Should your investment decision in mutual funds be based on their colour codes?   Feb 22, 2013

February 22, 2013
 
In this issue
 
  
Weekly Facts
  Close Change %Change
BSE Sensex* 19,317.01 (151.1) -1.50%
Re/US$ 53.48 0.5 0.83%
Gold Rs/10g 29,220.00 (1,060.0) -3.50%
Crude ($/barrel) 115.44 (3.9) -3.25%
FD Rates (1-Yr) 7.25% - 9.00%
Weekly change as on February 21, 2013
*BSE Sensex as on February 22, 2013
Impact

The Indian mutual fund industry as many of you may be aware, at present offers more than 1,500 schemes facilitating one to invest their hard earned savings in an endeavour to create wealth. But in the maze of so many schemes on offer, the task of selecting mutual fund schemes suiting your risk profile prudently, can be quite daunting when mutual fund advisors too, resort to the practice of pushing products rather than "advising" (taking into account their client needs and risk profiling).

Thus now to crack this whip, a panel constituted by the mutual fund industry lobby - Association of Mutual Funds in India (AMFI) has put forth a proposal to the capital market regulator - the Securities and Exchange Board of India (SEBI), that colour codes be applied to mutual fund products (across equity and debt schemes), which can signal the risk that product carries with it.

It has been proposed to assign colour codes as under and they be displayed on the application forms, account statements and even advertising related material.
 
Colour Codes Risk significance
Red High
Yellow Moderate
Green Low

Hence by the above, mid & large cap funds would be assigned the colour "red", while "yellow" would be assigned to pure large cap funds and debt oriented hybrid funds and the colour "green" could be confined to pure debt focused funds.

We are of the view that, the proposal assumes significance at a time when the Rajiv Gandhi Equity Savings Schemes (RGESS) is intended to be made popular. While the move may help investors - especially the retail ones, to pick a mutual fund aided by colour coding, we believe it is imperative for any investors to undertake a risk profiling carefully taking into account their age, income, expenses, assets, liabilities, number of dependents and nearness to financial goals. Moreover in order to select winning mutual fund schemes for the portfolio, one should also focus on the following aspects amongst others:
 
  • Performance (which includes: returns, risk, risk-adjusted returns, etc.)
  • Portfolio characteristics
  • Fund management style
  • Costs (in the form of expense ratio and exit loads)
     
So while the proposal from AMFI is good and may be accepted by SEBI, we think that imparting investor education should also be a priority, as that can help the Indian mutual fund industry in the long-term.

 
Impact

Today with good healthcare facilities available, life expectancy has increased and is set rise over a span of next 10 years. The Union Health Ministry's life expectation at birth projects that by the year 2021, an average Indian male would live till his 69.8 years, while a female upto 72.1 years.

Taking into account such statistics, mortality charges on life insurance policies is set to reduce. Recently, IRDA Chairman, Mr J. Hari Narayan said, "The new mortality tables are ready and it will bring down the premium as life expectancy has gone up."

It is noteworthy that, mortality charge is the actual cost of insuring oneself against death and forms a part of the premium paid by the policyholder. So it factors the probability of a person's death based on his age and other parameters.

We are of the view that with new mortality table soon coming into force, along with premiums being reduced, one may also expect returns on endowment / traditional policies improving, because more amount of the premium would be allocated for investment purpose rather than being assigned for mortality charges. But that in our view, that should not encourage one to combine investment and insurance needs together. We believe that insurance and investment needs should be dealt with separately, and thus for indemnifying risk to life, one should take cover only under pure term insurance plans, as they offer a far better cost-benefit proposition.

 
Impact

Many of you may have noticed that while the Indian equity markets have begun the year 2013 with an upward streak (gaining +1.6% in January 2013), the momentum seemed to have waned and thus now in the month of February 2013, we have depicted a descending trend (-1.4% until February 2013), with several worrisome factors in play.
 
