How to select the best midcap mutual funds

 by Dwaipayan Bose 

Small and midcap funds have attracted a huge amount of retail investor interest over the last 3 years. Over this period small and midcap funds have outperformed large cap and flexi cap (diversified) funds across different market conditions. While there are some concerns regarding midcap valuations, historical data shows that, midcap funds usually give higher returns than large cap funds over a long investment horizon. As such, in our view, small and midcap funds should form a part of the long term equity portfolios, especially for young investors.
I have seen that, many investors and financial advisors select mutual fund schemes based on recent performance; at any point of time, there are 5 or 6 funds, which are high on the shopping list of investors. However, you should know that, recent performance is not a good indicator of future performance. Over the last 15 years I have seen many erstwhile top performing mutual funds languishing in lower performance quartiles for long periods of time. In the case of midcap funds there is usually a big gap in performance between the best performers and the poor performers. Therefore, you must select midcap funds wisely. In this post, we will discuss how to select the best midcap funds.

Recent outperformance can be misleading
Let us first discuss why you should not select small / midcap funds just based on recent performance. Large cap stocks usually have higher correlation with major indices, e.g. Nifty, Sensex, BSE 100, Nifty 100 etc, but some midcap stocks may show a wide divergence from the performance of major indices. Midcap stocks giving more than 100% returns in a year are not unheard of. If a mutual fund scheme’s portfolio is concentrated in a few of such multi-bagger stocks, then it can give outstanding returns during a particular period.
You should, however, understand that, such extraordinary returns cannot be sustained because after a spectacular rally such stocks can become overvalued and investors are likely to lose interest in the stock. If a midcap fund’s performance is largely attributed to the rally of a few multi-bagger stocks, then its performance is likely to be average or below average once such stocks cool off after the big rally. Therefore, recent strong performance of a small / midcap fund can be misleading.

Qualities of the fund manager is the most important parameter
The performance of a mutual fund scheme can be attributed to three factors, (a) the overall market performance, (b) the risk taken by the fund manager and (c) the value-added by the fund manager (also known as alpha). Over a sufficiently long investment horizon, the last factor is the most important one. It is especially important in the case of small / midcap funds because, unlike large cap stocks, midcap and small cap stocks are under-researched in the public domain. Therefore, fund managers, who have deep knowledge of the business through experience of investing in similar companies, factory / site visits, and discussions with management etc., backed up by strong research capabilities of the Asset Management Company have an edge in delivering higher alphas.
Some of our readers may ask that, how will an average retail investor know if a fund manager has these outstanding qualities which enable him or her to deliver superior returns to investors compared to others? It is a fair question. Fund managers often give interviews in electronic (TV) and digital media. We, in Advisorkhoj, follow these interviews and also interview fund managers on our own website from time to time. We urge to readers to go through the interviews of Fund Managers / Chief Investment Officers on our website. However, we recognize that, investors may not have the time or sufficient information (fund managers are often constrained in terms of what they can or cannot speak to the media). So in interest of our readers, we have developed some analytical tools on our website that, will give investors a sense of how well the fund manager of a scheme has performed relative to others. Investors can use these tools in their fund selection.
Consistent Performance
Consistency in performance is the hallmark of a good fund manager and it should be one of the most important, if not the most important, fund selection criteria. Consistency in performance shows that, the scheme performed well in different market conditions over a period of time. Returns over the last 1 year or 3 years (trailing returns), often masks poor performance in an interim or different period, if the recent market conditions are highly favourable to the investment strategy of the fund manager.
In advisorkhoj.com we have built an analytical tool, Top Consistent Mutual Fund Performers, using which you can identify schemes which have performed most consistently in the last 5 years. Our internal research has shown that, 5 years is the best period for measuring performance consistency because a 5 year period usually has periods of rising market and falling market; therefore it covers different market conditions.
In the tool, Top Consistent Mutual Fund Performers, we look at a scheme’s performance in each year over the past 5 years. We then rank the scheme’s annual performance in performance quartile, Top Quartile has the best performers, Upper Middle Quartile has the next best above average performers, Lower Middle Quartile has the below average performers and Bottom Quartile has the poorest performers in any year. Using our proprietary ranking methodology, we then rank mutual fund schemes in different categories in terms of performance consistency. We urge our readers to use this tool, to identify the most consistent mutual fund performers.
Rolling Returns
In our tool, Top Consistent Mutual Fund Performers, we identified most consistently performing top funds using annual relative performance across different market conditions. Regular readers of our blog will be aware that, rolling returns is the best analytical measure of a fund’s performance consistency. In rolling returns, we look at the annualized returns of a fund for specific investment tenures, on every day over a specified period. Usually, the results are shown in a graphical (chart format). In Advisorkhoj, we also show summary of important rolling return analytics in a tabular format.
You can see the rolling return performance of an individual scheme versus the category (Equity Funds Small and Midcap for the purpose of this post), using our tool, Rolling Return vs Category. You can also compare rolling returns performance of multiple schemes by clicking on the link Add another fund; you can compare up to four funds. In the table below the chart, you can see the important Rolling Return analytics like Average Rolling Returns, Median, Rolling Returns, Maximum Rolling Returns and Minimum Rolling Returns. We also show Return Consistency in the table; i.e. how much percentage of times in the chosen period the rolling returns of the fund were in the specific rolling return ranges.
When using this tool for equity funds, especially small and midcap funds, we recommend that, investors choose a rolling return of at least 3 years, because in our view, investors should have at least 3 year investment tenure for equity funds, especially small / midcap funds. If you want, you can choose longer investment tenures; however, very long investment tenures like 10 years may not be relevant for scheme selection because many things may change in 10 years, like fund manager of the scheme, market place dynamics in an evolving market like India, AMC merger and acquisitions etc. We also recommend that, you select a start date that is at least 5 years from the date when you are using the tool because, as discussed earlier, 5 years is the best period for measuring performance consistency; you can choose an older start date if you want.
How to use this tool for fund selection? 
You need to shortlist 4 or 5 funds using our Top Consistent Mutual Fund Performers or funds recommended by your financial advisor or any other method. Compare the rolling returns of the funds either graphically or by comparing different performance parameters in the table below. Then you can downsize your shortlist to 1 or 2 funds (or more, as per your needs) based on average, median, minimum or percentage of occurrence in return range that you prefer.
Market Capture Ratio
Market Capture Ratio is, in our view, one of the most important performance metrics of a mutual fund scheme. This metric tells us how a fund performed in up market and down market. This metric provides very useful insights on the risk taken by a fund manager (very important for midcap funds because they are more risky than large cap funds) and also how the stock selection of the fund manager performs in both up market and down market (again very important for midcap funds because these funds usually show divergence from market index performance). You can see market capture ratio of any scheme by using our tool, Market Capture Ratio.
There are two important parameters in Market Capture Ratio - Up Market Capture Ratio and Down Market Capture Ratio. Up Market Capture Ratio measures the percentage of market gains captured by a fund manager when markets are up. If Up Market Capture Ratio is more than 100%, it means the fund manager was able to beat the market benchmark in upturns. I fit is less than 100%, it means that the fund manager was not able to beat the market benchmark in upturns. Down Market Capture Ratio measures the percentage of market losses suffered by your scheme when markets were down. If Down Market Capture Ratio of a scheme is less than 100%, it means that the fund fell less than the market benchmark in downturns.
Down Market Capture Ratio can sometimes be negative. Do not worry if it is negative because negative Down Market Capture Ratio implies that, the fund NAV went up when the market fell. Negative “Down Market Capture Ratio” shows great bottom up stock picking skills of the fund manager. Investors should look at both the Up Market Capture Ratio and Down Market Capture Ratio for true evaluation of fund performance. You should select schemes which have high Up Market Capture Ratio (more than 100%) and low (even negative) Down Market Capture Ratio.
How to use this tool for your fund selection?
Usually the funds selected using our tools Top Consistent Mutual Fund Performers and Rolling Return vs Category should have excellent Up Market and Down Market Capture Ratio. Nevertheless, you can use this tool to verify, if the funds selected by you performed well in both up markets and down markets; fine tune your selection, based on the results of Market Capture Ratio analysis of your selected schemes.
Conclusion
In this post, we discussed several analytical tools for selecting best small / midcap mutual fund schemes for long term investment. We urge our readers to use and play around with these Research tools on our website. We have tried to make these tools as user friendly as possible and we hope that, you will be able to learn to use these tools in a very short time. If you have a good understanding of these tools, you will realize that, in all these tools we are trying to evaluate the fund manager’s performance in different market conditions. In addition to these tools, you can also use star ratings issued by different mutual fund research firms; when using star ratings, you should try to understand how the ratings work. While we want to empower our readers with knowledge of mutual funds, in case you have any doubt, you should consult with your financial advisor before investing. (Courtecy: Advisors Khoj)
Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.

