Investing It! : mutual fund, Mutual funds

Mutual Funds Direct Plan Vs Regular Plan

Yogi — Wed, 20 Mar 2013 05:23:00 GMT

Gone are those days when you wanted to invest in Mutual funds and an agent used to come to you and say “I will take care of everything, sir”. You could invest for yourself directly in a mutual fund of your choice through the concerned Asset Management Company (AMC).

What is a Direct Plan?

Investing directly through the AMC without intermediary has been possible since 2007. In those days the benefit of investing through a Direct Plan was that the investors did not pay entry loads. As you know the entry loads were mainly the costs that an AMC incurred on paying commission to the intermediary community – distributors, agents, banks and financial advisors, which the AMC used to pass onto the client in form of entry loads typically 2% to 2.5% on equity funds and lower for debt funds. Hence logically when an investor is coming to the AMC directly these costs are not there and hence an AMC should not be charging the client.

From August 2009, entry loads for everyone was abolished and the distinction or benefit between direct route and intermediary route was no longer there. However, from 1^st January 2013, this distinction has come back.

Benefits of Direct Plan

AMCs have started charging distribution fee, in the form of trail fees of 0.30% to 0.50% a year, which comes out of the net asset value irrespective of the mode of investment – direct or regular through an intermediary. It is unfair that direct investors be charged this annual fee and that has been remedied now by SEBI. According to SEBI, AMCs will offer the direct plan with a NAV that is separate from the normal plan’s NAV as the expense ratio of the Direct Plan is lower than regular plans which are sold through distributors, agents and advisors. So any investor who wishes to deal directly with the AMC without any intermediary can do so through the Direct Plan at a lower cost and thereby maximize his returns.

The difference in expenses for these two routes could be anywhere between 0.5% to 1% p.a. for equity funds, 0.1% to 0.4% p.a. for debt funds and 0.05% to 0.15% p.a. for liquid funds. Hence Direct Plans are likely to give a higher return year on year when compared to regular plans; and with compounding over a long period of time, this difference could be significant.

Who should go for it?

For retail investors, going the Direct route is advantageous only if they are financially savvy and have sufficient time to do research. Selection of mutual funds is not just about expense ratios. If an investor doesn’t have the expertise, skill or knowledge to be able to select a scheme that has been consistent in giving good returns and is suitable to his objectives then the lower expense ratio is not going to be of much use when his returns are poor.

Moreover, advisor will no longer have access to investor’s information and therefore portfolio reviews and rebalancing, shifting from equity to debt funds depending on goals, strategic asset allocation may not be possible.

How about existing investments in Regular plan?

If you have already made investments partially through a distributor and partially without a distributor, these can be converted to direct plan by simply submitting a switch request.

If you are going for conversion from regular plan to direct plan, it will entail tax consequences. As per the provisions of income tax act, tax is payable on profit made on transfer of any capital asset. As per the definition, any exchange is also treated as transfer so the exchange of regular plan with any direct plan will amount to transfer and thus depending on cost and holding period, you will have to pay capital gain.

Conclusion

Be it direct route or Regular one, investing in mutual funds needs time, expertise and knowledge and hence is not everyone’s cup of tea. Remember, “Mutual fund investments are subject to market risk. Please read the offer document carefully before investing.”

About the Author:

A.V.Suresh is our in-house Financial Planner and a personal finance enthusiast. He is a Certified Financial Planner(CFP) and also has an MBA in Finance

Pick Your Mutual Fund Scheme Smartly

Yogi — Thu, 07 Feb 2013 09:59:00 GMT

Mutual fund is one of the most common investment avenues for a common man today. A mutual fund is a type of professionally managed collective investment vehicle that pools money from many investors to purchase securities.

Though mutual funds offer several advantages to investors, such as – professional management, liquidity, diversification etc. however selecting a suitable mutual fund scheme to match your needs can be tricky.

Here are a few tips to help you to invest in a mutual fund scheme in order to match your financial requirements:

1) Set down your goals before investing: Investments with sole purpose to fetch maximum returns is not the justified approach towards your financial aims. Make sure that every investment of yours is to meet a preset goal.

2)Know the scheme’s risk statistics: A mutual fund scheme generating above average returns doesn’t have to be suitable for you. It is highly recommended to ensure that the risk statistics of the scheme matches your risk profile. An aggressive equity scheme is not suitable for you in your 50’s despite of the fact that it earns good return on your money.

There are two widely used measures to assess risk of a scheme namely Standard deviation and Beta.

Standard deviation gives you the picture of volatility in scheme’s returns from its own average returns over the years. On the other hand, Beta captures scheme’s movement in relation to the market. Let us say a scheme has a beta of 1.5. If movement in the market index is 10%, the scheme NAV will move 15% thus fetching a higher return or higher losses.

Hence, schemes with high SD or high Beta are not recommended for investors with moderate or conservative risk profile.

3)Keep track of Alpha of the fund: In simple terms, alpha is nothing but the returns earned by the fund over its expected returns in view of its beta.

Let us understand it with an example. Fund XYZ has a beta of 0.80 and risk free return is 8%. Market index offers 10% return. Expected returns from the fund would be 8% + 0.8 (10 – 8) = 9.6%. If the actual return generated by the fund is 12%, then alpha would be (12 – 9.6) = 2.4. On the other hand, if actual return is lesser than the expected return, alpha would be negative.

