Debt Funds are those which allocate investors’ money in fixed-income earning instruments i.e. treasury bills, corporate bonds, government securities, commercial paper and other money market instruments. The main objective to invest in a debt fund is to accumulate wealth by means of interest income and steady appreciation of the fund value. The underlying securities generate interest at a fixed rate throughout the tenure for which you stay invested in the fund. The fund manager of a debt fund invests in the underlying securities on the basis of their respective credit ratings. A higher credit rating indicates that a debt security has a higher chance of paying interest regularly along with repayment of the principal upon expiry of tenure. Apart from that, the fund manager aligns his investment strategy according to the overall interest rate movements.
Just because debt funds underperformed FDs when equity gave fantastic returns, does not mean that debt funds are as risky as equity. In a bad bear market, equity funds can fall 20% or more. Even in a bad year for bond market like 2017, debt funds were able to generate positive returns. Debt funds are much less risky than equity funds. Further, many debt fund managers employ a flexible investment strategy to safeguard investor interests in different debt market conditions.
Any debt fund whose, maturity profile is more than a year, will be subject to interest rate risk. As such, even short term debt funds have interest rate sensitivity. However, the interest rate risk is limited compared to long term debt funds.
Bond yields can change even if RBI keeps rates unchanged. Investors should understand that the Government is the biggest borrower. If the Government of India needs to borrow more to meet its different obligations towards the economy, then bond yields will go higher, bond prices will fall and consequently, debt funds will give lower returns. In an increasingly globalized economy, bond yields in India also depend on bond yields in developed markets like the US. If US bond yields are increasing, then foreign investors are likely to shift their investment from emerging markets to the US Treasury Bonds, which is a much safer asset for them. Similarly, if the dollar is strengthening versus emerging market currencies, foreign investors will divert their funds to the US. To attract foreign investments, Indian bond yields have to rise and this may hurt existing bond investors.
It is true that, if you time your long term debt fund investments at the top of the interest rate cycle, you can get excellent returns. However, market timing is not a necessary condition to get good returns from long term debt funds. The yield curve is usually upward sloping, which means that long term bonds give higher yields than short term bonds. If you have a long investment horizon then, you can benefit from the higher yield over long investment tenure and also from the fact that, over a long investment tenure interest rate or yield cycles reverse, meaning that you will have periods of both rising rates and falling rates. So while rising rates will cause prices to depreciate, falling rates will cause prices to appreciate.
For some debt fund investors this may come as a surprise, but long term debt funds do not always outperform short term debt funds in the long term. The definition of long term can be quite subjective and vary from investor to investor. From a debt fund perspective, let us assume that, 3 to 5 years investment tenure is long term. In the last 3 years, short term debt funds gave 7.9% annualized returns while long term debt funds gave 7.4% annualized returns; in the last 5 years, short term debt funds gave 8.3% annualized returns while long term debt funds gave 8% annualized returns. Over both time-scales, short term debt funds outperformed long term debt funds by varying margins. Over very long term, the relative performances of short term and long term debt funds actually evens out, with no significant advantage to either category.
Debt funds are chosen by those who are looking for steady income with relatively lower risks, as it is comparatively less volatile than equities. In other words, debt funds are more preferred than equities because the risk is low. Debt funds are preferred by individuals who are not willing to invest in a highly volatile equity market. Debt mutual funds also help to provide tax efficient regular cash flows via systematic withdrawal plans or SWPs. Since these funds invest in fixed income securities, debt funds offer better safety on long term basis along with better returns. Debt funds are a vital component of a well-diversified portfolio as their returns are typically more stable (less volatile) than equity funds. Thus, diversifying nature of debt funds reduces the overall portfolio risk.
Debt funds are chosen by investors who are conservative and who do not wish to take exposure to the equity market. They want to grow their wealth but in a less volatile manner. Additionally, they would be concerned about regular income as well. Investors usually stay invested in debt funds for a short-term and medium-term horizon. You need to choose an appropriate debt fund according to your investment horizon. Liquid funds may be suitable for a short-term investor who usually keeps his surplus funds in a saving bank account. Liquid funds will provide higher returns in the range of 7%-9% in addition to the flexibility of withdrawals at any time just like a saving bank account. If you need to ride the interest rate volatility, then dynamic bond funds may be an ideal option. These funds are suitable for a medium-term investment horizon to earn higher returns as compared to 5-year bank FD.
Debt Fund aims to earn optimal returns by maintaining a diversified portfolio of various types of securities. You can expect them to perform in a predictable manner. It is because of this reason, that debt funds are popular among conservative investors.
Debt funds are further divided into various categories like liquid funds, monthly income plans (MIPs), Fixed Maturity Plans (FMPs),Dynamic bond funds, income funds, credit opportunities funds, GILT funds, short-term funds and ultra-short-term funds.
Debt funds are basically exposed to interest rate risk, credit risk, and liquidity risk. The fund value may fluctuate due to the overall interest rate movements. There is a risk of default in the payment of interest and principal by the issuer. Liquidity risk happens when the fund manager is unable to sell the underlying security due to lack of demand.
Debt funds charge an expense ratio to manage your money. Till now SEBI had mandated the upper limit of expense ratio to be 2.25%.
An investment of 3 months to 1 year would be ideal for liquid funds. If you have a longer horizon of say 2 to 3 years, you may go for short-term bond funds.
Debt funds can be used to achieve a variety of goals like earning additional income or for the purpose of liquidity.
You need to look for consistent returns over long-term say 3, 5 and 10 years. Choose funds which have outperformed their benchmark and peer funds in a consistent manner across different time frames. However, remember to analyze the fund performance which matches your investment horizon to get relevant results.
