The last 3 years has probably seen the most action from SEBI in the Mutual Fund space, probably as much if not more than when the Industry was opened up. We have seen action by the regulator across various activities of the Fund commencing from Distribution to Valuation, Fund Management etc.

Having acted on all these areas and making people who run the business responsible for a large number of activities, SEBI has taken the most important and critical step of arming the Trustees with the knowledge and understanding of their role.

As all of us know, the funds invested in the mutual fund scheme is managed on trust and hence the role of the trustees is extremely important. The Industry on its part have been able to attract the ideal profile of respected individuals from across various walks of life to become trustees. This enables ‘faith’ on the trustees. However, with so much of change in the industry and its regulation over years, there is a need for the trustees to clearly understand their roles and responsibilities in order to fulfill their role effectively.

It is in this background that the action of the regulator to get the trustees and independent directors of various fund houses through workshops (See Link: http://www.livemint.com/2011/02/15213117/Sebi-puts-mutual-fund-trustees.html) is a welcome move.

Sure, that we are moving in the right direction to not only have a well regulated environment for mutual funds but also a well empowered people who know their roles and responsibilities to run the same.

Fundu Vishy

No related posts.

One major reason which keeps most savers out of the Equity Markets (either directly or through Mutual Funds) is the Volatility that is part & parcel of the Markets. While most people know that equities provide an opportunity for better returns that most other asset classes over a longer duration, it is the fear of volatility which keeps them out of it. The impact is clearly seen in the number of investors getting into the equity markets. It is understood that there are around 3 cr. investors in Mutual Funds and 1.5 cr. Demat account holders in the country of 120 cr. population and around 10 cr. PAN Card Holders.

The objective of this post is to explore the ways in which one can benefit through this volatility.

1. Trading : One of the most often used strategies for benefiting from market volatility is ‘Trading’. In this, one will take a position depending on his expectations on the movement of a stock. If his position is right, he ends up benefiting from the volatility and if his position is wrong, he ends up losing money. Though, Trading is one of the most famous of the approaches among investors, it is only for the Brave Hearts owing to the risk involved. Also, over a long run, it has proved to be very difficult to benefit from volatility as the law of averages do work when one has to take a lot of decisions.

2. Future & Options : The other strategy used is taking positions in the Future & Options segment of the market. In the F&O Segment, both Hedging as well as Trading happens. Hedging is the process by which one tries to negate the impact of volatility on his portfolio which is at a cost. Hence, when he is saved on the downside, the benefit from the upside also gets reduced. The other activity of Trading in Futures and Options have the same features are trading mentioned above and in fact is much more risky owing to the gearing involved.

Hence, both these options of trading in Stocks and F&O does not provide the opportunity for benefiting from market volatility or there is too much of risk involved in the same.

Is there any other way? Yes. It is Discipline. Like in any other area in life, even in investments, it is the Discipline which enables one not only in his endeavor to create wealth but also to benefit from volatility.

Systematic Investment Plan(SIP)

It is common knowledge that Systematic Investment Plans (SIPs as famously known) in Mutual Funds (specifically Equity Mutual Fund Schemes) enables one to take a systematic approach to savings and investing creating a discipline. But, do you know that it is also one of the most efficient ways to benefit from volatility?

Yes, SIP is one of the most efficient ways to benefit from the volatility. The markets move up and down over a period of time. By investing through SIP, one has the opportunity to enter at every stage of the market. As a well known saying goes, ‘law of averages always works in every aspect of life’. SIP is one such scheme among investments that is available to an individual which works on the concept of law of averages. Hence, it is bound to be very successful one. Further, owing to the amount being invested each month remains to be the same, when the markets are up, you get lower number of units and when the markets are down, you get higher number of units. This makes the average price of the investment a weighted average thus reducing the average cost of purchase of units. This concept is also called ‘Rupee Cost Averaging’. Thus, when the markets are volatile (meaning the price keeps going up and down), as an SIP investor, one gets to enter at each of the levels and thus benefits from the volatility through the law of averages.

