How to select right Debt Fund.. ???

When we think about investment in mutual funds then first option we all think about is Equity Funds or Diversified Funds, and in this post I will explain how to choose the right Debt Fund. First, lets see what is Debt Fund.. A debt fund is a professionally managed funds, which invest money in Government Securities, Money Market Instruments & Corporate Deposits. These mutual funds include a small percentage of equity investment of around 10% in their portfolio to give investor capital appreciation. So, debt fund are associated with little investor risk too.

Most of the mutual fund investor think that choosing a debt fund is easy then chooising equity fund whereas on contrary, I would like to say selecting a debt fund is more problematic because of large number of categories available - Liquid, Income, Short-term, Ultra Short-term, Gilt, Monthly Income plans, Fixed Maturity plan etc. Though fund selection requires some basic criteria - risk profile, consistency in performance, quality of underlying paper & fund manager's track record etc.

Key parameters for choosing a right Debt Funds are:- 

Time Horizon & Fund Maturity - If you want to go for debt fund then first, you should ascertain the period for which you want to stay invested because each category has different maturity profile. Ideally, investor need to match its time horizon with that of the fund.

For example :- you are looking for investment for a period of 3month then investor should not invest in liquid or short-term fund instead they should go for Ultra Short-term fund where average maturity of fund is upto 90 days. For 1 year or more, Income fund or fixed matruity plans are the best option.

Note :- Short-term gains in debt funds are taxed according to the applicable tax slabs whereas Long-term gains are eligible for the inflation indexation benefits.

Quality of underlying papers - Before investment in debt fund investor should scrutinised the quality of debt instrument in the fund's portfolio. Every instrument is assigned a credit rating that signifies the level of default risk. Higher the rating, the safer the instrument. To check whether the instrument are safe or not, investor can go through the offer document as well as the subsequent fact sheet publised by the mutual fund. A debt fund may invest in number of instrument ranking from risk-free goverment securities to high-risk corporate paper As the safety of capital is of utmost importance to a debt investor and a fund holding large amount in a poor quality paper may find it difficult to sell such securities in the market, thereby putting the money at risk while its true that a debt fund with a risky paper is likely to yield higher returns, it may work unfavourably for the investor. So, investor should go for funds which have low quality investments.

Interest Rate scenario - Debt mutual funds are exposed to interest rate risk as they tend to go up in value when interest rate fall and vice-versa. This is because of the inverse relationship between bond prices and interest rate. However, short-term debt funds are less sensitive to movements in interest rate in comparison with the long-term funds. So, it is advicable for investor that when interest rate are on the rise it makes sense to move to short-term funds and vice-versa.

For example:- if you had invested in a deposite one year ago, you could have got 10% annual rate of return. A similar deposit today would fetch only a 7% per annum rate of return. If you were allowed to get the 10% per annum deposit today, you would probably be willing to pay a premium for it.

Expense Ratio - Debt funds have lower returns, expense become very critical as a higher expenses ratio eats into the investor's returns. As most of the debt funds offer returns in the range of 7%-10%, having an expensive cost structure will be huge drag on the returns. So, it is very important for investors to ensure that the cost structure is reasonable & in line with the return being offered by the fund. For example:- it doesn't make sense to pay a charges of 2.25% for a return of 3-4% and if you adjust for inflation then you are effectively earning a negative returns on your investment.

Size of the fund - While one can argue that size doesn't matter in equity funds, in the case of debt funds, it does assume greater significance. A small corpus may not hurt equity fund investors, but could affect debt fund investors. From time to time, debt mutual funds could see large redemptions, as happened in the case of Lehman Brothers crash. If the fund size is large, the fund manager can meet these redemptions out of his cash holdings. He also has more choice regarding which instruments to sell off to meet these redemptions. The manager of a small fund doesn't have as much leeway and has to perforce book losses. Hence, while in equity funds a large fund size can pose problems (the fund manager needs many more investment ideas to earn high returns), in debt funds large size can be an asset as it helps produce stable returns.

Fund Manager's track record - Past performance data for a debt fund no longer remain relevant if the fund manager who bring back those returns has left the fund. A good investment strategy would be to track the performance of star fund managers and move your investment with them when they move from one fund to another. If the fund manager is same and fund performance is consistent across interest rate cycles, it implies the fund manager is moving smartly between different types of debt instruments and making the most of the volatility.

These are the factor which an investment need to analysis investing in debt fund. At the end, I would like to say "In financial markets, the fastest does not always win; the winer is the one who is better prepared and more balanced."