Trifling roller coaster move of the Indian equity market
BSE Sensex Jan-Feb 2013
Base: Rs 10,000
Data as on February 18, 2013
(Source: ACE MF, PersonalFN Research)

The market seems worried over host of issues such as... To read more about this news and to know our view over it, please click here.

 
Impact

Last week we apprised you about the recommendations made by Reserve Bank of India's (RBI) working group, on gold monetisation, aimed at moderating gold import demand and encouraging financial savings in the economy. And now moving a step closer to recommendation made by RBI's working group, SEBI has permitted Gold Exchange Traded Funds (Gold ETFs) to invest in Gold Deposit Schemes (GDS) of banks, subject to limit of 20% of the total asset base of the scheme. To know the systems and process instilled thereto, and to read our view over it, please click here.

 
FREE Money Simplified Guide
Your Definitive Guide To Retirement Planning!
Download your FREE copy to know how you can indeed build the corpus for your golden days.
Click Here to get this most downloaded E-Guide, Now!
   
  • Country's premier bourse, BSE Ltd. has roped in S&P Dow Jones Indices to use the Standard and Poor's (S&P) brand for Sensex and other indices such as BSE 200 and BSE 100, a week after expiry of the global financial major's pact with rival exchange NSE.

    Hence now the BSE benchmark index Sensex will be managed and operated by the new strategic partnership and the aforementioned indices would now be known as S&P BSE Sensex , S&P BSE 100 and BSE 200. Moreover, these indices would join S&P Dow Jones Indices' other iconic financial market indicators such as the S&P 500, the Dow Jones Industrial Average, the S&P/TSX 60, and the S&P/ASX 200.

    We are of the view that, that such a strategic partnership would allow S&P Dow Jones Indices to further implement its South Asia growth strategy, as well as help India premier and oldest stock exchange (established in 1875), BSE in expanding its global presence. Such a strategic move may also enable BSE to shore-up its presence in derivatives segment, which thus far has been dominated by its rival NSE.
     
  • Public sector companies such as Rural Electrification Corporation (REC), Indian Railway Finance Corporation (IRFC) and Housing and Urban Development Corporation (HUDCO) are once again raising funds through the issue of tranche-II tax-free infrastructure bonds, with an issue size of Rs 100 crore, Rs 1,000 core and Rs 500 crore respectively.

    The coupon rate and effective yield per annum which they would offer on respective tenors, would be as under:
     
    Issuer *Coupon rate p.a. on 10-year bonds *Coupon rate p.a. on 15-year bonds
    REC 6.88% 7.04%
    IRFC 6.88% 7.04%
    HUDCO 7.03% 7.69%
    *Note: The coupon rate is mentioned for category IV investors (i.e. retail investors investing upto Rs 10 lakh)

    We are of the view that, the aforesaid public sector companies are coming with Tranche-II of tax-free bonds since the earlier issue did not see much participation from investors (as reflected by their total issue size being grossly underutilised). It is noteworthy that for the current fiscal year , the Government had allowed state-owned financial institutions to raise about Rs 60,000 crore through tax-free infrastructure bonds, compared to Rs 30,000 crore in the previous financial year; but with few taker to such issues, it is likely that the Government may reduce the cap on the amount in the next fiscal year.
     

Mortality Table: A table that shows the rate of deaths occurring in a defined population during a selected time interval, or survival from birth to any given age. Statistics included in the mortality table show the probability a person's death before their next birthday, based on their age.

Death-rate data help determine prices paid by people who have recently purchased life insurance. A mortality table is also known as a “life table,” an “actuarial table” or a “morbidity table.”
 
Source: Investopedia
Quote : "If investing is entertaining, if you're having fun, you're probably not making any money. Good investing is boring."   - George Soros
 
FEEDBACK | PERSONALFN HOMEPAGE | ARCHIVES | FORWARD TO A FRIEND