikh?s lump sum investments over the 5 period. The blue line shows the lump sum investment made by Mr Parikh and the red line shows value of his units. The NAV of the scheme as on Mar 31 2014 was 21.6. The value of Mr Parikh?s units is Rs 8.54 lakhs.

In terms of absolute returns, Mr Parikh?s returns are almost double that of Mr Prasad?s. The reason is quite obvious. Mr. Parikh?s Rs 5 lakhs investment was invested for the entire period of 5 years. However, Mr. Prasad?s total investment was not completely invested for the entire period, since the money was getting invested in small monthly instalments of Rs 5,000.

However, the comparison of SIP versus lump sum is not a like to like comparison. Such comparisons should not be the basis of deciding between lump sum and SIP investments. The option of investing in SIPs versus lump sum totally depends on the source of investment.

If the investor depends on regular savings for his or her investments, it makes sense to invest through the systematic investment plan route. The investor should not wait, till he or she has saved a sufficient corpus to invest in mutual funds

If the investor has lump sum funds as a result of an one-time income then he or she should invest in lump sum in mutual funds. The investor should not put his funds in a bank account and invest it over a period of time through SIPs
The underlying principle of wealth creation is that, the longer you remain invested, higher are your returns. Please refer to our article, How Compound interest works, to understand this in greater details. Whether you invest in lump sum or through SIP depend on your personal financial situation. Either ways, you need to ensure that your investible funds remain invested for a sufficiently long period so that you can take advantage of the power of compounding.

Investing in SIPs versus trying to time the market?

For a person with invests in mutual funds from his or her regular savings, investing through SIPs makes more sense than trying to time the market and investing in Lump Sum. Let us examine this through an example. The chart below shows the returns of Mr Prasad?s Rs 5000 monthly SIP in ICICI Prudential Focused Bluechip Equity fund in 2013. Mr Prasad invested Rs 60,000 through monthly SIPs in 2013, and the value of his investment as on Dec-31-2013 is Rs 65,873.

Can Mr Prasad get better returns than Rs 65,873 by trying to time the market? Let us examine. At first, Mr Prasad needs to accumulate Rs 60,000 investible funds. Since Mr Prasad relies on regular savings to make mutual fund investments, he needs to wait till he accumulates the investible corpus from his savings. Let us assume, Mr Prasad saves 50% more every month and accumulates Rs 60,000 by the beginning of September. He now has a 4 month window to put his lump sum Rs 60,000 investment to work. Please see the chart below to see the returns on Dec 31 2013, for Rs 60,000 lump sum investment, made any time between Sep 1 to Dec 31. The orange line shows the Dec 31 value of investments made on days shown on the horizontal axis. For example, the value of Rs 60,000 lump sum investment made on Sep 3 will be Rs 71,000 on Dec 31. The value of Rs 60,000 lump sum investment made on Oct 8 will be Rs 64,380 on Dec 31. The blue line shows the lump sum investment made by Mr Prasad and the red line shows the value of monthly SIPs on Dec 31 (Rs 65,873 shown in the chart above). Is it possible to beat the red line by timing the market? Let us see.

From the chart above, we can that it is possible to beat SIP returns. But Mr Prasad had to make the lump sum investment before Sep 7, to make this strategy work. After Sep 7, Mr Prasad would get very few opportunities to match SIP returns. This clearly shows that timing the market is very difficult, because equity market by its very nature is unpredictable. Even investment experts with many years of experience, find it very difficult to time the markets. Therefore, in this situation it makes more sense to invest via SIPs. In fact, for long term financial objectives like retirement planning for which you need to save and invest on a regular basis, investing in equity funds through SIPs is the best option. You can refer to our article, Retirement Planning through Mutual Fund Systematic Investment Plans, to see how investing through SIPs can create wealth for retirement planning.

Conclusion

As discussed in this article, the debate of SIP versus Lump Sum is meaningless. The decision to invest in lump sum or through SIP completely depends on your personal financial situation. If you have sufficient investible funds from a one-time income, you should invest in lump sum. A portion of your regular savings should be allocated to SIPs. Both lump sum investments and SIPs will create wealth for you, if you remain invested for a sufficiently long time.

