Blog – Page 7 – Pradeept Agarwal

Is it good to have four mutual funds in your portfolio?

You recommend four or five funds for a portfolio. Does it include both debt fund and equity fund or does it depend on the amount invested or you refer four or five equity funds only? – Hemant Bhatt

There is no rigid rule to recommend a certain number of funds. Also, there is no one scientifically derived precise number of funds that one can have. The rationale for investing in more funds is to diversify. This helps in offsetting the risk of some of the investments turning bad or performing poorly.

But there is no merit in continuing to add more funds in your portfolio beyond a certain point when you don’t get much benefit out of diversification.

How much is too much?

Four or five funds are good enough for diversification. This is as per an elaborate study which we did sometime back. The study suggested that beyond four or five funds, typically in the case of equity, you don’t get any meaningful benefit out of diversification in terms of reduced volatility.

Having said that, we’d suggest that you think of this aspect from the lens of your goals. As long as you have reasonable diversity in the number of funds for different goals, it is good enough.

Let’s understand with an example

Let’s say a person has three different goals to be achieved in the next one year, next two-three years and next 15 years. Such goals with different time frames would require a very different set of investments. Therefore if this person has 10-12 funds, they may not be too many considering all the three goals.

In contrast, if someone has three different goals, all to be achieved over the long term, say, in the next five years (single time frame), then a portfolio of more than 10 funds would be too many.

In conclusion
Your goal will have an important role to play in determining the number of funds that are good enough for your portfolio. So, have a goal-based investing mindset, and you’ll probably be able to make a better sense of diversification.

Source- Valueresearchonline

How to move your corpus to an equity fund?

Hi, I am 40 years old and my PPF maturity of around Rs 15 lakh is due next year. I want to move to a better growth investment instrument like NPS wherein I am ready to stay invested for another 15-20 years. I am aware that my withdrawals from PPF will be tax free. Can you please suggest the strategy to systematically move my investment into these equity funds? – Suchit Poothia

You need to keep a few things in mind when you want to move your corpus to equity funds.

Duration: The thumb rule to decide the duration of your equity investment when you have a lump sum is to spread the investment across half the period it took you to earn that money, but it shouldn’t be more than three years. For instance, if it took you five years to build a corpus of Rs 30 lakh, then you can divide the corpus and spread the new investment across 12 to 24 months. This staggering approach to investing will help reduce the cost of investment as well as the risk.

Allocating to equity: Since the time horizon for your new investment is about 15 to 20 years, you should look at allocating more in equity. This is because they tend to beat inflation in the long-run.

Now if you wish to use the current corpus to invest in your NPS account, select the active choice option and allocate 75 per cent to equities. But do keep in mind the withdrawal restriction.

You can withdraw only up to 60 per cent of the NPS corpus as a lump sum when you reach the age of 60 and the remaining 40 per cent has to be used to purchase annuities. Partial NPS withdrawal is allowed only under certain special circumstances such as to meet medical expenses, education and marriage expenses of children, etc.

Other investment options

Alternatively, if you are a disciplined investor and won’t touch the corpus until retirement, then you can invest in flexi-cap funds. These are pure equity funds and have no restrictions on withdrawals. Unlike the NPS which mostly invests in large-cap stocks, flexi-cap funds diversify their investments in mid and small caps too. This can provide you slightly better returns.

However, if you have never invested in equities before and are wary of allocating 100 per cent to equity, you can choose an aggressive hybrid fund. These funds invest about 65 per cent in equities and 35 per cent in debt. This mixture helps to contain the equity volatility and is better placed to provide more consistent returns as compared to pure equity funds.

Softening the risk is what is necessary for new investors so that you are psychologically strong to stay the course and do not end up exiting the fund in panic.

Source- Valueresearchonline

How to manage asset allocation during the accumulation phase?

I am 32 years old. I have been investing in mutual funds and shares since the last five years. But my question is how should I manage asset allocation during this accumulation phase, or to be specific when should I sell out part of the equity investment and move it to debt? – Anonymous

Great to know that you started investing early. Investing early has several benefits.

