Category: Investment

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

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

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

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

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

The Finance Act 2023 has created a third category for taxation in mutual funds. We are all aware that debt funds no longer qualify for LTCG benefits. They will be taxed at marginal rate of taxation irrespective of the holding period.

In this context, the Finance Act has defined debt funds as funds having domestic equity exposure of less than 35%. Hence, it includes other categories of funds like gold funds and international FOFs.

However, the definition has opened up a new category of mutual funds from the perspective of taxation. This category is funds having exposure to equity between 35% and 65%. These funds will continue to get indexation benefits if the holding period exceeds 36 months. The category of  multi asset fund (at least 10% exposure in three asset classes) may fall under this taxation ambit, depending on the positioning by the AMC. If the equity component of the fund is more than 65%, it will be taxed as equity. If the equity component is between 35% to 65%, it will be eligible for indexation.  Balanced hybrid fund (50% exposure to both equity and debt) fall under this category, but currently there is no balance hybrid fund in the industry.

There are couple of multi asset funds in the market answering this description i.e. equity in the range of 35% to 65% and eligible for indexation. Certain fund houses are launching multi asset funds to benefit from this tax arbitrage.

Conclusion

The extent of indexation benefit for LTCG depends on inflation. However, history shows that post-indexation, the effective LTCG tax rate is less than 10% in most of the years, which is the taxation rate for equity funds.

Source: Cafemutual