Difference between Trading and Investing: Qualities of good investors

by Dwaipayan Bose

Investment awareness in India has improved over the past few years, but I am still surprised that many people instinctively associate equities with share trading. This association shapes the risk perception of people towards equity as an asset class. It is true that, a large part of the daily turnover in our stock market is on account of trading, but many investors have created wealth by buying and holding stocks or mutual funds for a very long period. In this blog post, we will discuss the differences between trading and investing. We will also discuss the qualities of a good investor.
What is trading?
Trading in the financial markets is buying securities at a certain price and selling it at a different price. If the sell price is higher than the buy price, the trader makes a profit. If the sell price is lower than the buy price, the trader makes a loss. Readers should know that, in equity markets traders can make a profit even if the price falls, through the use of derivatives. In stock markets, traders make a bet on the price change of a stock (or index). If the price change (up or down) is in the direction of what the trader expected, then the trader makes a profit, otherwise he/she makes a loss.
There are two important points to note here. Firstly, the price at which the trader buys and sells, determines whether he/she makes a profit or loss; traders, therefore, study price levels very carefully. Secondly, not all traders in the market expect prices to go up, some traders expect prices to fall. Traders who expect the price to go up create demand for the asset and those who expect the price to fall creates the supply. The market price of the asset is the one at which demand matches supply. You should understand the concept of demand and supply very well in trading, because it determines the direction of share prices. If demand is higher than supply, share price will go up and vice versa.
You would have seen the share price of a company going up 2 – 3% one day and falling 2 – 3% after a few days. Companies declare their earnings once a quarter and so the volatility of their share prices may have nothing to do with performance. Then why do we see short term price volatility. It is simply because the price expectations on an aggregate change from time to time and shifts the balance between demand and supply. The dynamics are demand and supply of individual stocks or groups of stocks (in a sector) or the broader market are difficult to guess, which is why, less experienced traders (and also sometimes experienced traders) can lose a lot of money in stock markets. That is why, over the last 10 years or so, trading in India (like in the rest of the world) is increasingly becoming more technical and quantitative, with computer algorithms taking over trading from jobbers (day traders) in the market.
In trading volatility can be a double edged sword. High volatility can result in huge profits for the trader in a very short period of time, but it can result in big losses also. Volatility in India is significantly higher than the developed markets. Readers should know that, effect of volatility on returns is a function of time. The effect of volatility (good or bad) is highest in the short term, but its effect reduces as the time horizon gets longer. This is one of the most important differences between trading and investing. Also, in India, the transaction costs of trading in securities, e.g. brokerage, STT, service tax etc is high. Traders have to factor in the effect of transaction costs when making decisions. However, if your strategy is a long term buy and hold, then the effect of transaction cost is minimal.
What is investing?
Many of our readers know what investing is; in this post, we will explain some fundamental nuances between trading and investing. Like traders, investors also expect to buy low and sell high; however, the fundamental difference is in the time horizon. Traders hold their positions for a day or a few days or a few weeks. Investors hold their positions for many years (e.g. 3 years, 5 years, 7 years, even 10 years or more). Since the effect of volatility reduces over a period of time, volatility has little impact on the returns of long term investors; longer the investment horizon, lower is the effect of volatility.
The length of time horizon is one of the most obvious differences between trading and investing. However, there are several other important differences, which readers should understand. In trading, as discussed earlier, price levels are important. Some price levels act as support levels (below which prices are not likely to fall in the short term) and some price levels act as resistance levels (above which prices are not likely to rise in the short term); these levels determine the trading strategy. Going back to demand & supply dynamics, demand increases at support levels since price expectations are positive and supply increases at resistance levels since price expectations are less optimistic at that level.
Investing on the other hand is driven by fundamental economic value of the company rather than demand & supply dynamics of the stock. In the long term, all market participants have the same information and therefore, the long term price of a stock will converge with the fundamental economic value. Long term here may mean a few months or even a few years, but ultimately the market price (or equilibrium price between demand and supply). So, if you buy a stock at a price, which is lower than the fundamental value, in the long term, you are likely to see a rise in the price of the stock. This style of investing is known as value investing. The fundamental economic value of a company can be determined through fundamental analysis, which requires considerable expertise and experience, which we as retail investors lack; but professional mutual fund managers have this expertise and experience. Therefore, mutual funds are great investment options for investors to realize long term value.
Sometimes, a company may be fairly priced or even slightly expensively priced, but if it has a high growth potential in terms of revenues and earnings, then the share price of the company will rise to match the higher earnings. The fair share price of a company is the present value of future free cash-flows. If investors expect earnings growth of a company to increase, then the demand for the company’s shares will go up and hence the price will also go up to match the fair price. This style of investing is known as growth investing. Mutual fund managers have the necessary expertise and experience to identify companies with high growth potential.
 Is price not important in investing? 
Over a very long term, the price is not that important; value / growth potential is much more important. At the same time, fund managers will not want to buy a stock that is substantially overpriced relative to its value / growth potential because their objective is to generate capital appreciation for investors. Therefore, whether you are investing in lump sum or Systematic Investment Plan (SIP), if you have a sufficiently long investment horizon, you should not worry about market valuations. Of course, a bear market damages the prices of all stocks (over-priced or under-priced) and the value of your investment will fall, but if you remain invested through the bear market and through a sufficiently long period of recovery (depending on the severity of the bear market), then you can get good returns. To take advantage of price volatility, you can invest in mutual funds, through Systematic Investment Plans (SIP), which will help you with rupee cost averaging the purchase price.
Qualities of good investors
The most important quality of good investors is patience. As discussed in this post, price levels are not all that important in investing. Over a long investment horizon, equity is likely to give you good returns. However, patience as a virtue which is easier to preach and difficult to practice. If you see your investment (made with your hard earned money) falling in value day after day, patience is indeed difficult, but it is the one quality that separates successful investors from less successful ones. Warren Buffett once said that, emotional quotient (EQ) is a superior quality compared to intelligence quotient (IQ) in investing. EQ in investing is about controlling the impulses of greed and fear.
Discipline is another important aspect of investing. While patience is an important aspect of disciplined investment, a systematic approach is also important. In a systematic investing, you follow a certain rule based approach, like investing a fixed amount every month (or at any other regular frequency). This will not only help you stay disciplined and invest regularly for your long term goals, but you will also be able to take the advantage of volatility through rupee cost averaging. SIPs in equity mutual funds over a long investing horizon, have helped investors create substantial wealth (please see our SIP return calculator).
Smart investors also follow the market and take advantage of big price declines in the market, to tactically increase their allocations to equity. As discussed earlier, whether a stock is over-priced or under-priced, it is not immune to the demand and supply dynamics of the stock market in the short term. If there is an adverse shift in balance between demand and supply, long term investors can tactically invest in equities to take advantage of price corrections and boost long term portfolio returns. They should see these situations as windfall gain opportunities for the long term, rather than short term profit making opportunities.
Successful investors have the expertise and experience to research the assets they plan to invest in. While many retail investors may lack the necessary expertise and experience, mutual fund investors can benefit from the fund managers expertise and experience, to do the necessary research for stock selection on their behalf. Mutual fund investors should, however, make sure that the fund manager has a good track record of successful investing and delivering returns to investors.
Successful investors also keep track of the market and their investments on a regular basis, to see if their investments are performing up to their expectations and make appropriate adjustments, if necessary. Again, for mutual fund investors, the fund manager will do this job for you, but you should also monitor the performance of your portfolio and individual schemes within your portfolio, to see if the fund managers of their scheme are able to beat the scheme benchmarks and also outperform their peers.
Last, but not the least, asset allocation is an important determinant of long term portfolio returns. Research has shown that, asset allocation is the biggest attribution factor in portfolio returns. Asset allocation is dependent on your risk tolerance levels and short / medium / long term investment objectives. Asset allocation of your portfolio will change from time to time, depending on the market prices of the assets; asset re-balancing, therefore, is important to ensure that, your investment risk profile is consistent with your risk tolerance.
Conclusion
I have seen that, many investors confuse between trading and investing from a tactical or strategic perspective, though they are clear about their own objectives. Some investor friends told me that, Nifty is at all-time high, let it correct to 8,500 and then I will invest. When the Nifty was below 7,000, some of the same friends told me, let Nifty fall to 6,500 or show a breakout above 7,900 – 8,000 and then I will invest. These attitudes betray a trading mindset and not an investor mind-set. Trading and investing are very different, as we discussed in this blog post. To be a good investor, you should try to cultivate some of the qualities that we discussed in this post and ignore what is irrelevant. (Courtecy: Advisors Khoj)
Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.