Asset allocation is a critical aspect of investing. It involves distributing equity and fixed-income assets in your portfolio, based on your investment horizon, risk tolerance, and investment goals.

Equity allocation based on investment horizon

As a general guideline, your equity allocation should increase with a more extended investment horizon. Equities have the potential to offer higher inflation-adjusted returns than other asset classes over time. However, as you approach the time when you need your funds, you should reduce your equity allocation in your portfolio and allocate more to debt.

If your financial goals are approximately three years away, investing solely in debt/fixed-income instruments is advisable. For goals that are further than three years away, you may choose to allocate a portion of your portfolio to equities.

Allocation guidelines for specific financial goals

For goals that are three to five years away, allocating around 25-30 per cent in equities is preferable. If your goals are five to seven years away, you may allocate 30-50 per cent, or even higher, in equities, depending on your risk tolerance. For goals that are seven or more years away, you may allocate even a higher portion to equities (70-80 per cent) and the remainder to debt or fixed income.

Systematic investment and exit

Additionally, since it is advisable to invest systematically via SIPs, it is equally important to exit in a systematic manner through an STP or SWP. For example, if your long-term goal is only three years away, consider transferring from equity to debt in a staggered manner instead of doing so all at once. This approach can assist you in avoiding market volatility and ensuring a smooth investment experience.

In conclusion, managing asset allocation during the accumulation phase necessitates a thorough understanding of your investment horizon, risk tolerance, and investment goals. By making informed decisions and following a systematic approach, you can create a well-diversified portfolio that can help you achieve your financial goals.

Source- Valueresearchonline

Invest lump sum in aggressive hybrid funds?

“Can I invest a lump sum of Rs 10 lakh in an aggressive hybrid fund, since it is not a pure equity fund?”, asked one of our readers.

Investors often ask this question because they co-relate the importance of SIP and the averaging cost of purchase with equity funds alone. However, it is equally important to not invest a lump sum in equity or equity-oriented funds. For instance, in aggressive hybrid funds. To understand why, let us quickly look at how aggressive hybrid funds work in the first place.

Aggressive hybrid funds or equity-oriented hybrid mutual funds

An aggressive hybrid fund invests in both equity and debt securities. However, their allocation in equity and related instruments is higher (65-80 per cent) than in debt instruments. In other words, they can even be called equity-oriented funds.

Theoretically, the equity-debt combination helps them balance high returns and stability. However, because of their higher asset allocation in equity, they are subject to volatility and market risks.

Understanding the impact of market on aggressive hybrid funds

For instance, this graph illustrates the ten worst one-year rolling returns of the Sensex index and aggressive hybrid Funds. There are two things to notice here.

Firstly, it is evident that aggressive hybrid funds, despite being equity-oriented, have weathered the equity market downturn better due to their debt component. This aspect provides a protective cushion, resulting in smaller losses compared to pure equity funds, like the sensex index fund for instance.

More importantly, this graph indicates how a lump sum investment can suffer from massive losses if it experiences a market fall. In this scenario, if you had invested a lump sum of Rs 1 lakh just a year before March 2020, you would have suffered a 21 per cent loss over the year, leaving you with just Rs 79,000. This is why investing the entire sum at once doesn’t make sense.

The alternative

This is where SIPs step in.

They have the ability to shield your investments from short-term market fluctuations and thus protect you from risk. SIPs ensure that you do not invest a significant sum during a market high and then suffer from a subsequent fall.

When you invest through an SIP, it allows you to invest only a portion of your money, albeit on a regular basis, irrespective of the market conditions. As a result, when market prices are high, fewer units are purchased, and when prices are low, more units are bought.

In the longer run, your investment ends up with an average purchase cost, thus reaping the benefits of a disciplined approach to investing. This is commonly known as ‘rupee cost averaging’.

The timeline

Now you know you shouldn’t invest a large sum of money, all at once. Instead you should opt for an SIP.

The only question is – how much time should you take to invest this money?

An efficient way of calculating your investment timeline is to calculate the time it took you to accumulate these funds. Ideally, you should invest this money in half that time.