Choose fund houses which have a strong history of consistent performance in the investment domain. Ensure that they have the consistent track record for at least say 5 to 10 years.
It shows how much of your invested amount is being used to manage expenses of the fund. A lower expense ratio means higher take-home returns. Choose a fund with a lower expense ratio which can give you superior performance.
Currently, the minimum tenure for long-term capital gains (LTCG) has been extended from one to three years. This means that investors will have to remain invested for at least three years in debt funds if they want the benefit of lower tax on long-term capital gains. If redeemed/used within three years or lesser i.e. short-term capital gains (STCG), the gains will be added to the person’s income and taxed as per the applicable income tax slab structure. However, if the investor can hold for more than three years i.e. LTCG, a debt fund will be taxed at 20% after indexation. Indexation (it allows you to inflate the purchase price using cost Inflation Index) takes into account inflation during the period that the investment is held by investor and accordingly adjusts the purchasing price which can lower the capital gains tax significantly. Another tax-friendly feature of debt funds is that there is no tax deduction at source (TDS) on the gains.
You can use financial ratios like standard deviation, Sharpe ratio, alpha and beta to analyze a fund. A fund having, higher standard deviation, and beta are riskier than a fund with lower beta and standard deviation. Funds with a higher Sharpe ratio means it gives higher returns on every additional unit of risk taken.
Modified Duration and Volatility
In fixed income (debt) investing, primarily two types of investment strategies are deployed.
Hold till Maturity
This is also known as accrual strategy, by which the fund invests in certain types of fixed income securities (or bonds) and holds them till maturity of the bond, earning the interest offered by the bond over the maturity period.
Using this strategy the fund manager, takes a view on the trajectory of interest rates. Bond prices go up when interest rate falls and declines when interest rate goes up. Why? Suppose you bought a 20 year bond with a coupon (interest) of 9% at face value of Rs 100 a year back. If interest rate goes down by 1% during the year then bond yields will decline; in other words, new bond issuers will offer lower coupon (interest) rates. Since your 20 year bond will pay you higher interest rates than what current yields are, investors who wish to earn the higher interest rate, will be ready to pay more than Rs 100 for your 20 year 9% coupon bond. You can sell your bond which you bought at a face value of Rs 100 at a higher price and earn a profit, over and above the coupon payment you received in the last one year. Long term debt funds like Long Term Gilt Funds, Income Funds and Dynamic Bond Funds etc are examples of debt funds which take duration calls based on interest rate expectations.
Many income funds are showing double-digit annualised one-month returns as high as 57%. Indiabulls Income Fund has offered the highest annualised returns of 57%, followed by ICICI Prudential Income Fund (51.66%) and Reliance Income Fund (44%). The high returns are due to a sharp fall in the government securities’ yields in the last one month. Benchmark 10-year G-Sec yields have fallen because of the change in borrowing plan by the government and the RBI surprisingly cutting its inflation forecast. The central government has announced that it plans to complete around 47% of its borrowing in the first six months of the current financial year. The government generally completes around 60-62% of its targeted gross annual borrowing in first half of the year. The 10-year benchmark yield has fallen from 7.7%, in the beginning of March 2018 to 7.2% in beginning of April 2018, its lowest in four months. The inverse relationship between interest rates and bond prices is benefitting debt funds. Thus, debt schemes which were showing negative returns in January 2018 have turned green again. Income fund category is offering an average one-month annualised return of 22.48%.
Debt mutual funds have products starting from Liquid funds with lesser than 91 days of maturity papers to Long-term gilt funds with 8-10 years maturity. Choice of funds depends on your objective and the average maturity of papers. If you need money after 1 year then there is no point being into a long-term gilt fund with 8 years of average maturity, as this might make your portfolio more volatile. Similarly, if your horizon is 10 years or more, then being in short-term papers sometimes may not make sense. Selecting the category of debt mutual funds first becomes crucial. Investing aggressively at the longer end of the yield curve could prove imprudent. To put it simply, investing in long-term debt fund (holding longer maturity debt papers) can be perilous, since most of the rally has been already captured at the longer end of the yield curve. In fact, short-term maturity papers are turning attractive and fund houses are aligning their portfolio accordingly too. Ideally, you will be better-off if you deployed your hard-earned money to short-term debt funds. But ensure you are giving due importance to your investment time horizon, asset allocation, and diversification. Consider investing in short-term debt funds for an investment horizon of up to two years. If you have an investment horizon of 3 to 6 months, ultra-short term funds (also known as liquid plus funds) would be the most suitable. And if you have an extreme short-term time horizon (of less than 3 months), you would be better-off investing in liquid funds. Do not forget that investing in debt funds is not risk-free. Some other options to invest in debt instruments are tax-free bonds, especially, if you are in the highest tax-bracket. A few highly rated corporate deposits and bonds may also yield better returns than bank FDs. Ensure you study the company’s financials before investing, as the risk of default cannot be ignored. This will buffer you from any financial shock. Sensible and astute investment strategy serves the path to wealth creation and it is always beneficial for your long-term financial well-being.