Commercial Advt: SBI MF

DSP BlackRock Equity Fund: 44 times returns in 20 years

by Dwaipayan Bose

An investment of Rs 1 lakh in DSP BlackRock Equity Fund New Fund Offer (NFO), 20 years back, would have grown to around Rs 44 lakhs today. The return of this diversified equity mutual fund scheme since inception is a great example of the wealth creation potential of equity funds over a long investment horizon. DSP BlackRock Equity Fund was launched in April 1997 and has nearly Rs 2,400 Crores of assets under management (AUM). The expense ratio of the fund is 2.4%. The fund has given nearly 21% annualized returns since inception. The chart below shows the NAV movement of this fund over the past 10 years.

Though the fund performance has been a bit consistent over the past 5 years or so, we have noticed a turnaround in 2016 (notice the divergence between the fund returns and the benchmark, Nifty 500 index returns over the past 2 years or so in the chart above), when the fund fought its way back into the upper performance quartiles of the diversified equity fund category. The improvement trend has been sustained in 2017 so far and DSP BlackRock Equity Fund is a top quartile fund on a year to date basis. In the last 12 months the fund has given nearly 33% returns. Atul Bhole is the fund manager of this scheme.
Rolling Returns
The chart below shows the 3 year rolling returns of DSP BlackRock Equity Fund over the past 5 years. We chose a 3 year rolling returns period because we think that, equity investors should have at least a three year investment period, if not more; the longer, the better.

You can see that, DSP BlackRock Equity Fund consistently outperformed the Nifty 500 index in terms of 3 years rolling returns over the past 5 years. The quantum of outperformance has improved over the past 2 years or so (as you can in the chart above). The fund gave more than 15% annualized 3 year rolling returns nearly 90% of the times over the past 5 years. The highest 3 year rolling returns over the past 5 years was 27.5% while the lowest was 10.5%.
Investment Style and Portfolio Construction
DSP BlackRock as a fund house traditionally favoured value style of investment, but over the past year or so, they have shifted their focus to earnings (EPS) growth and relative valuations. This worked well for DSP BlackRock. DSP BlackRock Equity Fund’s fund manager employs a blend of growth and value styles of investing. From a sector perspective, DSP BlackRock Equity Fund is heavily biased towards sectors focused on domestic consumption. Banks, Oil and Gas, Cement and Construction, Automobiles, Fast Moving Consumer Goods (FMCG) and Capital Goods form a major part of the scheme’s portfolio. Exposure to troubled export oriented sectors like Technology and Pharmaceuticals is quite limited. From a market capitalization standpoint, the fund is large cap oriented with large cap stocks accounting for nearly 65% of the portfolio, while midcap and small cap stocks account for the remaining portion. The fund is very well diversified from a company concentration viewpoint, with the Top 5 stocks, State Bank of India, ITC, HDFC Bank, ICICI Bank and Yes Bank accounting for only 21% of the portfolio value.


SIP Returns
The chart below shows the growth of Rs 5,000 monthly SIP in DSP BlackRock Equity Fund (Growth Option) over the last 5 years.

With a cumulative investment of just Rs 3.05 lakhs (through monthly SIP of Rs 5,000) you could have accumulated a corpus of Rs 4.88 lakhs; a profit of Rs 1.83 lakhs in 5 years. The annualized SIP returns (XIRR) is over 19%.
Conclusion
DSP BlackRock Equity Fund, which recently completed 20 years, has historically been a top performing diversified equity fund. Though the fund performance was subdued for a period of time, the strong outperformance versus the benchmark and its peers since 2016 is quite encouraging. The pedigree of this fund is evident from the wealth creation by this fund over the last 20 years. As a fund house, DSP BlackRock is one of the most respected Asset Management Companies in India, with several top performing mutual fund schemes across several categories in its product portfolio. Investors should have a long term investment horizon for DSP BlackRock Equity Fund. You can invest in this fund from your regular savings through SIP for long term capital appreciation. You can also take advantage of market dips to invest in this fund in lump sum. Investors should consult with their financial advisors if DSP BlackRock Equity Fund is suitable for their long term investment goals. (Courtecy: Advisors Khoj)
Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.

How to earn better returns from your MF portfolio

Sanjay Matai- Author & Promoter -The Wealth Architects
More about the Expert...

Pick up any mutual fund portfolio of an active investor and you will usually find it beset with typical problems. These can affect the overall performance. If we can understand, identify and rectify these common blunders, we can make much better returns out of our money.

A bloated Portfolio

Many people have the habit of collecting funds. Over time, therefore, you will find such portfolios having 40-50 funds. Diversification is good, but over-diversification is not.

Firstly, a large portfolio would mean that some funds in the portfolio will always be below-average, thus dragging down your total returns. Secondly, even with all the support of the computers and specialized websites, it is not possible to effectively manage a large portfolio. This again is going to impact the performance on the whole.

One should, therefore, have a limited but power-packed portfolio. The idea is to extract maximum punch with minimum cost and effort.