Best ELSS Funds for 2011

Which is the best ELSS Mutual Funds?? In this post I am listing down some of the best MFs which I have find out with the help of Valueresearchonline.com. These are tax saving funds, used by investor for saving tax under Sec 80C upto 1lac.Suitable for those investor who want to invest for longer term with tax saving.

Canara Robeco Equity Tax Saver - G

• One of the oldest Tax Saving Fundwith 18years of Good track record.
• Returns since launch is 15.42% which is good enough in such a long-run.
• Very good performance in last 5 years with 18.12% returns beating benchmark by 7.5%.
• Good 24.93% return in year 2010.
• Well diversified amount Giant, Large, Mid and Small cap companies makes its a good fund overall.
• More Concentrating towards Giant (40.75%) makes it less risky.

HDFC Tax Saver -G

• This fund has not shout much about its performance and not even appreciated among its peers but has given a best long term  record and even has ability to put all the tax saving funds in shame.
• Oldest Tax Saving Fund with 15 years of excellent track record.
• Return since launch 32.77% which is no doubt unmatched achievement for Tax Saving Fund.
• Last 5 years return are 12.58% beating becnhmark by just 2%.
• Well diversified among Giant, Large, Mid and Small cap companies.
• Becoming more aggressive by increasing its allocation in Midcap Funds.

 Fidelity Tax Advantage - G

• This fund is new fund just 5 year old but with good track record.
• Return since launch 15.39% which is good enough for new fund.
• Good performance in last 5 years with 15.96% returns beating benchmark by almost 5%.
• Good 29.24% return in year 2010.
• Well diversified amount Giant, Large, Mid and Small cap. But bit aggressive fund as 35% invested in Midcap companies.Which makes this fund bit risky.

Sahara Tax Gain -  G

• One of the oldest Tax Saving Fundwith 14years of Good track record.
• Return since launch 27.16% which is excellent in such a long run.
• Good performance in last 5 years with 13.44% returns beating benchmark by almost 3%.
• Good 20.42% return in year 2010.
• Well diversified amount Giant, Large, Mid and Small cap. But its an aggressive fund with 48.74% invested in Midcap & Small cap companies.Which makes this fund risky then other fund in same category.

Religare Tax Saver -G

• This fund is new fund just 5 year old with average track record. but shows a potential for better performace.
• Return since launch 12.8% which is good enough for new fund.
• Good performance in last 3 years with 11.10% returns beating benchmark by almost 8.5%.
• Good 22.13% return in year 2010.
• Diversified Fund among Giant, Large, Mid and Small cap.
• A little aggressive fund with 48.84% portfolio in just 3 sectors of  Finance, Energy and FMCG.

Reliance Tax Saver - G

• This fund is new fund just 5 year old with average track record.cut comes under top 10 funds in this category.
• Return since launch13.41% which is good.
• Average performance in last 5 years with 10.88% returns just beating benchmar.
• Good 22.49% return in year 2010.
• Diversified Fund among Giant, Large, Mid and Small cap. Very aggressive fund with 57.49% in Mid and Small cap companies.
• Aggressive fund with 48.28% portfolio in just 3 sectors of  Automobile, Engineering and Financial.
  

HDFC Long Term Advantage - G 

• Oldest Tax Saving Fund with 11 years with good track record.
• Return since launch 28.32% which is no doubt unmatched achievement for Tax Saving Fund.
• Last 5 years return are 10.71% equal to becnhmark.
• Good 28.37% return in year 2010.
• Well diversified among Giant, Large, Mid and Small cap companies with 52% in Giant companies. So less risky fund.

Note : This blog is not for recommendation purpose, hence, must not be treated as an encouragement to invest in above listed funds. The decision of investment in any above listed funds solely lies with the reader/investor.

Do you think all Tax Saving Mutual Funds are same...

Main purpose of this blog post is to explain investors that all ELSS or TAX SAVING Mutual Funds are not one and the same. Investor who are investing in ELSS schemes might well be aware that ELSS scheme comes under Diversify Equity Mutual Funds but they may not aware that ELSS Scheme also have Aggressive and Safer & Balanced approach. 

• Aggressive Approach - In this approach ELSS mainly bet on small and mid cap stocks and hence they have more return potential with bit of more risk. 
• Safer and Balanced Approach - In this ELSS mainly bet on Giant and Large cap stocks, which are more safer than mid and small cap stocks.