The assets under management (AUM) of the mutual fund industry stood at Rs 22.24 lakh crore at the end of October 2018, up 3.8% compared to last year according to Association of Mutual Funds in India (AMFI), data. On a sequential basis, the AUM growth was almost stagnant growing by less than 1% in October 2018. The mutual fund industry’s AUM has grown from Rs 8.34 lakh crore as on October 31, 2013 to Rs 22.24 lakh crore as on October 31, 2018, more than two and half times increase in a span of 5 years. AMFI expects AUM to grow almost four-fold to Rs 94 lakh crore by 2025 on the back of increased distribution reach and strength. The total AUM of the Mutual Fund industry grew by 0.9% MoM to Rs22.23 lakh crore in October 2018 against contraction of 12.5% MoM to Rs22.04 lakh crore in September 2018. In October 2018, the AUM of all categories of mutual funds decreased except liquid funds. The AUM of equity funds (excluding Arbitrage Funds), ELSS and Balanced Funds slipped 0.6%, 1.4% and 1.6% respectively in October 2018. Overall, the minuscule increase in AUM of mutual funds was basically due to 15% expansion in the AUM of liquid funds. Income funds and Gilt funds continued to witness net outflows for consecutive six months. Investors are dumping income funds owing to their disappointing returns due to rising yields. The yields are expected to continue to rise due to fear of rising crude oil prices and the IL&FS financial crisis. After the IL&FS defaults, many fund houses are reducing their exposure to NBFCs and are reluctant to buy fresh papers of NBFCs, which is spiking the yields. Besides, investors are also redeeming their debt mutual funds fearing fall in NAVs. However, the net inflows into Equity Schemes (excluding Arbitrage Funds) increased 11.6% MoM to Rs11,422 crore in October 2018 compared to Rs10,237 crore in September 2018. Balanced funds witnessed decline in net inflows to Rs519 crore in October 2018 compared to Rs731 crore in September 2018. Surprisingly, Arbitrage funds witnessed net inflows of Rs2,161 crore in October 2018 compared to Rs79 crore in September 2018. The drop in inflows in arbitrage funds during the previous months was attributed to decline in post-tax returns of arbitrage funds after 10% capital gain tax on equity mutual funds. Liquid/money market funds observed net inflow of Rs55,296 crore in October 2018 against net outflow of Rs2.1 lakh crore in September 2018.
The latest SEBI data on mutual fund industry folios shows that the industry added 11.60 folios in October 2018. As the equities wobbled, investors jumped into the markets with the hope of benefitting from the correction. This is reflected in the folio numbers. Equity schemes have added 8.78 lakh folios last month. If we include equity, balanced and ELSS then the number of folios in equity funds went up to 10.6 lakh. This effectively means that 93% of the industry folios have come in equity schemes. Liquid fund and other ETFs grew at a robust pace at 5% last month. The growing interest in liquid funds can be attributed to low duration funds gaining favour in the current increasing interest rate scenario. Overall, majority of the fund categories reported a growth in their folios. Gold ETF, income and gilt funds were the only categories, which saw a decline in their folio count. Range bound gold prices are mainly responsible for the category falling out of favour while rising interest rates are to be blamed for the decline in gilt folios. Income funds, which are suffering under the twin assault of interest rate hike and credit related fears saw the highest decline in absolute terms in October 2018.
According to data provided by AMFI, the industry garnered Rs 7,985 crore through SIPs in October 2018, slightly higher than Rs 7,727 crore collected in September 2018. Mutual funds attributed the increased interest in SIPs to investor education and matured investor behaviour. Investors have continued to keep faith in SIPs during volatile markets. Over the last one year, AMFI and players from the industry have launched campaigns such as ‘mutual funds sahi hai’ and Jan Nivesh, which is helping garner interest for mutual funds. Fund houses have applauded the increase in average ticket size of SIPs. AMFI data shows the mutual fund industry added 10.05 lakh SIP accounts each month on an average during FY19, with an average SIP size of about Rs 3,200 per SIP account. Currently, domestic mutual funds have about 2.49 crore active SIP accounts, through which investors regularly invest in Indian mutual fund schemes.
HDFC MF continued to be the most profitable fund house with profit after taxation (PAT) of Rs.721 crore in FY 2017-18. ICICI Prudential MF and Reliance MF followed HDFC MF with PAT of Rs.626 crore and Rs.505 crore, respectively. In percentage terms, LIC MF and Motilal Oswal MF have witnessed a healthy growth in profitability. In fact, Motilal Oswal MF has recorded PAT of Rs.132 crore that is higher than some big AMCs. The fund house has witnessed healthy growth in its PMS and advisory business. Among top ten fund houses, DSP recorded the highest growth in profits. The financial data shows that the fund house has witnessed 132% growth in its PAT i.e. from Rs.85 crore in FY 2016-17 to Rs.201 crore in FY 2017-18. A further analysis of profit figures of all AMCs shows that of 37 AMCs, 28 have reported profits in FY2017-18. The rise in profitability can be attributed to the growth in retail assets in equity funds. AMFI data shows that the AUM of equity funds rose 59% to reach Rs.10.68 lakh crore and the industry added 1.60 crore retail folios in FY 2017-18. Apart from mutual fund business, AMCs derive profits from portfolio management, alternative investment funds and offshore advisory services. However, a few AMCs witnessed decline in their profit margins. IDFC MF witnessed the highest decline in profit figures last fiscal. Its profit decreased to Rs.55 crore from Rs.97 crore last fiscal. On the other hand, a few AMCs such as Union and Edelweiss reported loss largely due to amortisation. While Union Mutual Fund acquired the entire stake from the KBC Asset Management, Edelweiss MF took over schemes of JP Morgan AMC in FY 2016-17.
Mutual funds transfer agency Computer Age Management Services (CAMS) has introduced a new facility titled advanced net asset value (NAV) search for distributors and investors. Investors and distributors can use this facility on www.camsonline.com or myCAMS app. The advanced NAV search will allow investors and distributors to check NAVs using either old or new scheme name and look at its asset class through partial or full string search. This option was designed to help investors explore the value of multiple funds in a single class, helping them compare their performance. The enhanced NAV search facility will help investors to check for NAV of a specific fund and similar funds based on various criteria. Users can also compare it with funds that are identical to the preferred funds or with funds having similar features. Users can also check historical NAVs of a scheme on CAMS as the R&T agent has eliminated 90 day limit for historical NAV viewing.