SBI Mutual Fund launches SBI Debt Fund Series B 44: 1100 Days

On Oct 09, 2016 :-

NFO period: 05th October – 10th October, 2016

Highlights of the NFO:

Scheme type – A Close-ended Debt Scheme

Investment objective – The scheme endeavours to provide regular income and capital growth with limited interest rate risk to the investors through investments in a portfolio comprising of debt instruments such as Government Securities, PSU & Corporate Bonds and Money Market Instruments maturing on or before the maturity of the scheme. There is no assurance or guarantee that the scheme's objective will be achieved.

Product suitability – The product is suitable for investors who are seeking regular income over long term by investing in debt/money market instrument/govt. securities.

Minimum Application Amount – First investment is Rs. 5,000/- and in multiple of Rs. 1/- thereafter

Plan/ Options available – Regular Plan and Direct Plan having Growth Option and Dividend Option.

Fund Manager – Ms. Ranjana Gupta

Benchmark – Crisil Short Term Bond Fund Index

Maturity – 1100 days from the date of allotment

DSP BlackRock Dynamic Asset Allocation Fund: Superior returns with moderate risk

by Dwaipayan Bose

Category: Mutual Funds An asset allocation fund invests in a fixed or dynamic mix of three main asset classes, equity, debt and cash equivalents. In a fixed asset allocation fund, the asset allocation percentages of equity, debt and cash equivalents are fixed. The fund manager rebalances the asset mix if it deviates from the fixed asset allocation percentages. In a dynamic asset allocation fund, the asset allocation percentages change with changes in market conditions.

In our post, Asset Rebalancing will reduce your portfolio risk and improve returns, we had shown that asset re-balancing with fixed asset allocation percentages reduces portfolio risk and gives superior risk adjusted returns. In the same post, we had also said that, we can get even better returns, if asset re-balancing is done based on relative valuations of asset classes.

In our blog post, Valuation Matters: How can you use valuations to make better investment decisions, we demonstrated analytically that investors got superior returns, when investing at lower valuations.

Dynamic Asset Allocation funds, as the name suggests, dynamically rebalance their asset mix, based relative valuations of asset classes. Different dynamic asset allocation funds have different dynamic portfolio rebalancing strategies, but what is appealing about DSP BlackRock Dynamic Asset Allocation Fund's dynamic rebalancing strategy is that, it is simple, yet very elegant. At the heart of the DSP BlackRock Dynamic Asset Allocation Fund's dynamic rebalancing strategy is simple yet powerful analytical factor known as the yield gap.

What is Yield Gap?

There are a number of analytical definitions of yield gap, but leaving the mathematics aside for the moment (we will discuss it later), yield gap is nothing but the ratio of the debt market yield and the equity market yield. If the yield gap is high it means that the equity market is overpriced relative to the debt market, which is a signal for the portfolio to be more weighted towards debt.

On the other hand if the yield gap is low, it means that the equity market is underpriced, which is a signal for increased allocations to equity. DSP BlackRock Dynamic Asset Allocation Fund uses yield gap, to dynamically determine the asset allocation of debt and equity in the portfolio. In effect the fund aims to time the market by buying assets at the optimal valuation.

Fund Overview

DSP BlackRock Dynamic Asset Allocation Fund was launched in February 2014. It has र 1,000 crores of assets under management. Investors should note that, DSP BlackRock Dynamic Asset Allocation Fund is a fund of funds. Therefore, from a tax perspective, it is treated as a debt fund. The expense ratio of the fund is 1.85%. The fund managers of this scheme are Mayur Patel, Kedar Karnik and Laukik Bagwe. The benchmark of the fund is the CRISIL Balanced Fund Index. From a risk perspective, this fund has a moderate risk profile. As such, the fund may be suitable for investors, with moderate risk tolerance, looking for income and capital appreciation over a sufficiently long investment horizon. The chart below shows the growth of र 100,000 lump sum investment in DSP BlackRock Dynamic Asset Allocation Fund.

The chart above shows why DSP BlackRock Dynamic Asset Allocation Fund is good investment option for investors with moderate risk profiles. You can see that, despite the sharp correction in equity markets in 2015, the fund value of DSP BlackRock Dynamic Asset Allocation Fund was quite stable in 2015, unlike most diversified equity funds. The fund value dipped slightly (about 5%) in the early part of 2016 (January and February), but our readers, who follow the market, know that, early 2016 was terrible time for stock markets, with the Nifty falling 25% in two months. The dynamic portfolio rebalancing strategy of DSP BlackRock Dynamic Asset Allocation Fund paid off after March, with returns of 18% in the last 6 months or so.