Investors needs to understand this that they should invest in that ELSS Scheme which meet there risk appitete. It is also important that they should not invest entire money in just 1 ELSS Scheme which cover both the approaches (i.e Aggressive and Safer & Balanced).

Some Top Performing ELSS MFs with there category:- 

Aggressive 

ICICI Prudential Tax Plan-G

Reliance Tax Saver - G

Sahara Tax Gain - G

Safer & Balance

Canara Robeco Equity Tax Saver -D

HDFC Tax Saver - G

HDFC LT Advantage - G

Magnum Tax Gain -G

So, next time think twice before investing in ELSS Scheme. :)

Note : This blog is not for recommendation purpose, hence, must not be treated as an encouragement to invest in above listed funds. The decision of investment in any above listed funds solely lies with the reader/investor.

Which option is better in Mutual Fund - Dividend or Growth Option???

Famous English poet William Blake has said, "Exuberance is beauty." and this is what most of the financial markets in the world are trying to display thru "Financial Exuberance". But it is not that beautiful as that famous quote by a poet. Nowadays number of financial products are launched which are very complex in nature and due to this complexity financial engineers too are not clear about the product which they launch in the market and its implications in the long run. To make them simple, marketing team makes all their effort to persuade investor to fall for them and due to lack of knowledge about it many of investor purchase it without even assessing whether it goes well with their own objective or not. One of the best examples is Mutual Funds.

With so many MF options such as Dividend payout, Dividend re-investment, Growth and Bonus, are provided by MF houses to investor for investment, it's difficult for an investor to choose from them. Even many of investors are not aware of all these options and how these work and which is the most suitable option for them.

It is important for an investor that before making any choice of option, he/she should be aware what they actually mean and how they actually function in favour of their needs.

• Dividend payout option – Dividend payout option proposes to timely pay distributable profits to investors in the form of dividends, thereby giving investor facility to liquidate their profits.

• Dividend re-investment option – under this option MFs declare dividend but instead of paying to investor they goes in buying additional units of the same MF scheme and investors continue to book higher profits and keep re-investing them in the MF scheme. 

• Growth option – under this option, investors do not receive any kind of dividend instead of dividend they enjoy the compounded growth in their value if MF scheme, subject to the investment bets taken by the fund manager.

• Bonus – under this option, investors receive bonus units in accordance to a ratio declared by the fund house instead of getting regular dividend. This option usually offered by very few fund houses.

Now the big question is which option is best for investors. Well it depends upon what an investors financial calls in future. Investors financial plan are drawn by investor planner ideally should be a function of your age, income, expenses, your future goals and mainly your risk appetite.

For example :- If you are an old person, your income is moderate, your commitment towards expenses are high , risk appetite is low and your about to meet with your financial goals then you must opt for dividend payout option instead going for a growth. Whereas, if you are young, your income is high, your expenses are lower, risk appetite is high and you are far away from your financial goals then you must opt for growth option because you don’t need regular cash flow so you can opt for growth option.

However, if you still want to book profits at regular intervals then you can opt for dividend payout option while investing your money in MFs.

For dividend re-investment option is concern I would like to say that it doesn’t make any sense because indirectly it gives you the same benefit which Growth option provides. I would say that growth option provides more benefits of compounded because its NAV wouldn’t get effect due to the impact of dividend declaration.

As far as I know people don’t consider these aspect and has a common misconception that ‘Dividend payout option is always better’, since it provides a better return in the form of dividend. Which is not true? I am explaining this with one example below table. Let’s assume that someone wants to invest Rs. 10000 in HDFC Equity fund on 1Jan 2000 in the dividend and growth option each, at an NAV of Rs. 20.14 and Rs. 24.91respectively, and going to stay with this investment for next 11 years. He’ll earn return of investment nearly 15% in dividend option and 24% in growth option.

	HDFC Equity (Dividend)			HDFC Equity (Growth)
NAV Date	NAV (Rs.)	Dividend (%)	Cashflow (Rs.)	NAV (Rs.)	Cashflow (Rs.)
03-Jan-00	20.14		-10,000.00	24.91	-10,000.00
24-Mar-00	21.52	30	1,489.57	26.66
22-Dec-00	12.66	17	844.09	18.06
15-Mar-02	13.47	12	595.83	22.42
15-Jul-03	17.1	20	993.05	31.29
30-Sep-03	18.79	25	1,241.31	38.87
19-Mar-04	20.79	15	744.79	40363
30-Nov-04	23.45	30	1,489.57	60.31
17-Mar-06	41.88	50	2,482.62	123.52
07-Mar-07	40.35	50	2,482.62	135.17
07-Mar-08	45.45	55	2,730.88	173.18
19-Mar-09	23.253	30	1,489.57	100.801
25-Mar-10	46.947	40	1,986.10	233.855
22-Mar-11	49.093		24,375.87	266.851	1,07,126.05
Return CAGR			14% approx	12%	24% approx

                                    (Source : HDFC Mutual Funds)

Above Example indicates that opting for a dividend option does not always give good returns, when we compare them with Growth option. 