What’s more? SIPs should always be looked at as a long term investment. This enables the Power of Compounding work in your favor. Power of Compounding is a highly powerful tool, which is clearly brought out by the quotation “The most powerful force in the universe is compound interest”. This is a quote from a noted scientist, Albert Einstein. So what are you waiting for? Benefit through Discipline and make the market volatility and power of compounding work in your favor.

No related posts.

For scoring a six, you need to hit the ball in the air and the ball has to cross the boundary ropes without touching the ground en route. However, if the ball is caught by a fielder, the batsman is out. Hence, in order to get the maximum returns (6 runs) a batsman takes the risk of getting out. Even if he mistimes or misguides his shot by a fraction he will have to walk back to the pavillion.

However, if one keeps defending the balls, he gets very little opportunity to score runs. Hence, there needs to be an ideal mix of defense and risk taking for a batsman to be successful in his batting.

Equally, for a bowler to get a wicket, he needs to entice a batsman to believe that the ball is up for the hitting. For eg. a yorker is a great delivery to bowl for getting a wicket. Smallest deviation from where you want to bowl the ball, it becomes a full toss or a half volley and the ball gets whacked for a six or a four. Similarly, a spinner has to invite the batsman with a lot of air to his ball for getting a wicket, taking the risk of being hit for a six or a four.

This is a what risk vs. returns trade off is all about in Investments. You need to take higher risk for getting higher returns. If you are averse to risk, you can not expect much returns.

Please note that the converse is not true. Just by taking higher risk you don’t get higher returns. Eg. ‘Who Dares Wins’ or even in Cricket a very risky single which can at best give you a single run at the cost of loosing your or your partners wicket.

Same is the case with investing. If you want to get higher returns, there is a need to take higher risk. However, not every high risk action would result in the opportunity of getting higher returns. One should know what risks to take and when in order to be successful.

No related posts.

For investing in a mutual fund scheme, choosing the right scheme is very important. The following 6 parameters will be useful in order to idenfity a right scheme.

1. Scheme Objective and its suitability to you

The ‘Objective of the Scheme‘ ( detailed info in earlier blog post ) is the goal the scheme wants to achieve by investing in various securities. Generally, this also provides for the length of investment that is ideal in the scheme. One should necessarily take this into consideration while deciding on the scheme he is interested in investing. One of the ways to look at the schemes is through grouping the schemes with similar objectives . Generally schemes are categorized in various categories and sub categories. PowerMF segregates the schemes under various categories depending on the asset class the scheme invests in and sub classes based on investment objective of the scheme under these asset classes

Equity Schemes:

Schemes which have investment in equities as the main objective.  There are various sub categories under equity schemes, some of which are: Diversified Schemes; Mid Cap Schemes, Small Cap Schemes, Schemes focusing on specific sectors like Banking, Technology etc. Theme based schemes like Infrastructure, Service Industries etc. ELSS Schemes, ETFs, International Equity etc.

Debt Schemes:

Schemes which invests mainly in various debt securities. Some of the sub categories under this category are: Gilt Schemes, Floating Rate Schemes, Liquid Schemes, Fixed Maturity Plans etc.

Hybrid Schemes:

Schemes which invests in both Equity and Debt securities. Some of the sub categories under this category are: Balanced Schemes, Arbitrage Schemes, Monthly Income Plans etc.

2. Scheme Structure & Parameters

One of the key objectives of an investor in an investment, in addition to returns and risk is the ease with which you can sell back your mutual fund units once you’ve bought it (also known as liquidity), Scheme structure (ie., if the scheme is open ended or close ended) is an important consideration when someone invests in a particular scheme. Also, it is important to understand if the scheme has any lock in period. When you are looking at easy liquidity, it is always better to look at an open ended scheme which provides the necessary liquidity.

Other parameters about the scheme which have to be considered include minimum amount of investment, lock in period if any, periodicity of declation of NAV, Portfolio etc.