Chasing the Top Performers

There is too much focus on the performance and that too usually the recent one say over 3 months to 1 year. That�s why you always find this fascination among people for fund rankings.

Of course, performance matters! But making performance (and that too short-term) as the sole selection criteria can prove counter productive.

Historical evidence shows that no fund can always remain the top performer. It also shows that a fund, which has been consistently amongst the top quartile say over 3-5 years, will usually continue with its good performance. Similarly, a consistently poor performing fund usually finds it difficult to make it to the top.

Besides this the markets, as we all know, are highly sentiment-based. Therefore, more often than not, you will find some theme or the other being market fancy. It could be infrastructure, mid-caps or technology and so-on. At any given time you will find that most of the top performers belong to the same category.

So if you chase top performers you will end with similar schemes in your portfolio. In the process, the portfolio becomes concentrated, defeating the very idea of using MFs to diversify one's investment.

Your focus should not only be the past performance but also reputation & management of the AMC, funds investing style & focus, asset size, etc., besides of course, other key factors such as your investment horizon, risk appetite and other funds in your portfolio.

Mismatched and Unbalanced

It is but natural that the money you need in the short term should be in debt, while only the long term money should be in equity. Liquidity apart, your asset allocation between debt and equity should be in line with your risk appetite.

Some people of course do not do so. Some others start in planned manner. But, as equity and debt follow different paths, over time the portfolio will become mismatched and unbalanced.

As such you may either be over-exposed to equity thus increasing risk; or under-exposed thus losing out on the benefits of equity.

Or a liquidity mismatch may happen between the investment and your need. For example equity markets may be down when you need money, thus forcing you to sell at a loss.

Thus your portfolio needs timely review and correction in tune with your risk appetite & liquidity needs.

Infested with NFOs

Thousands of pages have been devoted to pointing out the myth of NAV. Yet the logic that NAV has absolutely no bearing on the future returns, simply does not register with a common investor.

Hence one can see thousands of crores flow into NFOs especially in a bull market, while the existing funds get practically nothing. In fact, it�s the opposite. People switch out of existing schemes to invest in NFOs under the false impression that Rs.10 NAV fund is cheaper.

As such a typical portfolio would be infested with NFOs. Higher costs in NFOs vis-a-vis existing funds will eat into the returns. Also as the so-called low NAV is why you invested in the NFO, it is quite likely that the funds style and focus does not fit with your needs. This also is going to hamper your returns.

Too Much Churning

Call it impatience or a false sense of being proactive or the instant-culture - we simply cannot wait and watch our portfolio grow. We always feel that we need to do something regularly.

Therefore, as soon as a fund shows good appreciation, we are quick to book profits. Or if a fund does not move for some time, we are equally prompt to dump it. This, for one, is adding to the costs in terms of capital gains taxes, entry loads, exit loads, STT, etc. But more importantly, we may be getting out too soon and thus missing out on future performance.

Selecting a mutual fund

What's strategy got to do with selecting a mutual fund? Shouldn't you just go and invest in the best performing fund? The answer is no. Mutual fund investing requires as much strategic input as any other investment option. But the advantage is that the strategy here is a natural extension of your asset allocation plan (use our Asset Allocator to understand what your optimum asset allocation plan should be, based on your personal risk profile). moneycontrol recommends the following process:

Identify funds whose investment objectives match your asset allocation needs
Just as you would buy a computer that fits your needs and budget, you should choose a mutual fund that meets your risk tolerance (need) and your risk capacity (budget) levels (i.e. has similar investment objectives as your own). Typical investment objectives of mutual funds include fixed income or equity, general equity or sector-focused, high risk or low risk, blue-chips or turnarounds, long-term or short-term liquidity focus. You can use moneycontrol’s Find-A-Fund query module to find funds whose investment objectives match yours.

Evaluate past performance, look for consistency

Although past performance is no guarantee for the future, it is a useful way of assessing how well or badly a fund has performed in comparison to its stated objectives and peer group. A good way to do this would be to identify the five best performing funds (within your selected investment objectives) over various periods, say 3 months, 6 months, one year, two years and three years. Shortlist funds that appear in the top 5 in each of these time horizons as they would have thus demonstrated their ability to be not only good but also, consistent performers. You can engage in such research through moneycontrol's Find-A-Fund query module.

Diversify

Don't just zero in on one mutual fund (to avoid the risk of being overly dependent on any one fund). Pick two, preferably three mutual funds that would match your investment objective in each asset allocation category and spread your investment. We recommend a 60:40 split if you have shortlisted 2 funds and a 50:30:20 split if you have shortlisted 3 funds for investment.

Consider Fund Costs

The cost of investing through a mutual fund is not insignificant and deserves due consideration, especially when it comes to fixed income funds. Management fees, annual expenses of the fund and sales loads can take away a significant portion of your returns. As a general rule, 1% towards management fees and 0.6% towards other annual expenses should be acceptable. Carefully examine load the fee a fund charges for getting in and out of the fund.

Why choose mutual funds?

Mutual funds are investment vehicles, and you can use them to invest in asset classes such as equities or fixed income. moneycontrolrecommends that you use the mutual fund investment route rather than invest yourself, unless you have the required temperament, aptitude and technical knowledge.

In this article we discuss why and how you should choose mutual funds. If you would like to familiarise yourself with the basic concepts and workings of a mutual fund, Understanding Mutual Funds would be a good place to start.

We are not all investment professionals

We go to a doctor when we need medical advice or a lawyer for legal guidance. Similarly, mutual funds are investment vehicles managed by professional fund managers. And unless you have a high Investment IQ, we recommend you use this option for investing. Mutual funds are like professional money managers, however a key factor in their favour is that they are more regulated and hence offer investors the ability to analyse and evaluate their track record.

Investing is becoming more complex

There was a time when things were quite simple - the market went up with the arrival of the first monsoon showers and every year around Diwali. Since India started integrating with the world (with the start of the liberalisation process), complex factors such as an increase in short-term US interest rates, the collapse of the Brazilian currency or default on its debt by the Russian government, have started having an impact on the Indian stock market.

Although it is possible for an individual investor to understand Indian companies (and investing) in such an environment, the process can become fairly time consuming. Mutual funds (whose fund managers are paid to understand these issues and whose asset management company invests in research) provide an option of investing without getting lost in the complexities.

Mutual funds provide risk diversification

Diversification of a portfolio is amongst the primary tenets of portfolio structuring (see The Need to Diversify). And a necessary one to reduce the level of risk assumed by the portfolio holder. Most of us are not necessarily well qualified to apply the theories of portfolio structuring to our holdings and hence would be better off leaving that to a professional. Mutual funds represent one such option

.Why credit opportunities funds make sense for young investors

Adhil Shetty- CEO -BankBazaar.com

If you are a seasoned investor, chances are that both debt and equity funds would be part of your investment portfolio. In a falling interest rate scenario, your returns from debt instruments will be on the lower side. But if you can invest in credit opportunity funds, you can still make decent returns. Here is a look at what credit opportunity funds are and why they may be good for young investors.

What are credit opportunity funds?

At their core, credit opportunity funds are debt mutual funds that invest in commercial papers and corporate bonds. Credit opportunity funds fundamentally invest in low-rated bonds that may see an upgrade in rating.

While success and failure of any market-driven fund depends on various parameters like overall economic health, interest rates, etc, the average return on credit opportunity funds has been the highest among all mutual fund categories till February 2016 averaging about at 8.70 per cent annually.