I have seen that people usually compare the NAV of dividend and growth option and then wonders why the NAV of dividend is lower than the growth. It is because when MFs declare dividend then hen NAV drop to the extent of dividend declare and if there is some downside volatility in market then even more.  Whereas in case of growth, NAV of growth totaly depend on market movements and the other expenses which fund is exposed to.

So next time while selecting between dividend and growth option pay attention towards your financial goals. If you are looking for compounding benefits then you should opt for growth option. Whereas if you are looking for a regular income or want to book profits at same intervals then you should consider dividend payout option.

Make your money work for you.

A well known saying from Noel Whittaker " Life is full of uncertainties. Future investment earnings, interest and inflation rates are not known to anybody. However, one thing is for sure, that those who put as investment program in place will have a lot more money when they come to retire than those who never get around to it."

Most of the people think that investing money is a difficult and expensive process which is not. The problematic area is that we do not do it well. Let me point out some of the reasons that cause an investors to hesitate:-

• Market Timing - Market timing is the strategy of making buy or sell decisions of financial assets (Stocks) by attempting to predict future market price movements. The prediction may be based on an outlook of market or economic conditions resulting from technical or fundamental analysis. A lot of investors believe that there is a right time and wrong time to invest in stocks and that is possible for most of us to predict that time. Which is absolutely wrong way of investment because stock prices do not always move on the same logic. An expected event which happen day by day usually move the stock prices up or down. Which can not be predicted by charts. Best example : in late 90s when stock of IT companies boom what happened at that time when investors in the excitement, intentionally or not became the market timers. Timing in these scenario can be risky.
• Buying High and Selling low - It violates the most of fundamental element of investing still many investors practice it every day. This is the one main reasons of failing to time the market correctly, and it most often results investor to chase for hot stocks and as soon as those sectors or stocks start losing their ground they sell and go looking for another hot stock. Again  investor pick new stock with gains to invest in and investor is again confident that he is back on the fast track to riches which is not in actual. All the instruments they purchase have proven track records bit yield him a below average returns. he is from one of those investors who make emotional decisions, tries to time the market and lose his sight on his own long-term investment objective.

In all the over hassle investor forget about  rules of investment. Here are rules for investment success-

• Diversify - It is very important for an investor that he do not pull all his money in one sector. As the economy expands and slows, money has a tendency to flow back and forth equities and fixed income instruments. Inside these 2 markets lies a selection of sectors which also expand and slow with differing rates. Because of this timing of market get more absurd since you have to time the smaller sectors against the broader sectors. Solution to this problem is to diversify your portfolio. Diversification reduces the unsystematic risk which is company specific. However, the risk which is affect the economy cannot be reduced by it. It is a strategy of investing in a portfolio of securities so that the losses from one will be offset against gains in others.
• Ignore the hot stocks - If you buy this year's top-performing stock, be prepared to see at the bottom next year. The fancy academic expression for this is - reversion to the mean. Even their is the old saying that - What goes up must come down. So, better to chose stocks carefully.
• Invest regularly for cost average - Cost averaging is the systematic purchase of investment instrument over a time. By buying an equal amount each period, you should end up with a cost basis and is surest way to reduce the risk of investing. It is valuable in volatile markets where dramatic swings are experienced and no one is smart enough to anticipate all the moves, both up and down.
• Be a disciplined investor-  After you have chosen some stocks, stick with them. Don't be afraid to go against the tide, as often the unpopular groups tend to outperform in subsequent years. although market moves based on economy, it can also swing wildly based on psychological reasons such as political turmoil, rumors about interest rates or other world news. If the fundamentals of the economy matches your overall portfolio objectives then you should stay with that. 

Union Budget 2011-12 impact on a common man.

How much you will be benefited with this union budget?? there are positive and negative effects on a common man due to this union budget which I'll try to explain with the help this article.