However, it is recommended that you invest this money in not more than three years.

Three years is a good time to go through an entire market cycle, and capture both the market rise and fall.

Beyond this timeline, there isn’t any real advantage to staggering your investment. In fact, a major downside to a longer timeline is that you may be tempted to spend this money.

Our take

Do not invest a large sum all at once. Instead, always plan an SIP.

To calculate the timeline for your SIPs, consider the following:

How large is this sum?
How important and valuable is this money for you?
How much time, effort, and energy went into accumulating it?
Invest the money over a shorter duration if you have a higher income.
Or, if your risk appetite is low, invest this money over a slightly extended period.

Do not take more than three years to invest your lump sum.

The key to your wealth, dear reader, is always in disciplined investing!

Source- Valueresearchonline

How expense ratio eats into your mutual fund gains

We recently received a question from one of our readers (we urge all of you to share your names) asking how mutual fund houses charge expense ratios.

Before we answer that question, let’s understand what expense ratio is and how it impacts your mutual fund investments.

What is expense ratio

In simple words, it’s an annual fee that fund houses charge their investors. It consists of their annual operating costs, which include management fees, administration fees and even advertising and promotion expenses, among others.

It is important to note that while the expense ratio is an annual fee, it is not charged once every year. Instead, it is subtly deducted daily from the fund’s net asset value (NAV) .

Since the expense ratio is an intrinsic expense, which is automatically deducted from the NAV, you don’t get any receipt on it.

This fee is charged irrespective of the fund’s positive or negative performance.

How expense ratio applies to your investments

Let’s see an example. Suppose you invest Rs 50,000 in a flexi-cap fund and the holding period is one year.

As with any other investment, there are certain charges applicable. One of them is the Securities Transaction Tax (STT), a direct tax payable on the purchase or sale of securities.

Let’s assume the STT to be 0.005 per cent.

This means the total investment amount going into the flexi-cap fund will not be Rs 50,000 but Rs 49,997.5 (Rs 50,000 – Rs 2.5).

Next, let’s say the expense ratio is 1.5 per cent.

If you invest your money for exactly 12 months, you will be charged the 1.5 per cent expense fee.

But if you remain invested for, say, nine months, you will be charged on a pro-rata basis for 273 days instead of 365. In this case, you’d have to cough out an expense ratio of 1.125 per cent.

How expense ratio affects your investment

Essentially, after accounting for the expense ratio, the actual gain from the investment over the course of the year is not 10 per cent but 8.35 per cent.

Things to keep in mind

While the daily deduction is small, the expense ratio incrementally reduces your returns.
While choosing a fund with a lower expense ratio may be tempting, it should not be the only factor while selecting a fund.
Instead, you should also consider the fund’s five-, 10-year returns, the experience of the fund manager, and how well the scheme aligns with your risk tolerance and investment goals.

Source- Valueresearchonline

Best mutual funds for beginners: Your first equity investment!

If you are planning to invest and see your wealth grow, equity is the best option. Yes, you are right in thinking that equity is volatile and goes up and down daily, but that’s just half the story. If you look at the historical data, equity has been able to beat inflation in the long-term. ‘Long-term’ is the key word here.

In fact, equity is the only asset class that can generate inflation-beating returns. This is why one should invest in equities. If you want to know the importance of earning returns that are higher than inflation, this is a must read for you.

So, how does one start investing in equities?

Option #1: Direct stocks

While terms like trading, BSE, bulls, Sensex, etc., are seductive, this form of investing should be ignored by beginners. Direct stocks can be very overwhelming if you are new to investing. You need to know what stocks to buy, when to buy, when to sell, etc…too many things to learn at the beginning.

Option #2: Mutual funds

So, what is a mutual fund? This type of investment simplifies the task of investing in equities.

Why? Because they reduce your risk by diversifying your portfolio. Secondly, every mutual fund has an expert who will manage your money on your behalf and ensure you receive healthy returns. This is why it is highly desirable to start your equity investment with mutual funds.