Portfolio Composition

As per its investment strategy, DSP BlackRock Dynamic Asset Allocation Fund can invest between 10 to 90% in equity and similarly between 10 – 90% in debt. Currently the allocation to debt investment is about 55%, while the allocation to equity is about 43%. Cash equivalents account for the balance allocation. Since the DSP BlackRock Dynamic Asset Allocation Fund is a fund of funds, it does not directly invest in securities but in equity and debt mutual fund schemes of DSP BlackRock. Currently the fund has invested in DSP BlackRock Strategic Bond Fund, DSP Black Rock Money Manager Fund and DSP BlackRock Short Term Fund for the debt portion. For the equity portion the fund has invested in DSP BlackRock Equity Fund and DSP BlackRock Top 100 Fund.

The chart below shows the portfolio holdings of the DSP BlackRock Dynamic Asset Allocation Fund.
(Source: Advisorkhoj Research)

However, investors should note that in future the fund can invest in other DSP BlackRock equity and debt mutual fund schemes of DSP BlackRock Mutual Fund.

Yield Gap Model Demystified

As discussed earlier, yield gap is the ratio of the debt market yield and equity market yield. The parameter used for debt market yield is the 10 year Government Bond (10 year G-sec) yield. The parameter used for equity market yield is nothing but the reciprocal of the price earnings ratio (PE ratio); in conceptual terms, the earnings of the Nifty as percentage of the price of Nifty.

If the yield gap is in the range of 1.4 – 1.5 the asset allocation is 50% debt and 50% equity. If yield gap is lower the allocation to equity his higher and vice versa. DSP BlackRock uses the following allocation bands for the debt and equity allocation of DSP BlackRock Dynamic Asset Allocation Fund.

(Source: DSP BlackRock)

In addition to the yield gap factor to determine asset allocation, DSP BlackRock also uses a modification of the yield gap. The modified yield gap is the ratio of 1 year G-sec to Nifty earnings yield.

How robust is the yield gap model?

DSP BlackRock has back-tested the model from 2000 and compared the returns with Nifty and the CRISIL Balanced Fund Index. The model has generated better returns than both Nifty and CRISIL Balanced Fund Index across various investment periods. Longer the investment horizon, higher has been the outperformance versus the benchmark. The yield gap model has also outperformed P/E based asset allocation model. The model increases equity allocation from 2001 to 2006 and then reduces it to the lowest level by January 2008. This was the time when the market was at its peak. The model again increases its equity allocation through the bear market of 2008. The back-testing shows that the model worked correctly in terms of timing the market.

How has yield gap model worked in the last 2 years?

The chart below shows the Nifty P/E ratio and 10 year Government bond yield from 2014 to date (September 28, 2016).

(Source: National Stock Exchange, Investing.com)

Let us now compare Nifty yield (inverse of Nifty P/E ratio) with 10 Government Bond yield.

You can see that, throughout 2014 and the first half of 2015, the 10 year Government bond yield was significantly higher than Nifty yield, justifying maximum allocations to debt. However, from August / September 2015, Nifty yields started converging towards the 10 year yield, suggesting higher allocations to equity.

The yield gap (ratio of 10 year Government Bond yield and Nifty Yield) was in the range of 1.7 to 1.8 (sometimes even higher) after the NDA won the 2014 elections, suggesting very high allocations to debt, as per DSP BlackRock Dynamic Asset Allocation Fund dynamic rebalancing model (as per the table above).

However, by September 2015, the yield gap was below 1.7, suggesting shift in asset mix towards equity (as per the table above). In January 2016, the yield gap was below 1.6, suggesting 40% allocation to equities. In February the yield gap was even below 1.5, suggesting 50% allocation. The incremental allocation to equities paid off, as we saw earlier. The current yield cap is around 1.6, which explains the current portfolio composition discussed earlier in this post.

Dividend Track Record

DSP BlackRock Dynamic Asset Allocation Fund (Monthly Dividend Option) has a good monthly dividend pay-out track record over the past two years. The table below shows the monthly dividend history of the fund.

The average annual dividend yield is 7.7%.