ICRA Online has launched its cloud-based research and analysis tool for mutual fund distributors and RIAs called MFI 360. MFI 360 is conceptualised and designed to empower brokers, IFAs, RIAs and AMCs to gain critical insights and timely access to accurate data on mutual funds. MFI 360 can be used on www.icrainsights.com. The platform provides a comprehensive fund review, enables analysis of performance trends, provides portfolio details and attributes and peer comparisons. The tool:
Yes Bank will soon launch its mutual fund business under the name of Yes Mutual Fund. In fact, the fund house has filed draft offer documents with SEBI to launch its ultrashort term fund and liquid fund. The fund house has hired Piyush Baranwal as its debt fund manager. Baranwal was earlier associated with BOI AXA Mutual Fund, Morgan Stanley and Principal Mutual Fund. CAMS is the registrar and transfer agent for the company. Similar to other bank sponsored AMCs, Yes Bank will leverage its banking network to distribute its funds. The AMC will channelize the savings of retail, corporate and institutional investors in equity and debt capital markets by leveraging Yes Bank’s expertise. This will complement Yes Bank’s retail liabilities strategy and also allow the AMC to leverage the bank’s distribution network for customer acquisition and provide customers a seamless experience for their investments and savings solutions. Yes Bank manages AUM of Rs.1730 crore from its MF distribution business. The fund house received SEBI’s in-principle approval to float an asset management business this year.
SEBI’s new guidelines require a detailed disclosure about each rating factor in all the sectors which will increase the predictability of rating changes by credit rating agencies. Credit rating agencies need to disclose promoter support, links with subsidiaries and liquidity positions of the companies being evaluated. This is the result of a series of defaults by Infrastructure Leasing & Financial Services (IL&FS), as unclear and incomplete details were the primary reasons for the company’s sudden fall. Poor ratings given to IL&FS papers after its collapse hurt many funds which had exposure to the group company. Presently, ratings are done on the basis of historical data, whereas investors should base their decisions on the future outlook. It is important that rating agencies start sharing key assumptions based on which they came up with the ratings. If disclosures were detailed, investors can protect themselves from sectors under pressure. Ratings in developed economies disclose the weights of sector-specific risk factors and the possible route ratings would take if the scenarios change.
AMFI has requested SEBI to allow ‘side-pocketing’ to reduce risks for investors. Following the IL&FS fiasco, AMFI has once again batted for the introduction of side-pocketing to mitigate risks in debt funds. The trade body has requested SEBI that the market regulator should allow fund houses to do side-pocketing in debt funds to mitigate risks in debt funds. Side-pocketing is a practice in which fund houses can segregate risky assets from the rest of their holdings and cap redemptions. Simply put, fund houses can create two funds one with risky assets where fund house will not allow redemption expecting recovery from stressed assets and another fund with other assets with existing features. This practice is prevalent among hedge funds in developed markets. Fund managers can create a separate account of stressed assets and try to recover the amount in the meantime without affecting the entire portfolio of the scheme. In 2016, JP Morgan Mutual Fund had pursued this practice in the absence of regulations. Later, AMFI had approached SEBI seeking formal guidelines to create uniform practices across fund houses. However, SEBI had earlier rejected the proposal citing that the practice may encourage fund managers to take undue risks.
SEBI has been reportedly deliberating introduction of mark-to-market valuations of all debt securities, regardless of maturity. Just like equity funds, liquid funds may become more volatile going forward. This means fund houses may have to do mark-to-market valuation of debt securities having maturity of less than 60 days. Currently, SEBI rule says that fund houses have to do mark-to-market valuations of securities having maturity of up to 60 days and more. Liquid funds hold securities having maturity of up to 91 days. However, most liquid funds hold securities having maturity of less than 60 days. As a result, post IL&FS crisis, NAVs of only a very few liquid funds witnessed a sharp decline due to mark-to-market loss. This would ensure that fund managers would not take undue risks to deliver attractive performance in liquid funds. Most fund managers buy short term corporate bonds which carries high credit default risk. Since short term funds are meant for conservative investors, taking undue risk is against the scheme’s mandate. Since debt securities are illiquid in nature and not traded like equities, mark-to-market valuation is challenging for fund houses since they have to quote NAV on a daily basis. Hence, most fund houses rely on rating agencies to derive NAV. Often rating agencies look at accrual to value debt securities. Credit rating agencies reflect the rating agencies’ opinion about the credit risk of debt securities based on historical data and some assumptions about the future, which underplays the possibility of default. In fact, SEBI has recently tightened disclosure norms for credit ratings agencies.
SEBI will soon start the process to appoint self-regulatory organisation (SRO) for mutual fund distributors. In fact, the market regulator has asked AMFI to start preparing for SRO. SRO for mutual fund distributors will be responsible for micro-regulations of its members. The SRO will spread awareness about mutual funds among people, educate and train distributors and conduct screening test for them. Earlier, SEBI had invited applications for SRO in March 2013. In fact, the market regulator gave its go ahead to AMFI promoted Institution of Mutual Funds Intermediaries (IMFI) to form SRO in February 2014. However, SAT quashed SEBI’s decision to grant in-principle approval to IMFI after Financial Planning Supervisory Foundation (FPSF) intervention. Later the Supreme Court upheld SAT’s decision and asked the market regulator to start the selection procedure afresh in December 2017.