How credit opportunity funds are different from debt funds

Typically, a debt mutual fund scheme invests in bonds that have a high credit rating. Since credit rating is an indication of the company’s financial health and its ability to repay, most fund managers choose bonds based on credit ratings.

But credit opportunity funds invest in bonds that do not necessarily have the highest credit rating. Typically, a bond with AA credit rating is considered high risk compared to one with AAA rating. Credit opportunity fund managers may take a call on investing in the AA bond, preferring it over AAA ones. This may be because of a potential rating upgrade down the line or assured returns due to strong fundamentals.

When the economy improves, the improvement trickles down to the corporate sector. This sees improvement in its balance sheet and financials. With improving balance sheets, the rating agency upgrades the bonds issued by the company. A bond with high rating typically offers lower interest rate than a bond that comes with low rating. Hence a rating upgrade leads to a fall in yield and a rise in bond price. In a recovering economy there are more chances of rating upgrades and one can play this theme with credit opportunities fund.

Taxation aspects of credit opportunity funds

If you sell your investments in these funds within a year of investment, your gains are liable for income tax as per your tax slab, with capital gains being added to your individual income for the financial year.

If you redeem your fund after holding it for more than one year, you will be liable to pay tax at the rate of 20% after indexation on the capital gains.

Credit opportunity funds for young investors

If you are a young investor with an appetite for risk, you could consider diversifying your portfolio by investing in credit opportunity funds. Invest with a minimum two to three year time frame. This long term investment of more than two years allows the credit opportunity fund to offer better returns than most other investments including even bank fixed deposits. Also, being a debt investment instrument, your risks are far lower than investment in equity based funds. If you remain invested for more than three years, your post tax returns are much better than most fixed deposits.

When you design your financial portfolio, you have to carefully choose products that suit your needs. Opting for credit opportunity funds can be a good idea provided you have the resources to ride over intermittent volatility in bond markets and liquidity requirements you may have in the short term. (Courtecy : Money Control)

Are you investing in balanced funds for monthly dividends?

The trend of older or conservative investors moving their life savings into balanced funds essentially means that they are convinced these funds can give them regular dividends that can beat fixed deposits by a good margin over the medium to long term.

 ByDr.Renu Pothen
 As I write this column, it takes me back to the time when our parents were content that they were able to achieve all their goals by investing into one of the most simple investment opportunities: fixed deposits. Now, caught up in the buzz around rocketing markets and a growing economy, I find that many investors of their age are considering investing into equity focused funds so that they can lead a stress-free life in retirement. Our discussions with a few retired investors recently gave us the feeling that they seem to be pretty impressed with the monthly dividends being generated by balanced mutual funds, and are thinking of moving significant chunks of their portfolio from banks into these funds. While all of us in the mutual fund industry have been consciously working towards greater inclusion in the markets, to me, this trend is a little bit worrying as it goes against well-proven asset allocation strategies. Some of us might argue that funds with equity exposure allow these investors a better chance at beating inflation. But have they really considered the risks involved?

The trend of older or conservative investors moving their life savings into balanced funds essentially means that they are convinced these funds can give them regular dividends that can beat fixed deposits by a good margin over the medium to long term. This might be true in the current scenario, but is this going to be the reality five years from now as well? How well do these investors understand the potential volatility and is it fair to subject them to the vagaries of the stock market?

What is the balanced funds category all about? Can these funds provide a regular stream of income to investors - not just retirees, but even others who need regular payouts? My endeavour in this column is to take a quick look at the category, its management, and its record of providing growth and stability, while keeping volatility to the minimum when markets get into a jittery mood.

‘Balanced funds’ fall in the hybrid category and have more than 65 percent of the corpus invested into equities, while the rest is allocated among fixed income instruments. A trend that we are seeing now is that funds recently launched in this category are not entirely investing 65 percent or 70 percent of the portfolio in direct equities, but a small exposure is being used to find good opportunities in the arbitrage space.

LIC Mutual Fund Balanced Fund is the oldest fund in the category launched in 1991, followed by Canara Robeco Balance, UTI Children’s Career Balanced Plan and HDFC Prudence Fund (erstwhile Zurich India Prudence Fund). As of April end this year, there are 24 balanced funds in the industry with a total AUM of Rs 98,165 crore. It is interesting to note here that ~ 55 percent of this AUM is concentrated in four balanced funds: HDFC Prudence Fund, HDFC Balanced Fund, ICICI Prudential Balanced Fund and SBI Magnum Balanced Fund. The top 10 balanced funds have 88 percent of the surplus allocated among them. HDFC Prudence Fund is the largest fund in the category having a corpus of Rs 22,057 crore which translates into 22 percent of the market share as far as this category is concerned.

We normally recommend that our first time investors take an exposure into balanced funds so that they can get a feel of the two asset classes (equity and debt) without going through a roller coaster ride when the market decides to panic. However, at this juncture, we should also evaluate to what degree balanced funds really insulate investors from volatility. We have analysed the portfolios of all 24 balanced funds and have the following observations in this regard:

• Balanced funds have their equity allocation invested across the market capitalization spectrum. This means that the funds in this category take an exposure into the large/mid/small cap and even micro cap space. While the fund mandate given in the Scheme Information Document (SID) allows them to take this exposure, the mid to micro cap space is a fairly risky one, and it is important that conservative investors are aware of and understand the resulting risks.

• Coming to the fixed income allocation, active management on the basis of the interest rate outlook seems to be the norm for a few balanced funds. Taking a more aggressive stance, a few funds also scout for opportunities in the credit space (low rated papers, for example), exposing investors to both duration and credit risk.

These two observations alone should help investors make a more informed decision about whether funds in this category can give them the regular payouts they desire. Fund houses can pay out regular dividends only out of the distributable surplus available with them. Our markets have been partying since we got a reform-oriented government at the centre. This has given opportunities to fund management teams to create ‘alpha’ (a return in excess of that indicated by the benchmark index) in their portfolios by picking up gems in the mid/small/micro caps space. This in turn has allowed them to garner good distributable surplus in their funds, and thus pay out good dividends. To top it all, the duration calls in the fixed income space have also been supporting the returns on these funds. A deeper study of the top 10 balanced funds in our model, however, reveals that these funds have missed out on regular dividend payouts (even in the monthly option) during 2010-2015. Hence, investors’ dependence on balanced funds having the ability to pay out regular dividends may prove to be unfounded if Dalal Street decides to change track and move in a southward direction for some time.Conclusion

For new and conservative investors, exposure to balanced funds should be guided by a study of funds appropriate to their risk profile. A deeper study of the funds’ portfolios is warranted to make them aware of the potential risks and vulnerabilities. For risk-averse investors, parking their hard-earned money into funds whose surplus is allocated among the most volatile segment of the equity market, while also taking risky bets in the debt instruments, is something that can definitely be avoided. It would, in fact, be ideal if portfolios of balanced funds are created in such a manner that they are suitable to meet risk averse investors’ needs.
(The writer is Research Head at Fundsupermart.com, India) (Courtecy: Money Control)

Ramayana shows how to make money in stocks: Nilesh Shah Read

ETMarkets.com| Jun 19, 2017
The stock market is like a boxing ring, says Nilesh Shah, MD of Kotak Mutual Fund. If you enter the ring with the hope that you will not get hurt, then you are never going to win the match, because you will be running away from your opponent and finally the referee will say ‘hell with it’.
“So if you are entering the stock market but not willing to take a downside, then please do not enter the market. It is not a place meant for you. First, have the maturity to take a loss, then you can make money,” Shah said in an interview with ETNow.
We picked some wisdom and investing tips from the interview verbatim.

