(Issue January 2011 MF Newsletter)

Q1. I am 46 and keeping in mind the retirement I want to save Rs 20,000 per month in mutual funds through SIPs for 14-15 years in the followings:

1. Reliance Banking Fund         Rs 4,000
2. HDFC Top 200                          Rs 4,000
3. DSP BR Top 100                       Rs 3,000
4. Tata Infrastructure                Rs 3,000
5. ICICI Tech                                Rs 2,000
6. Birla SL Div Yield                     Rs 2,000
7. IDFC Premier Equity Plan 'A' Rs 2,000

Do I need any change. Somebody has suggested investing in NPS by dropping
1-2 funds. Kindly suggest.

Answer : Well, just to apprise you ideally for planning for your retirement needs, one should ideally start early as you have a longer tenure to meet your financial goal. Moreover, in order to achieve your financial goal you have to take the right investment decisions; and in your case you have done the same by selecting the SIP mode in mutual funds to plan for your retirement.

As far as the selection of funds is concerned, you should focus towards investing in well diversified funds with a well established performance track record. While sector / thematic funds are high risk high return investment proposition, they may lose sheen when the sector is out of favour, and may also erode your wealth, and thus you should resist from investing in such funds. Out of the set of the funds selected by you, Reliance Banking Fund, Tata Infrastructure and ICICI Prudential Technology are sector / thematic funds, which may not be the right fit for your portfolio. Hence, instead taking into account your age, you may instead add a good balanced fund or a large cap fund to your portfolio as they are more consistent even during volatile market phases.

NPS as a product takes care of your pension benefits during your retirement. One can regularly invest in this scheme and get a part in lump-sum on retirement and a fixed monthly income for the lifetime. You should be aware of and opt for the right plan (Tier I and Tier II) and choose among the various class of investment (Class G, Class C and Class E) based on your risk appetite. However, in order to enjoy a tax benefit on your investment and build a retirement corpus with guaranteed returns, we opine that PPF would be a better option as compared to NPS.

Q2. I have the following doubt. Please help.

Since ELSS will attract almost "no" investors post DTC, and due to increasing redemptions after the lock-in period, could there be a huge fall in NAV of the funds resulting in loss for the investors. Please clarify, can this happen just because the fund asset is being decreased due to no buyers in the market.

Answer : A mutual fund’s NAV is not impacted by the buying or selling in a particular mutual fund scheme, as the NAV is calculated on per unit basis. Moreover, unlike stocks where price fall due to sentiments of buyers and sellers in the market; under mutual funds buying and selling happens on creation of unit basis i.e. when one buys into a particular scheme, the funds asset size is increased and so do the units (new units are created and the no of units in the scheme is increased). Similarly, when one sells the units, the funds asset size reduces and so do the units.

So any redemption pressure in a particular scheme may not impact its NAV. It will be only required for the fund manager to book profits by selling equities if he is not holding enough cash, to manage the redemption requirements.

Q3. I would like to know what is the right time to buy ST debt funds. It is generally said when the interest rates are moving up it is better to invest in short term debt funds why? Why not bond funds since the interest rates and bond yields are inversely related. Why the concept of equity market is not applied buy low and sell when high, why not to invest when the interest is high and prices are low.

ETF can be sold at the prevailing market rate then why other mutual funds cannot be sold? What is the difference between ETF and MF expense ratio.

Answer : As bond yield and bond prices are inversely related (i.e. when rates rise - price fall, and when rates fall - price rise), investment in longer tenor bond funds are bound to lose in the rising interest rate scenario. However, on the other hand shorter duration instruments are less impacted due to interest rate movement and hence they are preferred in the rising interest rate scenario. Short term debt funds with less maturity holdings are well placed to sell their old holdings at nearing maturity and buy new shorter duration instruments with new yield.

You can definitely apply the concept of buy (when the interest rates are at peak) and sell (when the interest rates bottom out) by timing the interest rates if you have the expertise and can read the interest rate movements and scenario well in time.

As ETFs are exchange traded funds that are traded on exchange, it needs both buyer and seller and the transaction is executed only when both buyer and seller arrive at a common price. While ETFs are funds traded on the exchange, MF expense ratio is the fund management and expense fee charged by the fund.

Q4. I had invested an amount of 1 lakh in January 2008 in Sundaram BNP Paribas Energy Opportunities Fund (growth option) and now its value is negative, so should I sell, hold or switch it - please tell me what I should do.

Answer : Sundaram Energy Opportunities is a thematic fund launched in January 2008, when the markets were trading at their all time peak of 2008. The fund was badly hit then and at present too it’s trading below its issue price, thus having eroded investors’ wealth.

As the fund is thematic in nature, its performance is highly linked to the development in the sector. At present with Government’s intervention in the sector by adopting a decontrolling policy stance, and the volatile movement in the crude oil prices have surged the level of uncertainty for the sector, thus making it quite volatile. Hence, given that we opine that you exit from the said fund and instead invest in a well diversified equity fund with an established track record.

Q5. I started an SIP in SBI magnum Taxgain in May 2007. Initially I opted for growth option, but my broker by mistake enrolled me for an SIP in the dividend payout option. Now can I switch over to growth option? What is the procedure?