Tata Mutual Fund along with CAMS has introduced ‘1 Click’ digital NFO subscription to help KYC-compliant clients subscribe to NFOs in just a few clicks. This facility aims to bring ease, convenience and speed of investing for new and existing clients. This facility is launched for Tata Small Cap NFO, where an existing or new investor can subscribe to the NFO in just 4 clicks – with nearly no data input. Investors can skip the entire process of log-in and form filing. This is an industry first digital initiative to make investing in NFOs completely hassle-free for existing and new investors and TATA Mutual Fund has been an early adopter to implement digiNFO solution.
NFOs of various hues adorn the November 2018 NFONEST.
SBI Debt Fund – Series C29 is a close-ended debt scheme that matures 366 days from the date of allotment. The scheme endeavours to provide regular income and capital growth with limited interest rate risk to the investors through investments in a portfolio comprising of debt instruments such as Government Securities, PSU & Corporate Bonds and Money Market Instruments maturing on or before the maturity of the scheme. The fund is benchmarked against the CRISIL Short Term Bond Fund Index. The fund is managed by Ms. Ranjana Gupta.
ICICI Prudential Bharat Consumption Fund – Series 5 is a close-ended equity scheme with a maturity of 1100 days. This close-ended scheme is a thematic one, focusing on consumption and will mainly invest in the stocks of consumption related companies. The scheme may also take exposure of up to 50% to derivative instruments, American depositary receipts (ADRs), Global Depositary Receipts (GDRs), overseas ETFs or foreign securities. Additionally, the scheme may also invest in securitized debt and stock lending, but will not be engaged in short selling and credit default swaps, among others. The scheme will invest in sectors such as consumer non-durables (dairy products, bakery), consumer electricals, pharmaceuticals, paint, among others. ICICI Prudential Bharat Consumption Fund – Series 5 will use the Nifty India Consumption Index as a benchmark. ICICI Prudential Bharat Consumption Fund – Series 5 will be jointly managed by ICICI Prudential AMC’s co-head of equities, Sankaran Naren, Roshan Chutkey and Priyanka Khandelwal.
Motilal Oswal AMC has launched a new fund of fund named Motilal Oswal Nasdaq 100 FOF. The FOF or Fund of Funds will invest in Motilal Oswal NASDAQ 100 ETF. The Nasdaq 100 predominantly constitutes the big tech players from the USA like, Facebook, Google, Netflix etc. This makes it a very technology sector specific index. Moreover, the valuations of this index are very expensive. This makes it less attractive for Indian retail investors. Retail investors cannot invest in ETFs because of the high ticket size. The Motilal Oswal Nasdaq 100 Fund allows a minimum application amount of Rs 500. The FoFs are a convenient way of investing in ETFs but they are taxed as debt funds, which is where they lag the feeder funds.
The fund is benchmarked against the NASDAQ 100 Index. The fund is managed by Ashish Agrawal and Abhiroop Mukherjee.
DSP Mutual Fund has launched DSP Healthcare Fund, an open ended scheme investing in the healthcare and pharma sector. Investment up to 25% could also be in international healthcare stocks, especially in large US companies, giving investors access to international diversification. The fund aims to benefit from three major growth drivers in India – growing demand, export opportunities and a conducive policy environment. The benchmark for the fund would be the S&P BSE Healthcare Index. Aditya Khemka, Vinit Sambre and Jay Kothari will co-manage the fund.
Union Mutual Fund has launched Union Value Discovery Fund, an open ended equity scheme following a value investment strategy. Union Value Discovery Fund would predominantly invest in stocks that are categorised as bargain stocks and are temporarily out of favour. The multi cap portfolio would follow bottom up selection to pick up stocks. The scheme will invest between 65% and 100% of assets in stocks of value companies. Value stocks are the ones that investors deem as potentially undervalued or trading below their intrinsic value. Investments in debt and money market instruments are capped at 35%. The Union Value Discovery Fund will utilise the S&P BSE 200 Index as its benchmark. The scheme will be benchmarked with the Total Returns of the Index (TRI).The fund will be managed by Vinay Paharia.
ICICI Prudential Mutual Fund has launched a new fund named as ICICI Prudential Capital Protection Oriented Fund – Series XIV – Plan A, a close ended capital protection oriented scheme. The tenure of the scheme is 1275 days from the date of allotment. The investment objective of the scheme is to seek to protect capital by investing a portion of the portfolio in highest rated debt securities and money market instruments and also to provide capital appreciation by investing the balance in equity and equity related securities. The debt securities would mature on or before the maturity of the scheme. The scheme will invest 100% – 65% of its assets in debt securities & money market instruments with low to medium risk profile and invest upto 35% of assets in equity & equity related securities with medium to high risk profile. Benchmark Index for the scheme is CRISIL Composite Bond Fund Index (85%) and Nifty 50 Index (15%). The fund managers are Rajat Chandak (Equity Portion), Rahul Goswami jointly with Chandni Gupta (Debt Portion) and Priyanka Khandelwal, the dedicated fund manager for managing overseas investments of the Fund.
Indiabulls Mutual Fund has launched Indiabulls Dynamic Bond Fund, an open-ended dynamic bond scheme across securities of various durations. Dynamic bond funds’ assets are allocated in both, short-term and long-term bonds. The Indiabulls Dynamic Bond Fund is considered moderately risky and is suitable for investors looking to earn an interest income over the medium and long-term. The scheme will invest up to 100% of its total assets in the debt and money market instruments. The Dynamic Bond Fund may also engage in short selling and securities lending or borrowing, while it may not engage in credit default swaps or invest in equity-linked debentures. CRISIL Composite Bond Fund Index will be utilised as the benchmark for Indiabulls Dynamic Bond Fund. The fund is managed by Malay Shah, who is the head of Fixed Income at Indiabulls.