Conclusion

The fund had over 80% to debt in 2014 (when equity valuations were high), but over the past year or so, the equity allocation of the fund has increased to over 40% (taking advantage of the sharp correction in 2015 and early 2016).

This change of asset allocation of the fund over the last two and half years makes intuitive sense and is a validation of the robustness of the fund's strategy. While studies have shown that, asset allocation is the most important driver of a portfolio's relative performance, the underlying schemes of DSP BlackRock Dynamic Asset Allocation Fund are good mutual fund schemes.

Earlier this year, we had reviewed DSP BlackRock Top 100 Fund and DSP BlackRock Strategic Bond Fund (you can read the fund reviews by clicking on the link). Investors should understand that portfolio rebalancing strategy of DSP BlackRock Dynamic Asset Allocation Fund is set up for moderate investment risk. Based on our experience of equity market valuations in India, only in rare market circumstances, the equity allocation of this fund will exceed 60 or 70%.

However, the portfolio strategy of this fund ensures that, the investor will buy equity at attractive prices. The elegance of the fund strategy can give investors with moderate risk profiles, good returns for the risk they are taking. Investors who want regular cash-flows from their investment can consider investing in the monthly dividend option of this fund. Investors should consult with their financial advisors, if DSP BlackRock Dynamic Asset Allocation Fund is suitable for their investment needs.

Mutual Fund Investments are subject to market risk, read all scheme related documents carefully

SBI Magnum Monthly Income Plan: A good hybrid mutual fund scheme for conservative investors

by Dwaipayan Bose

SBI Magnum Monthly Income Plan balances the need for capital safety with inflation beating returns. The fund achieves the balance by investing around 85% of its portfolio corpus in debt and money market, and around 15% in equity market. The fund has given 12 – 14% returns to investors over the last 1 to 3 years. These are excellent returns for a conservative monthly income plan (aggressive monthly income plans invest 25 to 30% in equities). If you see the 1 year rolling returns of SBI Magnum Monthly Income Plan over the last 10 years, you will see that, except during the global financial crisis of 2008, the fund always preserved the investor's capital (even during stock market corrections in 2011 and 2015 – 16.

The rolling returns chart of a mutual fund scheme reveals very useful characteristics of the scheme, if you observe the chart carefully. Firstly, you can see that the returns are a little volatile (like all other mutual funds, monthly income plans are subject to market risks and cannot give investors assured returns). However, you can also see that, the rolling returns are much less volatile than equity (for most periods you can see that, the returns fluctuated between 0 to 10%. The chart shows that, your capital was always preserved except during the financial crisis of 2008.

The financial crisis of 2008 was an extreme event of global liquidity crisis; events like these occur once in several decades (the financial crisis of 2008 was the worst crisis after the Great Depression of 1930s). In such crisis no asset classes (stocks, bonds or even gold) are spared.

In 2008 stock market crashed by more than 50%; gold fell around 25%. The 1 year rolling returns chart of SBI Magnum Monthly Income Plan shows that, fund value fell by less than 10% in 2008. During severe liquidity crisis events, Governments and central banks (in our case the RBI) pro-actively take fiscal or monetary measures (stimuli) to inject liquidity and restore confidence in the markets.

The rolling returns chart of SBI Magnum Monthly Income Plan shows how quickly the fund recovered all its losses. After 2008, we again had stress in capital markets several times, in 2011, 2013 and 2015 / early 2016. You can see that, even in those stressful times, as mentioned earlier, the fund was able to show resilience and preserved the investor's capital.

Now focus your attention on the peak rolling returns. You can see that the peak rolling returns were all in double digits; in fact the maximum 1 year rolling returns (circled red) of the fund was more than 20%. This is the effect of the equity kicker; in other words, SBI Magnum Monthly Income Plan was able to capture bull market upsides to give investors higher returns than what they would get from a debt fund investment. Monthly income plans provide high degree of capital safety to investors (through high debt allocation) and on an average, over a sufficiently long investment horizon, can give investors higher income than what they can get from risk free fixed income investments (through equity allocaton).

Fund Overview

SBI Magnum Monthly Income Plan was launched in 2001 and has around र 525 crores of assets under management (AUM). The expense ratio of the fund is 2.2%. Dinesh Ahuja and Ruchit Mehta are fund managers of this scheme. The chart below shows the annual returns of the fund over the last 5 years.