Answer : If you switch out your units from SBI Magnum Tax Gain - Dividend option to SBI Magnum Tax Gain - Growth option, your "free" units (which have completed the three year lock-in period) will be again locked in for a period of 3 years (on which you can claim tax benefit under section 80C in the respective financial year), while the units that have not completed 3 years in the dividend option may not be switched due to its compulsory lock-in period of 3 years.

You can stop further SIP in SBI Magnum Tax Gain - Dividend option and simultaneously start a new SIP in SBI Magnum Tax Gain - Growth option.

Q6. I am 65 years old -- but , still working and fall under highest ( 30% ) tax slab .

I have parked substantial funds in three MIP funds with a view to earn tax free monthly dividend income -- although , I know that it is not obligatory for fund house to give monthly dividends.

I have recently invested sizeable money in "HSBC MIP -Savings Plan - Monthly Dividend '". Indeed, they are paying very good dividend for past 6/7 months.

Can you please tell me "how safe is this fund ". Higher dividends are obviously good but can this fund be trusted for absolute return.

I will be grateful for your kind comments.

Answer : HSBC MIP - Savings Plan is an aggressively managed with around 20% to 23% exposure in equities and the remaining in debt. Though the fund has performed consistently across market cycles, it has shown some beating during bearish market phases (its return from 08/Jan/2008 to 09/Mar/2009 was - 5.98%) while on the other hand shown superior performance during bullish market phases.

The fund has performed consistently and in line with its portfolio allocation and has managed to outperform most of its peers in the past. HSBC MIP - Savings is more suitable for moderate to aggressive investors, who are willing to take risk of holding above 20% exposure to equity. If you are willing to take that risk, then you can continue holding onto your investments.

Q7. My father gave me a sum 20000 to me to do anything. I would like to invest a part of money in mutual fund monthly. So, suggest me what type of investments can be made so that a bulk amount can be received by me after a period of 10 or 11 years, which will help me for my future.

Send any books that explain mutual fund and share market to my email Id so that I can make use of it.

Answer : As you hold a longer time horizon of 10 to 11 years, you can start with monthly SIP in diversified equity funds having well established and consistent track record. Your regular investments will help you accumulate a decent amount after 10 years which will help for your futures.

You can refer and make use of our Mutual Fund Guide to increase your knowledge on mutual fund investments.

You can download our free Mutual Fund Guide and Financial Planning Guide from our website www.Personalfn.com. We also right several articles on mutual funds and financial planning which can certainly be of good use to you.

Note : PersonalFN provides personalized and online Personal finance services like Financial Planning, Investment Planning, Retirement Planning and Mutual Fund Research in India. Our Mutual Fund Advisory services and Financial Planning services are backed a decade old solid research. We also offer Free Newsletters & Guides on Mutual Funds and Financial Planning.

Disclaimer:

Answers to the queries are based on facts provided and PersonalFN would have no responsibility for the consequences of the outcome based on these solutions. For a detailed analysis of your mutual fund portfolio, please consult a mutual fund advisor.

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Comments
nmrsridhar@apf.co.id Jan 07, 2011 I have few queries. please help. a) ELSS funds -- will not redemption pressure reduce the NAV? as per your answer to question no. 2 above, it may not-- but I feel that since these MF's do not hold much in cash, the redemption pressure will force the Fund manager to sell , which will defiintely impact the NAV. Pls clarify. b) do MF's have separate holdings for the Growth and Dividend options? if so,does the same Fund manager handle both? when funds are being analysed, why is it specifically mentioned as "Growth" and "Dividend" , if both have the same holdings?
research@personalfn.com Jan 07, 2011 Dear Mr. Shreedhar:  Yes under condition where the fund manager is not holding enough cash, he may be required to sell some shares to arrange for the redemption proceeds. This may to an extent impact the performance of the fund (in terms of NAV growth) as he may have to sell shares before his targeted levels. However this may not result in huge fall in NAV from the current levels. Also Not all but some mutual funds have separate portfolio for their Dividend and Growth option and we have found upto 20% deviation in both the portfolios. The same fund manager handles both the portfolios and as a core portfolio, he holds stocks which suits the schemes primary investment objective and style, while 15-20% portfolio varies in terms of Dividend yielding company or Growth oriented company in the portfolio. Growth and Dividend option provided by mutual fund is a convenience offered by mutual funds to its investors. If one is looking for a long term compounded growth, he may go for a Growth option (i.e. he will get his entire fund value when he redeems his investments) and if one is looking for a regular payouts then he can go for Divided option i.e. he can receive some portion his investment in the form of dividend when the fund manger distributes the portion of the surplus generated by the fund. Thanks, Team PersonalFN Research
sarathismr@gmail.com Jan 08, 2011 Dear Sirs, Please kindly change the size of the letters in the newsletter to a bigger one. It is difficult to read the contents fluently. Regards. Parthasarathi.
shubhadaparbat@gmail.comy main Jan 14, 2019 I would like to invest rs. 500000 in a mutual fund. My main objective is capital appreciation. My friend advised me to invest in sector funds. What would u recommend?
email@gmail.com Jun 19, 2014  Major thanks for the blog post.Really looking forward to read more. Really Cool.

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