Alpha denotes efficiency of the fund manager.

In a situation, where alpha of the fund is constantly on the negative side, you should not wait to get rid of the mutual fund scheme.

4)Evaluate the fund manager: A fund manager is the mainstay of a mutual fund scheme. In order to evaluate a fund manager, you must evaluate the fund manager’s record of accomplishment: how his schemes have performed over the years.

5) Position in Nine – Grid Box: The nine – grid box gives you quick snapshot of the type of MF scheme in one glance.

Image Source Page: http://mytagpay.com/401k.html

This gives you a picture of scheme’s investment style as well as market capitalization of the securities held under it. By having a look at this box for any mutual fund scheme, you will be able to figure out, whether that scheme matches your need or not to a fair extent.

6) Monitor your mutual fund portfolio time to time: Last but not the least, keep a track of your portfolio on a regular basis. Your job doesn’t end with picking the suitable scheme, it has to be monitored effectively too. Finance is a world of changes and MF industry is no exception. There might be a situation when your fund is not performing well. It would be better to come out on time rather than being stuck in the scheme for a long time to recover your invested money on the least.

So, from now on before you invest your hard-earned money in a MF scheme, make sure that it is appropriate for you.

Happy Investing!!!

Sapna Tiwari is a CERTIFIED FINANCIAL PLANNER and masters in Financial Management with over half a decade’s experience in the field of personal finance. The views expressed are personal. She can be reached at sapna3031@gmail.com

L&T NFO Short Term Debt Fund

Yogi — Mon, 12 Dec 2011 05:53:24 GMT

The Indian debt market has witnessed a sharp rise in interest rates in the last 18 months. RBI’s rising Repo rate to curb inflation and tight liquidity norms for banks, have contributed to this rising interest rate. At this juncture of the debt market, L&T is out with its short term debt fund issue, open to both individual as well as institutional investors. With positive market expectations of the debt market, and Corporate Deposits, Commercial Papers and NCDs, already generating a six to nine month yield of around 9.5%, this L&T fund issue is worth considering.

Issue Open Date: December 07, 2011

Issue Close Date: December 21, 2011

Understanding Short Term Debt Funds

Short term debt funds are mutual funds that invest in fixed income securities of short maturities. The portfolio primarily comprises of government securities, treasury bills, commercial papers and other money market instruments. Short term debt funds possess low risk and are generally preferred by investors seeking steady returns.

Overview of L&T Mutual Funds

L&T Mutual Funds is an AMC backed by L&T Finance, and is one of the premier fund houses in India. The fund house has around Rs. 5,000 crores under its management with various schemes catering to diverse investor needs. With L&Ts efficient portfolio management techniques, the AMC has been making investments in quality instruments, to generate positive returns to investors.

Investing in the L&T Short Term Fund

The scheme is an open ended scheme with an investment objective to generate returns from fixed income securities of short term maturities. This scheme is positioned primarily for investors with a short term investment horizon. The average maturity period of the scheme would be maintained at three years.

Scheme Specifications

Nature of Scheme	An Open Ended Debt Scheme
NFO Issue Price	Rs. 10 per unit Rs. 10 per unit during New Fund Offer and at NAV based prices after the scheme re-opens for ongoing sales
Minimum Application Amount	Rs. 5000 and in multiples Rs 1 thereafter.
Benchmark	CRISIL Short Term Bond Fund Index
Options	Dividend (Payout & Reinvestment), Quarterly Dividend (Payout & Reinvestment), Growth, Bonus

Portfolio Composition

The fund would allocate around 65% to 100% in debt and money market instruments of residual maturity up to 24 months. These investments would be low risk in nature. The balance investment from 0% to 35% would be in debt instruments with residual maturity greater than 24 months and less than 60 months, with a low to medium risk profile. The scheme may also invest in securitized debt of up to 50% of the portfolio.

Load on the Scheme

There will be no entry load charged on the scheme. For all redemptions before 6 months of investing in the scheme there would be an exit load of 0.5%. No exit load would be applicable if redeemed after 6 months.

Who Should Invest in the Scheme?

The volatility in the equity market coupled with the current scenario of rising interest rates in the Debt market, have surely made investments in fixed income securities more attractive and a safer bet to generate positive returns. For investors seeking to park their funds for one to two years, and those with a low to medium risk appetite, L&T’s short term debt fund would be an ideal investment option. And with L&T Mutual Fund’s satisfactory past performance in its various offerings, one could expect good fund management, positive returns and definitely a promising investment.

How to Invest In the Scheme

Application forms for the issue are available at the offices and branches of the AMC and the CAMS Service Centres (CSC). Payment for purchase of units will be accepted only through a cheque or demand draft (i.e. in case of “Regular Application”), drawn in favour of “L&T Short Term Debt Fund” and payable at the centre where the application is lodged, or account to account transfer instructions (in case availing of “Direct Deposit Application Facility”). Investors need to comply with Know Your Customer (KYC) norms when completing the application form. Apart from this traditional way, investors could also invest online through www.lntmf.com and other associated Depositary Participant websites.

Author

Ramya Ramachandran