3. Past performance of the scheme

There are various ways by which the performance of a scheme can be analysed.

Standalone Performance of the scheme

One of the most common ways to analyse the performance of the scheme is to look at the returns of the scheme as on date over various periods. Ideally, you should look at the performance of a scheme over the period for which the scheme is recommended and planned to be invested for.

It’ll also be useful to check the performance of the scheme over a period of time. The performance of a scheme across various periods will help you understand the impact of different market conditions on the performance of the mutual fund. Also, this will ensure that the impact of recent development in the market does not unduly influence your decision. For this reason, PowerMF provides not only returns as on date for various periods, but also the quarter wise returns over the past 8 years or since the commencement of the scheme whichever is later.

Performance vis-a-vis Benchmark & Other Similar Schemes

Another important factor in identifying a scheme is the relative performance of the scheme. Each scheme has a benchmark which is generally an Index whose performance can be tracked. Also, one important factor is to ensure that the comparison is done only along with schemes of similar nature.

In most cases, schemes are put in various quartiles depending on its ranking amongst other similar schemes. However, more than just the ranking, it is the absolute returns which is more important. Hence, on the PowerMF platform, the performance of the top scheme as well as the bottom scheme in this group along with the performance of the benchmark is provided. This will provide clear understanding on the comparative performance of the scheme.

Risk Adjusted Returns

When comparing performance of a scheme, it is important not to get too caught up only with the returns and the ranking. It is also important to see the risk taken for getting the returns. There are various measures that are there to check the risk adjusted returns. Some of the measures are: Beta, Sharpe Ratio, Beta Square etc.

4. Scheme Portfolio

A scheme gets its returns based on the portfolio in which the funds collected have been invested in. Hence, it is important to look at the portfolio of the scheme. Some of the key parameters to look at are:

Asset Allocation

Exposure of the Scheme to various asset classes like Equities, Derivatives, Debt and Cash.

Stock and Sector Concentration

This provides for the concentration of the portfolio. One of the objectives of investing in a mutual fund is to get diversification across various stocks and sectors. Hence, one should look at the concentration of the portfolio among top 5 stocks and industries in order to understand the true diversification a scheme offers.

The portfolio and its analysis

The recently declared portfolio of various schemes is available on the PowerMF platform. Further, analysis of the equity portfolio across Sectors as well as across index groups is available and similarly, for the debt portfolio, type of securities as well as rating wise analysis are available. This will provide a complete understanding of the portfolio.

5. Brand

In addition to the performance of the scheme, the AMC and its brand also have its say while selecting a scheme. While good brand alone does not mean good performance, a good brand helps the AMC in its ability to attract the right talent and manage the performance. Hence, a product from a well known and more importantly well managed and consistently performing brand both in terms of AMC brand and in terms of the fund manager will provide the necessary comfort to the investor. Also, generally a brand name gets built over consistency of performance and acceptance of the market of its products. A few areas which need to be focused are:

1. AMC (Asset Management Company) background and its promoters
2. Assets Under Management of the AMC, Fund Manager and the Scheme
3. Awards and recognitions won by the Scheme, Fund Manager / AMC

6.   Cost

Cost also plays an important role in the identification of the scheme. (Refer our previous blog post to understand the costs associated with Mutual Fund Schemes ) as the costs get accounted for in the NAV (Net Asset Value), the returns comparison generally takes in to consideration the cost. However, it is still important to understand the costs in the scheme in order to understand the impact of costs in the schemes performance. As the costs directly impact the returns in a scheme, higher cost will eat in to the returns for the customer. This needs to be kept in mind while deciding a scheme for investment.

While there are maximum allowed expenses that can be debited to the scheme by an AMC, each scheme has a different cost structure. The details are available in the Scheme Performance Snapshot in PowerMF.

If you consider all the above 6 points while deciding a scheme for investment you will be able to identify the right scheme to invest in.

Hope you found this post useful. Do let me know your comments.

–

Fundu Vishy

No related posts.