Sundaram Mutual Fund has launched Sundaram Equity Savings Fund, an open-ended scheme that aims to invest in equity, arbitrage and debt. The equity exposure will tilt in favour of large caps. The arbitrage investment will primarily be through cash futures arbitrage on individual stocks while the fixed income investments will be made in high credit quality fixed income instruments. This is an offering which moderates the riskiness of pure equity with the safety of arbitrage and fixed income thus offering a wholesome blend of risk and reward while maintaining equity taxation. Sundaram Equity Savings Fund would follow a three-pronged investment strategy by choosing to invest in equity for capital appreciation, taking hedging or arbitrage investment calls, primarily cash futures arbitrage on individual stocks to enhance income. It will also invest in high credit quality fixed income instruments for consistent income generation. The fund will be managed by Krishna Kumar, CIO-Equity, S.Bharath, Fund Manager–Equity and Dwijendra Srivastava, CIO- Fixed Income. The performance of the scheme will be benchmarked to the Nifty Equity Savings Index.
SBI Debt Fund Series C – 31 to 34, DSP Nifty Next 50 Index Fund, DSP Nifty 50 Index Fund, ICICI Prudential Overnight Fund, ICICI Prudential Interval Fund – Series IX, Essel Balanced Advantage Fund, Reliance Mutual Fund – CPSE ETF FFO 3, Shriram Long Term Equity Fund, YES Liquid Fund, YES Ultra Short Term Fund, Tata Ultra Short Term Fund and Motilal Oswal Liquid Fund are expected to be launched in the coming months.
Personal financial prudence is the cornerstone for the better and secure future of an individual. It aids in tackling personal and social obligations. One of the most effective methods to reduce the income tax outflow, while garnering decent returns is to invest in the Equity Linked Saving Scheme (ELSS) under Sec 80C of the IT Act.
The consistent performance of all five funds in the November 2017 GEMGAZE is reflected in all the funds holding on to their esteemed position of GEM in the November 2018 GEMGAZE.
Launched in February 1999, the Rs. 636 crore Birla Sun Life Tax Plan, is one of the oldest ELSS funds in the industry. Currently, large caps account for 42.49% of the portfolio. Portfolio allocations show the fund to be small and mid-cap oriented when compared to its peers, with a 57.51% allocation to small and mid-cap stocks. With 49 stocks and the top 5 holdings accounting for 33.78%, the fund looks well-diversified. The fund invests 50.23% in the top three sectors, i.e. healthcare, finance and FMCG. The fund’s investment strategy focuses on a diversified and high-quality portfolio, with parameters such as capital ratios and balance-sheet strength used to judge quality. It uses a combination of top-down and bottom-up approaches to take sector/stock positions. The fund avoids highly leveraged plays and offers superior growth opportunities. After a bad patch from 2008 to 2010, Birla Sun Life Tax Plan has made a big comeback in the last five years, with a particularly good run since 2014. In spite of getting hit in the bear market situations a few years ago, it maintained a consistent growth. Since inception, this mutual fund has managed to give a very impressive return of 19.54% along with displaying a very consistent performance. In the past one year, 5 years and 10 years, the fund has earned returns of -2.21%, 19.08% and 17.41% respectively as against the category average of -4.29%, 16.43% and 16.23% respectively. The expense ratio is 2.38% and turnover ratio is 10%.
Launched in April 1999, the Rs. 3,553 crore Franklin India Taxshield Fund is one of the oldest ELSS funds in the industry with a proven track record in bull and bear phases. An established fund in the ELSS category, known for its consistency of returns and an ability to contain downside, it has religiously maintained a large-cap bias amid different market phases. This ELSS fund’s strategy has been to buy quality large caps or emerging large caps at a reasonable price, even in a category crowded with multi-cap funds. Currently, large caps account for 82.69% of the portfolio. A large-cap oriented fund with a bottom-up investment strategy, this fund always stays fully-invested. The most distinctive feature of the fund’s performance history is its ability to do better than its peers when markets crash. It fell only 15.19% as compared to the category average of 23.82% in 2011. But in the next year it slightly lagged behind its peers in terms of performance. The fund’s long term returns are attractive, with a trailing five year return of 21.48% and it is ahead of its benchmark. Globally, Franklin Templeton is known for its stock selection. The Franklin India Taxshield Fund adopts the value investment philosophy. The fund waits for attractive price before investing in a share. The fund focuses on big companies which have potential to grow the business. The fund is backed by a strong research team. Anand Radhakrishan’s disciplined investment approach and a strategy that thrived well with his skill-sets has yielded desired results for this fund under his watch from April 2007 to April 2016. However, the fund went through some fundamental changes in May 2016 such as change in the manager and investment strategy. Lakshmikanth Reddy, who joined the fund in May 2016, has been at the helm of affairs of this fund since then. Although R. Janakiraman is the named comanager here, Reddy is the primary manager. The change in the fund’s strategy is significant, too. While earlier it had a more definite mandate of investing around 70% in large-cap stocks and 30% in small/mid-cap stocks, it is now managed with a flexicap approach, which enables the manager to invest without paying heed to the benchmark index, market cap, or any specific style of investing. The change in the strategy is largely to align it with Reddy’s skill-sets and to capture wider range of investment opportunities in the fund. Although the investment team has a reasonably good track record in running flexicap strategies, which is positive, it should be noted that it will also change the fund’s risk/reward profile going ahead. Further, the changes here have made the fund’s past track record less relevant. With 58 stocks and the top 5 holdings accounting for 30.62%, the fund looks well diversified. The fund invests 55.30% in the top three sectors, i.e. finance, energy, and metals. Since inception the fund has given returns of around 22.51%. In the past one year, five years and ten years the fund has earned returns of -2.14%, 16.85% and 18.01% respectively as against the category average of -4.29%, 16.43% and 16.23% respectively. The fund’s returns in the last one year show a slowdown relative to the category and benchmark. The fund’s year-to-year returns do not always beat its more aggressive peers, but its performance adds up to very handsome returns over the long term. The expense ratio is 2.04% and turnover ratio is 21%.