How to start mutual fund investment

A first-time investor should look out for low-risk schemes that provide a decent amount of return. Only once you get a taste for mutual fund investing should you explore other investments. Sounds boring but it is always better to walk before you run.

Hence, there are two specific types of mutual funds that are suitable for a beginner.

#1 Aggressive hybrid funds

These funds invest about 65 per cent in equities and 35 per cent in debt. Debt instruments include bonds that are issued by a government or a company. They earn a fixed income and don’t depend on the stock market performance.

Therefore, this is how aggressive hybrid funds help in containing the equity volatility and are better-placed to provide more consistent returns as compared to pure equity funds.

Why is this good for you? Softening the risk is what is necessary for new investors so that you are psychologically strong to stay the course and do not end up exiting the fund in panic.

#2 Tax-saving funds

Also known as equity-linked savings scheme or ELSS, this type of mutual fund in India majorly invests in relatively-safer large-cap stocks.

Why are these funds good for you?

These funds help you save tax. Under Section 80C of the Income Tax Act, you can claim a tax deduction of up to Rs 1.5 lakh in a financial year.

One caveat of this scheme is that there is a lock-in period of three years. This means that once invested, you can only take your money out after three years. However, this works as an advantage for new investors who can’t handle the market volatility and also helps one have a long-term view which is the holy grail of equity investing.

Source- Valueresearchonline

Mutual fund investment in children’s name: New SEBI rule comes into effect today

Parents or legal guardians will be able to invest from their own bank accounts in mutual fund schemes for their children, starting today i.e. June 15. The Securities and Exchange Board of India (SEBI) has revised its 2019 circular which prescribed the uniform process to be followed across Asset Management Companies (AMCs) in respect of investments made in the name of a minor through a guardian.

Earlier, Sebi only allowed payment for investment from the bank account of the minor or from a joint account of the minor with the guardian. The new rule will streamline this investment process for mutual fund investors who invest on behalf of minors.

Decoding the rule

Under the new rule, payment for investment in mutual funds by any mode will be accepted from the bank account of the minor, parent or legal guardian of the minor, or a joint account of the minor with parent or legal guardian.

They will no longer need to open joint accounts or open the account of minor children for this purpose.

What happens to existing folios?

For existing mutual fund folios, the AMCs will have to insist upon a change of pay-out bank mandate before redemption is processed.

Irrespective of the source of payment for the subscription, all redemption proceeds will be credited only to the verified bank account of the minor, which he or she can hold with the parent/ legal guardian, Sebi said.

Source- cnbctv18

SGB: Sovereign Gold Bond Scheme 2023-24 Series I issue price announced; check details

The latest Sovereign Gold Bond (SGB) tranche will open for subscription on June 19 and will close on June 23, 2023. The Reserve Bank of India (RBI) has kept the settlement date of this tranche of Sovereign Gold Bond Scheme 2023-24 Series as June 27, 2023

Sovereign Gold Bond Scheme 2023-24 Series I – Issue Price

The issue price of the SGB Series I during the subscription period will be Rs 5,926 per gram, according to an RBI press release issued on June 16, 2023.

How is price calculated?

The bond’s nominal value is based on the simple average of the closing price [published by the India Bullion and Jewellers Association Ltd (IBJA)] for gold of 999 purity on the last three working days of the week preceding the subscription period, namely June 14, June 15, and June 16, 2023, which works out to 5,926/- (Rupees Five thousand nine hundred and twenty six only) per gram of gold.

Discount on subscription

In collaboration with the Reserve Bank of India, the Government of India has agreed to offer a discount of Rs 50 per gram on the issue price to investors who apply online and pay in digital manner.
The issue price of a Gold Bond for such investors will be Rs 5,876 per gram of gold.

Payment option

Payment to buy SGB can be made in cash up to Rs 20, 000 for higher amounts in draft, cheque or electronic banking

Where can investors buy SGB

SGBs will be sold through the following channels

Scheduled Commercial banks (except Small Finance Banks, Payment Banks and Regional Rural Banks), Stock Holding Corporation of India Limited (SHCIL),
Clearing Corporation of India Limited (CCIL),
Designated post offices (as may be notified) and
Recognized stock exchanges either directly or through agents.