Thumb rule for entering the stock market
You should read the Ramayana, because it is written how to make money. I am sure, all of you have the Ramayana, but you should not read it like the Gujju bhai. In Ramayana, which was the richer city, Lanka or Ayodhya? It was Lanka; it was gold-plated. How did Lankans become so rich? Because they invested like Kumbhkaran; they invested in the equity market and slept for 14 years. That is why they became rich. There, Ramayana has given you a solution.

Stocks that have fallen 99%
True, Lanka jal gaya tha, but when? When you went and picked that stocks that were leveraged, when you went into bed with a bad promoter, When you went and picked that stocks that were leveraged, when you went into bed with a bad promoter, when ..

So, should you always buy bad news?
In life, you always get an opportunity to score. Let’s take the example of a cricket match. Did Sachin Tendulkar become Sachin Tendulkar because he got all the half-volleys to hit for a fours and sixes? Of course, not. He got opponents who were throwing bouncers at him to kill him; they would have loved to injure him, but Tendulkar survived those bouncers and that is why he came Tendulkar. So if you think in the pitch of life or stock market you are only going to get half-volleys and you will hit them for fours and sixes, that is never going to happen. You are going to get bouncers. Which is why I said, if you cannot be Eklavya, you should stay with mutual funds.

Watch the Sensex daily or do SIP and sit?
Today the mutual fund industry has reached a level where all of us have worked together to create a long-term investment culture. I will give you an example. I went to RPG House office and there was a watchman who was looking at me and I could sense that he was looking at me. But I ignored him to move forward, meet the CFO and came down and then this guy said you the person who is coming on television. Now when a watchman says he has started an SIP, then I have done something in life.

Wealth creation
Go and attend any good company’s AGM, and you will rarely find a person coming and congratulating the company top brass for the stock performance. The amount of wealth created by the good companies in India over the past 25 years is mind boggling. I will show you the example of InfosysBSE -1.17 % versus MastekBSE 1.09 %, 425000% return, it is not a small number. So long-term wealth is created by long-term investment and we are lucky to be born in this era. In my career, I have seen India grow 10 times from $200 billion to $2 trillion. I do not think there will be generations like mine who will see 10-times growth in a country.

Importance of regular investment
First is the acceptance of the fact that you do not know where the market will go. So, the moment you realise that, you get the benefit of regular investment. All of us do regular investment for our physical health, we take breakfast, we take lunch, we take dinner. I have not seen a person who eats for seven days at one go and then uses his time for the next seven days for productive activity. So what you do for physical health, you have to do for financial health; you have to have your breakfast investment, lunch investment, dinner investment. Now do not confuse that with day trading, I am talking about monthly SIPs

Importance of asset allocation
So asset allocation is basically the skill of creating a balanced diet. And you know if you see our culture, our home food, home thaali has a balanced diet. It has daal, roti, chawal subzi and some people like desserts and some people make dessert main food like gujju bhais but that is what we do physical health, a right mix of protein, carbohydrates and other things put together it gives you taste as well as health.

The same applies to the asset allocation in investment. You need some equity which will create growth; you need some fixed income which creates stability; you need some gold which gives you hedge against something going wrong in the country and giving global currency return; you need some real estate because that is also an asset class, which can give you stable return. So create an ideal balance of real estate, gold and other commodities, fixed income and equities and that will ensure that you are consistently making money, you can ride the volatility of the market and that creates wealth.

6 Factors to Keep In Mind When Choosing SIPs for Investing Money

Systematic Investment Plans (SIPs) are one of the most perplexing investment instruments. While most new investors are wary of them, a lot of seasoned investors too have struggled to get their SIP strategy right. So, before jumping on to understanding how to choose the best SIP, let’s first get some clarity on what SIP really means.

Decoding SIP

A systematic investment plan enables you to invest a fixed amount at regular intervals (monthly, quarterly or annually) in mutual funds, which in turn invest in the markets. Being a flexible instrument, SIPs help you build wealth and instil the habit of saving even in the most undisciplined of us. The major benefit of investing in SIPs is the power of compounding. You earn compound interest on your deposits on a monthly basis, thereby, increasing your investment amount significantly over the long run.

Choosing the Best SIP

Choosing the right fund to invest in via a SIP is very critical to earning high returns. Keep in mind the following factors when deciding which SIP to invest in.

1. Investment Objective:

   Before you even start investing in a fund, it is important to know what you are investing for. You need to ask yourself two questions. 1) Are you investing for the short term or the long term? And, 2) what is your risk appetite? Your investment horizon and risk profile will help determine which type of fund will suit you. For instance if you are a risk-averse investor and want consistent returns, without a tear-jerk reaction, debt funds might be more your thing. However, if you are in for the long haul and are comfortable with market volatility, equity funds should be your investment avenue.

2. Fund type:

   As mutual funds are of various types, it’s important to know which type is suitable for your risk appetite. Let’s take a quick look at the types of mutual funds:
1. Asset-based mutual funds


1. Equity Funds – These funds are further categorised into various types: large cap, diversified, mid & small cap, sector and index funds.


2. Debt Funds – These funds can be further classified based on investment tenure: money market, income and fixed maturity funds.


3. Balanced Funds – These funds are a blend of equity and debt funds and present the best of both worlds to an investor. They counter equity fund’s risky profile by simultaneously investing in debt instruments to ensure steady returns to the investor.
2. Structure-based mutual funds


1. Open-ended – An investor can enter or exit these funds at any time, without restriction.


2. Close-ended – These funds are open for investment for a specific time during the scheme’s launch. Once the new fund offer (NFO) closes, no further investments can be made.


3. Historical Performance & Returns: Carefully study funds before investing in them. Compare funds on the basis of performance over a 3 to 5 year term. A comparison of historical performance will tell you how strong or weak a fund is and whether it can withstand market volatility. Avoid funds that perform strongly when the market is high but collapses as soon as the market also falls. When studying these trends, avoid a myopic view and look at fund’s performance over the long term, say 5 years and 10 years.
4. Fund House:A fund is as good as its fund house. The decisions taken by the fund house shape a fund’s return-yielding capacity and growth. If the fund house does not take the right calls, we investors will end up losing our money. Before investing, read about the fund house and the fund scheme you intend to invest in. Get a copy of the scheme information document and key information document to get such details as the fund house’s investment approach, number of schemes offered, funds/products designed with investors in mind, and more. Answers to these questions will empower you to decide which fund house will be able to help you reach your investment goals.
5. Expense ratio:If your research has boiled down to funds that are similar in nature, you can choose among them on the basis of expense ratio. This ratio comprises management fee and administrative costs, and is essentially a fund’s annual fee. Schemes that have higher assets under management usually have lower expense ratios, making them a go-to option. A difference of 0.5% in expense ratios of two funds may seem negligible but should not be taken lightly. Consider Fund A with an expense ratio of 1.5% and Fund B with 1%. Now, for these two funds to give same returns, Fund A will have to outperform Fund B every single year. While this may seem doable, in the long term, maintaining this performance will be difficult. Simply put, a high expense ratio will pull down a fund’s performance.
6. Entry or exit load: Earlier, investing in funds invite a small fee in the form of entry load. However, Securities and Exchange Board of India (SEBI) has stopped funds from levying an entry load. So, now, the only time you pay is when you are leaving a fund (also known as redeeming a fund) which is called an exit load, before the exit load period. The fee varies with scheme, investment tenure and amount. For example, if you redeem your fund whose value has grown to Rs 100 at an exit load of 2%, you will only get Rs 98. Exit loads too are regulated by SEBI and all the fund houses have to follow the directives.