At Rs. 5,308 crore, ICICI Prudential Long-term Equity Fund is one of the largest ELSS funds in the industry. Currently, large caps account for 71.64% of the portfolio. With 39 stocks and the top 5 holdings accounting for 27.68%, the fund looks well diversified. The fund invests 52.08% in the top three sectors, i.e. finance, healthcare and automobile. The fund is valuation-focused and the portfolio is constructed around stocks across sectors and market-capitalisation ranges, based on cheaper valuation and reasonable growth expectations. Expensive stocks which cannot be explained by valuation tools are avoided. A fund which has outpaced its benchmark over not one but three different market cycles, it has beaten its benchmark in 13 of the last 15 years. This is a rare ELSS fund that has managed to stay one step ahead of the benchmark on a trailing one-, three-, five- and ten-year basis, while also beating the category over these periods. The fund’s investment strategy typically delivers outsized returns in the beginning stages of a bull market when sector rotation is in vogue. It trails when markets are overheated. It also works well in containing losses when bears are in control. The value style of stock-picking has suffered setbacks in the last five years but seems to be back on the saddle in the last one year or so. The fund has earned a return of 20.39% since the fund’s inception. In the past one year, five years and ten years, the fund has earned returns of 3.39%, 16.75% and 19.93% respectively as against the category average of -4.29%, 16.43% and 16.23% respectively. The expense ratio is 2.25% and turnover ratio is 138%.
With a corpus size of Rs. 621crore, Invesco India Tax Plan is one of the smallest schemes in its category, but it packs in quite a punch. The fund invests across market capitalisation and sectors and spreads its assets over 39 stocks without being overly diversified and the top 5 holdings constitute 33.95%. 59.76% of the assets are invested in the top three sectors, finance, energy and technology. Even though the fund currently has a large cap bias with 71.04% allocation, it has not been hesitant about being heavily invested in smaller companies. In the past too, the mid-cap and small-cap allocation have been high. Its relatively small size makes an effective mid-cap strategy viable. Designed to own some of the best large-cap and mid-cap ideas of the fund house, the fund prefers quality businesses with healthy growth. But it is careful about not going overboard on valuations. It does not take tactical cash or sector calls. After remaining overweight on mid-caps until late 2015, the fund has drastically shifted gears since 2016. It managed to contain downside to levels much lower than its benchmark during 2008 and 2011 and has outpaced it by big margins both in 2010 and 2014. The fund’s recent large-cap tilt may help contain downside in the event of a market correction. The fund has delivered 14.05% returns since inception. The one-year, five year and ten year returns are 0.72%, 18.46% and 19.39% respectively as against the category average of -4.29%, 16.43% and 16.23% respectively. The year-to-year returns of this fund show it to be equally good at navigating both bull and bear markets, which is a hallmark of this fund. It managed to contain downside to levels much lower than its benchmark during 2008 and 2011 and has outpaced it by big margins both in 2010 and 2014. The last one year has seen the fund outpace its benchmark, but it slightly lagged behind its category. This could be due to its higher large-cap tilt in a category that is largely multi-cap-focused. This fund is a good choice for investors who are looking for a conservative approach to tax planning. Despite its relatively short history, the fund has consistently delivered returns for the investors. A fund that has managed to beat its benchmark through markets ups and downs in seven out of the eight years since launch, the fund prefers quality businesses with healthy growth prospects. But it is careful about not going overboard on valuations. It does not take tactical cash or sector calls. Stock picking has been the key for success of this fund. The expense ratio is 2.63% and the portfolio turnover ratio is 41%.
Launched in January 2007, DSPBR Tax Saver Fund has a fund corpus of around Rs 4329 crore. The fund is not wedded to any particular style and follows a blended growth-at-a-reasonable-price approach to select stocks. Though multi-cap by mandate, the fund has been quite large-cap oriented in the last five years. Typically, 65 to 75% of the portfolio has been in large-caps and 20 to 25% in mid-caps. The fund also takes tactical calls to capitalise on market trends and opportunities. It has a growth-oriented multi cap portfolio with 70.6% of the corpus in large cap stocks at present. There are 68 stocks in the portfolio. The top 5 holdings constitute 27.2%. 60.23% of the assets are invested in the top three sectors, finance, technology and construction. This fund has outperformed its benchmark in eight out of nine years since launch and its peers in seven of those years. The fund’s margin of outperformance relative to the category and benchmark has widened in the last one year to over 6 percentage points. On a three- and five-year basis, its annualised returns are over 7 percentage points and 3 percentage points ahead of the benchmark and category, respectively. It is creditable that this has been managed with a distinct large-cap tilt relative to the category. The track record suggests that the fund has proved better at navigating bull runs and volatile phases in the market than bear phases. In 2008 and 2011, the fund lost slightly more than the category. It has delivered sizeable outperformance in 2012 and 2016. However, as the fund has seen a change in manager in 2015 and also adopted a higher allocation to large-cap stocks, past performance may not be a great guide to the future. DSP BR Tax Saver fund has offered 13.29% returns since inception. In the last one year, five years, and ten years, the fund has earned returns of -5.45%, 17.74% and 18.12% respectively as against the category average of -4.29%, 16.43% and 16.23% respectively. The expense ratio is 2.1% and the portfolio turnover ratio is 82%.