SGB interest

The investors will be paid at a fixed rate of 2.50 percent per annum payable semi-annually on the nominal value.

Tax treatment

According to the provisions of the Income Tax Act of 1961 (43 of 1961), interest on SGBs will be taxed. The capital gains tax arising on redemption of SGB to an individual is exempted. Long-term capital gains resulting from the transfer of SGBs will be eligible for the indexation benefits.

Source- Economictimes

A practical guide to choose the ‘right’ mutual fund

In the intricate tapestry of India’s mutual fund market, choosing the best mutual fund might feel like navigating a maze. Amid the myriad of options available, Amit is determined to select the ideal mutual fund tailored to his financial goals.

Equipped with a clear understanding of his investment objectives, risk appetite, and time horizon, Amit opts to use the ‘Fund Selector’ on the homepage of ‘Value Research Online’ to identify the right fund.

So, let’s join Amit on this exciting expedition.

Select the right category of mutual funds

Amit wants to build wealth for retirement, and recognizes the need for a reliable and relatively-safe type of mutual fund.

After thorough research and introspection, he decides to focus on the large-cap fund category. Why? Because he prefers stability, lower volatility, and consistent returns – something that large-cap funds typically offer.

What you should know

In the vast expanse of India’s mutual fund landscape, selecting the right category is crucial. Investors encounter a variety of equity funds, each with a unique approach. Choices span from large-cap to small-cap, multi-cap, sector-specific, and thematic funds.

The challenge lies in identifying the category that matches your financial goals, risk appetite, and investment horizon. For instance, let’s assume you were looking for a more aggressive option and had a five-year investment horizon, we’d suggest looking at a flexi-cap fund.

Check the star rating of the mutual funds

Amit discovers there are approximately 152 large-cap funds available in the ‘direct’ category. (For the uninitiated, if you are buying funds on your own, opt for direct plans. Here’s why).

Coming back to Amit, he is clearly frustrated. For good reason too. It’s not easy to choose a fund when there are multiple options.

This is where ‘Value Research Ratings’ comes to his rescue. (By now, you must be smiling at our blatant pitch, but it’s true. In fact, our mutual fund ratings are used by leading media outlets and fintechs).

Amit uses the ‘VR Ratings’ to remove all funds that are rated 2 stars and below. By doing this, he narrows down his options to a more manageable 42 funds.

Also, by eliminating the poor funds, he now has access to funds with a proven track record of strong performance, solid management, and robust portfolio composition.

What you should know

‘Value Research Ratings’ evaluates funds based on quantitative factors.

Compare returns of funds

Having successfully narrowed down his large-cap fund options to 42 high-rated contenders, Amit compares their returns to make an informed investment decision. As a long-term investor, he is keen to know which funds are more consistent in the long run.

To accomplish this, Amit selects ‘Long-term’ in the ‘Returns’ tab, focusing on the five-year performance of each fund.

With the five-year returns data at his disposal, Amit makes a list of the ten best large-cap funds!

What you should know

Past performance is not a guaranteed indicator of future results. But it does tell you each fund’s long-term track record, which is important.

Check expense ratio and exit load

Amit, now armed with a shortlist of 10 promising mutual funds, delves deeper into the ‘Fees and Details’ section to examine the expense ratio and exit load. This is a smart move because why should he pay unnecessary fees to a mutual fund.

What you should know

Expense ratio and exit loads are fees charged by a mutual fund for various reasons. Hence, the lower the better.

But please remember that though this is an important factor, you should not base your fund-selection decision on this criterion alone.

Final check

To complete his selection process, Amit refers to the ‘VR Opinion’ available in the ‘Snapshot’ tab.

These opinions, provided by Value Research’s analysts, assess mutual funds based on several parameters, including risk-adjusted performance, portfolio diversification, and fund manager’s track record.

Backed by expert insights, he finds The One large-cap fund that suits him best!

By following these four steps on our platform, Amit has laid a solid foundation for his investment journey, increasing the likelihood of achieving his long-term financial goals.