• Base exemption limit increased - Budget 2011 proposed the increase in base exemption limit for individual from Rs. 160000 to Rs.180000. Which means a tax saving of Rs. 2000 for an individual

Income –tax rates in Budget 2011
Taxable Income	Tax rate
Upto Rs. 180000	Nil
Rs.180001 to Rs.500000	10%
Rs.500001 to Rs.800000	20%
Above 800001	30%

Impact of this move with example :-

Individual other than Women, Senior Citizen and Very Senior Citizen
AY 2010-11 Below 65 Years				AY  2011-12 Below 60 Years
Taxable Income assumed 1000000				Taxable Income assumed 1000000
Slabs	Rates*	Liability		Slabs	Rates*	Liability
0- 160000	Nil	Nil		0- 180000	Nil	Nil
160001 - 500000	10.03%	35020		180001 - 500000	10.03%	32960
500001- 800000	20.06%	61800		500001- 800000	20.06%	61800
Above 800000	30.09%	61800		Above 800000	30.09%	61800
Total tax liability		158620		Total tax liability		156560

*rates are adjusted for education cess

Here, a male individual whose net income is Rs.1000000. As per current tax laws his income tax liability will be Rs 158560 for FY 2010-11, while in the FY 2011-12, once the new exemption limit applies, his tax liability will work out to Rs 156560 i.e saving of Rs 2060. For women, the exemption limit is at the same Rs 190000.

• Senior Citizen - The base exemption was increased to Rs 250000 (from Rs 240000 at present), While the qualifying age for senior citizens was reduced from 65 years to 60 years.

• New Category 'Very Senior Citizen' -  There is a new category of senior citizen called “Very Senior Citizen” in this budget. Any one above 80 years of age will be under this category and they will not be taxed up to the income Rs 500000. While this looks a nice move, but I wonder how many 80 years old will have their personal income more than Rs 500000 in our country to avail this benefit.

• Extension to Infra Bonds for one more year - Government has retained the additional income tax deduction of Rs 20000 under Section 80CCF. Which means that in 2011 – 2012 also you can invest in Infrastructure bonds and save some tax.

• No Tax Return filing if income less than Rs 500000 - From years small tax payers who were having salary less than 5lacs had to go with the cumbersome process of filing tax returns, but now small tax payers who are having income less than Rs 500000 will not have to file their tax returns  if their TDS is cut by employer. But, if someone has additional income from other sources like dividends, capital gains, income from house property etc. In that case they will have to file a tax return themself or need to notify their employer in advance about these additional source of income so that their employer can take these things in consideration and deduct extra TDS.

• Insurance policies to get expensive excluding Term Insurance - Service tax on insurance policies which have investment component means ULIP's, Endownment plans, Money Back plans and return of premium term insurance plan will have a higher service tax on the premiums.  Earlier there was a 1% service tax but now it has been raised by 0.5% i.e 1.5%. Which means that if an individual insurance premium is Rs. 50000 in ULIP, then service tax was Rs 500 earlier but now its going to be Rs 750.

• Hotels, Restaurant, Air-travel and Medical become expensive - Expensive Air-travel, hotels, restaurant and medical become more expensive now due to some changes in budget which are: Hotel Accommodation - in excess of declared tariff of Rs 1000 per ay with an abatement of 50%, so that the effective burden is only 5% of the  amount charged. Restaurant - Service provided by air-conditioned restaurants that have license to serve liquor, by giving an abatement of 70%, so that the effective burden will be 3% of total bill amount. Air-travel- Service tax on domestic air travel levied at Rs 50, while Rs 250 on international journeys by economy class. Also it has been proposed to tax travel by higher classes on domestic sector at the standard rate of 10%, thus brining it on par with journeys by higher classes on international air travel. Hospitals - with 25 or more beds that have the facility of central air-conditioning and which are providing high-end treatment, however after providing an abatement of 50% the actual burden is kept at 5% of the value of service. 
  

• Daily Items get expensive - Excise duty of 1% levied on 130 items which includes day-to-day itmes like tea, coffee , ketchups, mobile phones and other lind of food mixes even ready to eat package foods.

• DTC will be finalized for enacting and will be proposed with effect from 1st April 2012. 

• New Pension Scheme - 'Swavalamban' where the minimum contribution is Rs 1000 and a maximum contribution of Rs 12000 per annum during the FY 2010-11, the Government has proposed to relax the age of exit from 60 years to 50 years, or the minimum tenure for 20years, whichever is later.  Government has also proposed to extend the benefit of government contribution from 3 to 5 years for all subscribers of 'Swavalamban' who enroll during 2010-11 and 2011-12.