ELSS (Equity Linked Savings Scheme) or Tax Saving Mutual Funds, as the name suggests, are equity-based mutual funds which invest a majority of the corpus in equity markets. These are the only set of mutual funds that help you avail tax deductions. ELSS Funds are special funds which are meant for tax saving purpose under Sec. 80C of IT Act. These mutual funds come in with a lock-in period of 3 years from the date of purchase. The investment route can be either lump sum investment or an SIP. The monthly investment could be as low as Rs. 500 and there is no maximum limit.
The amount invested up to a maximum of Rs. 1.5 Lakh in a year will qualify for tax deduction under Section 80C along with other instruments like Life Insurance Premium, PPF, etc. The ELSS Mutual Funds come with a 3-year lock-in period – you cannot sell the units within 3 years from the date of investment. If you are opting for an SIP in ELSS Mutual Funds, then each SIP installment will have the mandatory 3-year lock-in period. However, each investment (monthly SIP) is considered as a fresh investment. Hence, each such investment or monthly SIP must complete 3 years for liquidating. Let us say, you started the monthly SIP on 1st January 2017, then the first SIP will be eligible for withdrawal after the completion of 3 years, i.e., after 1st January 2020. Same way 1st February 2017 SIP will be eligible for withdrawal after 1st February 2020. It will continue like that. One year SIP in ELSS funds means you have to wait for the completion of the fourth-year to completely withdraw the amount. You can also invest a lump sum amount in ELSS tax saving funds. One option for investment in ELSS is the Growth Option where the holder will not get any benefits in the form of dividends. The investor shall only receive the gains at the end of the tenure. This will help appreciate the total NAV and thus multiply the gains. The only caveat being since these returns would be subject to market conditions, it may work in the investor’s favour or maybe completely bad but it is possible that the profits might be great. In Dividend Option, the holder gets timely benefits in the form of dividends which are completely tax-free. Dividend Reinvestment option is an option wherein the investor gets the option of giving back the dividends received in order to add to the NAV. It is a good option if the market has been performing well and is likely to continue the same way.
Equity Linked Savings Schemes are equity mutual funds which will not only help you to save tax but also provide a better opportunity to grow your wealth. Though there are many tax savings options available for investors who want to make use of the exemption limits provided under Income Tax section 80(C), ELSS funds serves as best tax saving mutual funds.
You need to look at fund’s recent performance for a minimum of 5 years before investing in that particular fund. Choose funds which perform better than the benchmark and other similar funds in the same time period.
Choose fund houses which have performed consistently over a long period of time say 5-10 years.
It shows how much of your invested amount is being used to manage expenses of the fund. A lower expense ratio means higher take-home returns. Choose a fund with a lower expense ratio which can give you superior performance.
Consider various parameters like Standard Deviation, Sharpe ratio, Sortino ratio, Alpha and Beta to analyze the performance of a fund. A fund having a higher Standard deviation and beta is riskier than a fund having lower deviation and beta. Choose funds having a higher Sharpe ratio as they give you more returns for each additional risk undertaken.
The Asset under management is also taken into account while selecting best ELSS for investment. Higher AUM means higher the confidence of investor to that fund.
Tax-saving mutual funds, popularly known as equity-linked saving schemes (ELSS), had a good run over the past one year. Their average performance was heartening, and returns rose to an average 26% during the period compared to 16% delivered by the BSE Sensex and 21% by the large cap category. In fact, a large number of funds under the tax-saving category have returned more than 30% in the past one year. The outstanding performance of the tax-saving funds is not an aberration, though. For one, they have beaten their peers over long periods, as long as 10 years. For the past five years, these funds returned 20% compared to the broader market’s 13%, which means if you had invested Rs 1 lakh during this period, your corpus would have grown to Rs 2.48 lakh while the broader market would have given you Rs 1.84 lakh.
To sum it up, carefully analyse your own risk appetite before selecting the ELSS funds. Although past performance of ELSS funds cannot guarantee their future performance, they can at least give you an idea of how a particular ELSS fund has dealt with past bear and bull market phases. Make sure to compare the performance of your chosen ELSS fund with its benchmark index and its peer ELSS mutual funds over the last 3 and 5 year period before finally investing in that fund. You may even choose to invest large amounts, above your tax deduction limit, but be mindful that your investment will not be accessible, and to that extent unchangeable, for the first 3 years of lock-in. Also, keep in mind, allocation to equity is most efficient over a period of more than 5-7 years. By keeping a long-term investment horizon, you can benefit from compounding and multiply your wealth. The performance of ELSS funds can vary wildly over the years. A top ELSS fund in one period may not necessarily be the best ELSS fund for the next period. Thus, you need to pick the right ELSS fund, one that has performed consistently and one that has generated a superior risk-adjusted performance. Because equity is highly risky, you will be better off investing systematically – putting in a small amount every month for a long period rather than paying a lump sum at one go. A monthly SIP will not only help you save money regularly but will also help you ride through the market volatility. Set aside a small part of your salary for the ELSS-SIP and watch your wealth grow. Overall, while ELSS funds are a great instrument for the combination of tax saving plus capital appreciation, two important aspects should always be considered before investing into them- (a) They all have a 3-year lock-in; and (b) They are, in the end, equity-oriented funds. To take maximum benefit from them it is advisable to not redeem the investments after 3 years but to give them a much larger horizon before considering redemption. This way you can truly combine tax planning with long-term wealth creation.