The last word

Selecting the right mutual fund is no rocket science, as you just saw for yourself.

All you need to do is explore our platform to find the right fund for you. You can Get Started now.

Source – Valueresearchonline

What’s best for STP?

Ram, one of our subscribers, recently contacted us, saying he had received Rs 50 lakh from a property sale and wanted to invest in a hybrid fund to build a sizable retirement kitty.

But since Ram knows he should not put the entire money in a mutual fund in one go, he is wondering if stashing the money in an arbitrage fund and then setting up an STP to a hybrid fund over the next three years would be the better option.

That way, he’d be able to spread his Rs 50 lakh investment in a hybrid fund over three years, and at the same time, the money that would lie in the arbitrage fund would earn acceptable returns.

His proposed idea got the number-crunchers working in our dark, damp dungeon excited, now that they had a new project of finding out if there were better options than an arbitrage fund.

But before we lay out the numbers, let’s take a step back and understand what on earth an STP is and its benefits for the larger audience.

What is STP

Full name: Systematic transfer plan.

Role: It allows investors to transfer a specific amount from one fund to another at regular intervals.

Benefits: Markets are generally volatile over short periods. Therefore, putting all your money in a mutual fund in one shot is not ideal, as it can fall in value over the short term.

This is where an STP comes in.

It ensures your large sum of money – Rs 50 lakh in Ram’s case – is protected from market volatility, while earning acceptable returns that match or beat inflation at least.

Last but not least is the STP’s ability to provide the benefits of rupee-cost averaging. In layperson’s terms, spreading your investment helps avoid catching the market high. Instead, you invest more when the markets are depressed, and less when markets are expensive. (This is a strategy investors dream of, to be honest).

Now that we know what an STP is, let us tackle Ram’s question of whether he should put his Rs 50 lakh in an arbitrage fund and then start an STP to a hybrid fund.

Tackling Ram’s question

Arbitrage funds have competition in this space. Besides them, Ram can also think of stashing his Rs 50 lakh in the following options:

Fixed deposits (FDs)
Short-term debt funds
Bank savings account

Let’s tackle arbitrage funds first. Over the last 12 months to five years, these funds have generated 3.9-5.19 per cent on average, and their tax outgo is 15 per cent in the first year and 10 per cent after that.

Short-term debt funds. They have delivered 5.68-6.51 per cent returns on average in the last 12 months to five years, and the tax outgo depends on which tax bracket you fall under. For instance, if you earn over Rs 10 lakh per annum and are in the old tax regime, your gains from these funds will be taxed at 30 per cent.

Fixed deposits. FDs have delivered assured returns in the 6-7 per cent range in recent years, but you can be taxed up to 30 per cent on the interest earned. Worse, you’ll need to pay tax yearly, unlike short-term debt funds where you pay tax only when you withdraw your money.

Even worse is that FDs aren’t very STP-friendly. Here, you need to manually withdraw your money each month to get the STP going. Hence the reason it’s not recommended.

Savings account. The humble savings account in your bank offers assured interest of around 3 per cent. (There are a few small banks that provide 6 per cent interest as well).

But even in their case, you can be taxed up to 30 per cent on the interest earned, though interest up to Rs 10,000 is tax-exempted if you are below 60.

What should Ram or you do

There is no clear winner here. Different options have different strengths (and weaknesses).

From a tax perspective, arbitrage funds emerge victorious.

From a returns perspective, they are all closely bunched together. Perhaps, short-term debt funds eke out slightly higher post-tax returns than the other three options. Looking ahead, these funds will provide higher returns as yields of bonds have risen in the last few months. By that logic, returns of arbitrage funds will rise too, as some portion of their portfolio is invested in debt.

That said, returns should not be of paramount importance when you plan to start an STP. You should look at capital preservation instead.

In that case, savings account, FD and short-duration debt funds hold up well. But let’s rule out FDs because, as mentioned earlier, they are not well-configured for STPs.

Lastly, if you prefer convenience over an extra per cent or two returns, you can simply stash your money in a savings account and start an SIP to a hybrid fund.

Source- Valueresearchonline