You can see that, the fund was able to beat the benchmark and its peers in most years. We had seen in the 1 year rolling returns chart of SBI Magnum Monthly Income Plan, that the volatility was much lower than equity investments. The effect of low volatility can be seen in the stable NAV growth of the fund over the last 5 years (please see the chart below).

In our opinion, investors should have a sufficiently long investment horizon, when investing in MIPs. Longer investment horizon reduces the impact of volatility and increases the possibility of capturing the equity market upside (equity kicker). The tax treatment of debt funds (MIPS are taxed as debt funds) further strengthens the case of at least a 3 year investment horizon for MIPs. Debt funds held for a period of over 3 years are taxed at 20% after allowing for indexation benefits. The indexation benefit reduces the tax obligation of the investor considerably. The chart below shows the 3 year rolling returns of SBI Magnum Monthly Income Plan, over the last 5 years.

In our blog, we repeatedly urge investors to use rolling returns in their investment decisions, because rolling returns are the most powerful performance measure of investments and give insights that most other performance measures fail to provide. You can see that, the three year rolling returns of SBI Magnum Monthly Income Plan (please see the chart below) over the last 5 years was always above 9%. The minimum 3 year rolling returns of the fund was higher than the best bank FD interest rates in the last 5 years. You can also see that, the fund gave double digit returns more than 70% of the times. Peak returns were north of 14%.

Risk Factors

There are three risk factors in SBI Magnum Monthly Income Plan:-

Interest Rate Risk: SBI Magnum Monthly Income Plan is a debt oriented hybrid fund (83% portfolio corpus is invested in debt securities). The average maturity of the debt portion is 7.5 years. We had discussed a number of times in our fixed income blog posts that, longer the maturity of bonds or debt funds, higher is the interest rate risk. With debt portfolio's average maturity of 7.5 years, SBI Magnum Monthly Income Plan is sensitive to interest rate risk.

The fund managers of the scheme aim to mitigate the impact of interest rate risk through an actively managed portfolio of floating rate and fixed rate debt instruments. Strong consistency in 3 year rolling returns over the past 5 years, which included periods of both rising interest rates and falling interest rates, is a testimony to good interest rate risk management by the fund managers. Readers should also know that, interest rates move in cycles, which imply that, interest rate risk reduces in the long term, because a long investment period (3 years or more) includes periods of rising as well as falling interest rates. Therefore, as discussed earlier, investors should have a long investment horizon (3 years or more) for MIPs, because a longer period automatically neutralizes interest rate risk to a large extent.

Credit Risk: The credit quality of the portfolio is high. 97% of the debt portfolio is rated AA and above. 83% of the debt portfolio is AAA rated. 50% of the debt portfolio corpus (45% of the total portfolio corpus) is invested in Government of India bonds.

Equity market risk: 14% of the portfolio corpus is invested in stocks which are naturally exposed to equity market risk. But since, the overall portfolio allocation to stocks is limited only to 14% the equity risk is quite limited in the context of the overall portfolio risk. Within the equity portion more than 60% is invested in large cap stocks.
The volatility of SBI Magnum Monthly Income Plan, measured in terms of annualized standard deviation of monthly returns, is only 3.5%. To volatility of SBI Magnum Monthly Income Plan in context, the average volatilities of diversified equity funds are more than 17%.

Growth of र 1 lac investment over the last 5 years
The chart below shows the returns of र 1 lac lump sum investment in SBI Magnum Monthly Income Plan (Growth Option) over the last 5 years.

Historical Dividends
SBI Magnum Monthly Income Plan (Monthly Dividend Option) has a very strong track record of monthly dividend payments. The fund has a very strong track record of making continuous monthly dividend payments in the last 5 years (please the see table below). Investors should note that, since SBI Magnum Monthly Income Plan is a debt fund, dividends are paid to investors after deducting dividend distribution tax (to know how dividends of debt funds are taxed, please read our post, Know your Mutual Fund tax implications in FY 2016-17)

Conclusion
We had discussed in this post that, SBI Magnum Monthly Income Plan has a strong track record of performance. This fund can suitable for investors looking for regular income as well capital appreciation, on the bedrock of high degree of safety and liquidity. Investors should consult their financial advisors if SBI Magnum Monthly Income Plan is suitable for their investment needs.

Mutual Fund Investments are subject to market risk, read all scheme related documents carefully