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

How Mutual Fund SIPs created wealth in the last 15 years: Diversified Equity Funds

 by Pradip Chakrabarty

Mutual Fund Systematic Investment Plans or SIPs were introduced in India way back in 1993 by Franklin Templeton Mutual Fund. Since then investing through SIPs have come a long way according to data provided by Association of Mutual Funds in India (AMFI). The current SIP book is around 1.32 Lakhs Crores and the industry is adding around Rs 5,000 Crores per month through SIPs. That means, in another two years we can expect the mutual fund industry SIP book to be doubled.
The data further shows that mutual fund industry added on an average 6.36 Lakh SIP accounts every month during the FY 2016-17. Also, during the same period Rs 43,921 Crores were collected through SIPs.

If you crunch long term industry data of equity mutual fund returns, there is no doubt Mutual Fund SIPs have created immense wealth for the investors who remained invested for the long term. There are a number of advantages of investing through SIPs which we will explore here –

Wide choice of funds

– Mutual funds SIPs offer a wide array of schemes belonging to various categories of funds. You can start a SIP in a fund suiting your risk profile, investment horizon and fund objectives.

No need to time the market

– It is impossible to time the markets as you do not know how it will behave. By investing a fixed amount on a fixed date every month, you are investing at high and low points of the market and thus benefiting from rupee cost averaging.

Flexible investments

– Mutual Fund SIPs are very flexible. There are no restrictions and penalties on regular SIP payments and withdrawals. You can start a SIP with a monthly investment of as low as Rs 500 anytime. Similarly, you can stop the SIPs anytime you wish, in case you do want to continue.
Disciplined approach

– SIPs bring disciplined approach to investing. By investing a fixed amount every month from your investible surpluses you can build a big corpus for the future. Investing in SIPs is habit forming and helps you invest the money which otherwise you would often spent on things that are not required.
Tax efficient

– Investing in equity mutual funds, either through SIP or lump sum is most tax efficient. Long term (investments held for more than one year) capital gains are tax free. Dividends received from equity mutual funds are also tax free. Moreover, SIPs in ELSS Mutual Funds helps you save taxes under Section 80C of The Income Tax Act 1961 (maximum Rs 150,000 per annum).

In this article, we will look at how SIPs in diversified equity funds have created long term wealth for the investors in the last 15 years. In case you want to know why invest in diversified equity funds, we suggest you read this article - Investing in diversified equity funds is a safer option.

For this article, we have selected 10 diversified equity funds that have given the best returns in the 15 years. You can see the full list here. Having selected the above funds, however, we are neither recommending these funds to start new SIPs nor trying to prove a point that these are the best funds. This is just to illustrate you how long term investments in SIPs, have created wealth for the investors and if you have not yet started a SIP for yourself then this is high time you should start one!

Here is the list of top diversified equity funds which have given the most returns in the last 15 years if one had invested in them through SIPs -



Each of the funds in our selection (Regular plan – Growth option) has given SIP returns ranging from 17.50 – 20.50%. Since SIP investments are made over a period of time, the method of calculating SIP returns is different from that of Lump Sum investments. SIP returns are calculated by a methodology called XIRR, which is a variant of Internal Rate of Return (IRR). XIRR is similar to IRR, except that XIRR can calculate returns on investments that are not necessarily strictly periodic.

For our examples, we have assumed a monthly SIP of Rs 3000 only, made on 2nd of every month in the funds that we have selected above (based on the returns generated by them). The SIP start date was 15 years back in July 2002. Over this period, the investor would have invested Rs 5.40 lakhs through monthly instalment of Rs 3,000.
As you can see above, the investors would have accumulated Rs 23.16 Lakhs to Rs 29.67 Lakhs against an investment of Rs 5.40 Lakhs only in the last 15 years. These top 10 SIP funds have beaten their respective benchmarks and CNX NIFTY Index with a huge margin. The same amount, i.e. Rs 3,000, if invested in CNX NIFTY would have given you only Rs 15.75 Lakhs against Rs 23.16 Lakhs generated by the 10th fund in the above list! SIPs in these top 10 funds would have given you annualized 3 to 7% more returns than CNX NIFTY, NIFTY 500 Index and S&P BSE 200.

Let us now discuss 5 Funds selected by us in more details –

Birla Sun Life Equity Fund:

This is one the top performing funds in the current charts also. Launched in 1998, the fund has an AUM of Rs 5,287 Crores and has given 24.92% annualised returns since launch. The fund is managed by Anil Shah who has chosen financial, Metals, Energy, FMCG and Healthcare as top 5 sectors to invest for this fund.



If you had started a monthly SIP of Rs 3000 in Birla Sun Life Equity Fund way back in July 2002, by now you would have accumulated nearly Rs 29.67 lakhs corpus, with an investment of only Rs 5.40 lakhs. Over the 15 year period the compounded annual returns on your SIP investments in this fund would be over 20%.
ICICI Prudential Multi-Cap Fund:

This is one of thepopular funds from ICICI Prudential Mutual fund stable. Launched in 1994, the fund has an AUM of Rs 2,668 Crores and has given over 15% annualised returns in the last 22 years. The fund is managed by George Heber Joseph and Atul Patel who have chosen financial, construction, Services, Technology and Healthcare as top 5 sectors to invest for this fund.



If you had started a monthly SIP of Rs 3000 in ICICI Prudential Multi-Cap Fund way back in July 2002, by now you would have accumulated nearly Rs 24.66 lakhs corpus, with an investment of only Rs 5.40 lakhs. Over the 15 year period the compounded annual returns on your SIP investments in this fund would be over 18%.

DSP BlackRock Opportunities Fund:

This is one of theTop performing funds from DSP BlackRock Mutual fund stable. Launched in May 2000, the fund has just completed 17 years and has an AUM of Rs 2,344 Crores and has given over 19% annualised returns in the last 17years. The fund is managed by renowned fund manager, Rohit Singhania who has chosen financial, Energy, construction, FMCG and Metals as top 5 sectors to invest for this fund.



If you had started a monthly SIP of Rs 3000 in DSP BlackRock Opportunities Fund way back in July 2002, by now you would have accumulated nearly Rs 28.06 lakhs corpus, with an investment of only Rs 5.40 lakhs. Over the 15 year period the compounded annual returns on your SIP investments in this fund would be close to close to 20%.

HDFC Capital Builder Fund:

This is one of the popular funds from HDFC Mutual Fund stable.Launched in Feb 1994, the fund has just completed 23 years and has an AUM of Rs 1,566 Crores and has given around 15% annualised returns since inception. The fund is managed by Miten Lathia, who has chosen financial, Energy, construction, Technology and Healthcare as top 5 sectors to invest for this fund.



If you had started a monthly SIP of Rs 3000 in HDFC Capital Builder Fund way back in July 2002, by now you would have accumulated nearly Rs 28.19 lakhs corpus, with an investment of only Rs 5.40 lakhs. Over the 15 year period the compounded annual returns on your SIP investments in this fund would be close to close to 20%.

Franklin India Prima Plus:

This is one of thetop rated and marquee funds in the diversified equity fund category. Launched by Franklin Templeton Mutual Fund way back in 1994, the fund has a long history of consistent performance and has a big AUM of Rs 10,964 Crores. The fund has given over 19% annualised returns since inception. The fund is managed jointly by veteran fund managers, Anand Radhakrishnan and R Janakiraman. The top 5 sectors that the fund has invested in are financial, automobile, construction, Technology, GMCG and Healthcare.



If you had started a monthly SIP of Rs 3000 in Franklin India Prima Plus way back in July 2002, by now you would have accumulated nearly Rs 28.63 lakhs corpus, with an investment of only Rs 5.40 lakhs. Over the 15 year period the compounded annual returns on your SIP investments in this fund would be over 20%.
Rolling returns of the 5 diversified equity Funds

So far we have seen how Diversified equity funds have created wealth for investors in the last 15 years. We have also seen how the 5 funds, from 5 different fund houses, analysed by us were true wealth creators. Let us now see how these 5 funds are doing now?



As you can see in the above rolling return chart, all the 5 funds in our selection continue to beat their benchmark returns (the deep blue line) in the last 5 years. We have taken 3 years period for the rolling return as we feel that one should have a minimum 3 years investment horizon if investing in equity mutual funds. Therefore, we can conclude that if you have SIPs in these funds, you should continue with your investments in the long run while reviewing the individual performances at least every 1 or 2 years.

Conclusion

In this article, we have seen how Systematic Investment Plans or SIPs in diversified equity funds have created wealth for the investors who stayed invested in the long termSIPs. SIPs benefit from the power of compounding, and therefore the earlier we start our SIPs and longer we stay invested, the greater is the potential for wealth creation. However, it is important to select good funds for your SIPs. You should consult your financial adviser who can help you select good funds that is suitable according to your risk profile.
You may also refer to Top Consistent Mutual Fund Performers section in our research section of the website wherein we have picked the consistent funds from various categories.

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

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Do you know the essentials of Retirement Planning

On May 31, 2017 by Priyanka Chakrabarty

A survey by IMRB International shows that India's per capita retirement and pension assets as a percentage of Gross Domestic Product (GDP) is among the lowest compared to other economies like Germany, USA and Brazil. The survey also reveals that Indians generally do not focus on retirement planning and mostly depend on the accumulated savings received from their respective employers post retirement.

India has only 15.1% of retirement assets (as a percentage of GDP) as compared to 78.9% in USA, 41% in Brazil and 21% in Germany.Though India is comparatively a young nation with the median age of the population under 30 years, we also have around 100 million people above the age of 60 years. This is expected to triple to 300 million by 2050. That is why it is very retirement planning becomes very important for all of us.

What is retirement?

Retirement is explained as a phase in your life when you stop working and stop earning a regular income. As a salaried employee, you are discharged from your duties after the pre-specified retirement age (in India, which is usually when you reach 58-60 years of your age). Even if you are an entrepreneur, you cannot work forever and plan your succession. Once you pass on the responsibility to your successor, you can be called as retired.

However, the question is whether you were in a job or an entrepreneur what do you do when your income stream dries up? Does your expense stop too? Obviously not! If they don't, how do you live a happy retired life without any savings at your disposal?

The answer is a certain 'NO'. You can't live a good life post retirement until you have known what retirement planning is at an early age when you started your career or earning. But unfortunately, inIndia most of us either plan for retirement at a very late age or not plan at all assuming whatever we have accumulated so far will take care of our retirement years.

Then what should we do?

Know your post retirement expenses and save for it

During the working phase of our lives, we worry about earning more and spending more, invest in physical assets and busy fulfilling our social and moral responsibilities.We also make a budget and allocate earnings carefully. However, as we earn or get monthly salaries and an annual increment we do not notice the devil called 'inflation'. But while doing our retirement planning, we must not ignore this devil called 'inflation'. Let us see how inflation can have a big impact on your monthly expenses post retirement

As you can see in the above chart, if your current annual household expenses is Rs 8 Lakhs it could shoot up to Rs 25.66 Lakhs, Rs 34.33 Lakhs or Rs 45.95 Lakhs, after 20, 25 and 30 years respectively, depending upon after how many years your retirement life will start!

The important point here is that you should start saving for the targeted amount or corpus (inflation adjusted) and not today's amount. But what is the target corpus amount? The target corpus amount is something, keeping which in a safe investment you can earn the amount required for your annual expenses.

How to accumulate the target corpus amount? If you start saving monthly from an early age into Unit linked insurance plans then accumulating the targeted corpus is easy.

Start savings early in life

This is the most important part of retirement planning. If you plan for retirement that is not enough, even saving for retirement may not be enough. The most important thing is staring the retirement saving as early in life as possible.

Let us understand through an example –

Mohan (Age 28), Somnath (Age 35) and Karthick (Age40), are working in a company and all three are planning to save for an equal retirement corpus, i.e. Rs 3 Crores. All will retire at the age of 60.

Mohan need to save Rs 14,000 per month till age 60 to reach the target corpus of 3 Crores, assuming return on investment @9%

Somnath need to save Rs 27,000 per month till age 60 to reach the target corpus of 3 Crores, assuming return on investment @9%

Karthick need to save Rs 44,000 per month till age 60 to reach the target corpus of 3 Crores, assuming return on investment @9%
As you can see, Mohan need to save the least as he has more number of years in hand. Somnath need to save almost the double amount as he has 7 years less to save. And Karthick need to save almost the double amount than Mohan as he has only 20 years to save.

Review and select a good plan for medical expenses

With old age come various kinds of ailments, some minor and some major. It could be very difficult to pay huge hospital bills in case of hospitalization as you no longer have a regular income or reimbursement of medical expenses from your employer

Buying a health insurance plan covering the major critical illnesses along with aMediclaim plan is must for self and spouse. There are health plans which are renewable lifelong and you should invest in one immediately.

You can avail a health insurance plan covering critical illness and disability, from a life insurance company

Set aside contingency funds

Contingencies can come in any form, you or your spouse falling ill, a serious sickness or a sudden travel or an expense that you have to commit for marriage of someone very dear or so on. What do you do in a situation like this?

You should save for a contingency or emergency fund. You can either create an emergency fund from your final retirement corpus or can save separately from an early age. You can invest in ULIP plans which offer low risk debt portfolios and keep it aside for meeting your emergency expenses post retirement.

Choose the right Retirement Plans

Just retirement planning or investing in a medical insurance will not help. You must ensure to invest in certain plans which help you magnify your savings i.e. help you in creating wealth in order to help you lead a dignified life post retirement.

If you are planning a secured retirement life then investing in a good retirement plan is important. Many insurance companies provide various pension plans such as deferred annuity, immediate annuity, with cover and without cover plans, life annuity, pension funds etc.

Retirement plans offered by life insurance companies are such plans wherein the insurance company provides a stream of annuity payouts to the policyholder. Such annuity payouts are made out of the funds contributed by the policy holder either in lump sum or in monthly, quarterly or annual instalments depending on the pension plan chosen. Month or annual annuity payouts are made during the lifetime of the policyholder. Post his expiry, the annuity payouts normally stops, but, in many pension plans, the annuity payouts continue to be paid to the nominee even after the policyholder's death.

During our retirement years, when we stop earning and start a new life called 'golden years', a regular income through savings made during working years could be the most ideal situation. So, in order to make retirement life happy, healthy and enjoyable we must make proper retirement planning in order to take care of our retirement years.

                      (Courtecy:Advisors khoj)