There has been a dramatic increase in Indian citizens’ life expectancy in the past decade. Life expectancy was about 62.5 years in 2000 and it is 69 years now. People are deferring their retirement. However, most people do not have adequate retirement benefits. This means that they need to work harder to make enough wealth for use after retirement. Given the increasing lifestyle and healthcare costs people will need a much higher retirement corpus than they might have required a decade ago. This is especially because of higher life expectancy.
Here’s an example. Let’s say you are 30 years old. You plan to retire at 58. If you hope to live till 65, you will need Rs. 87 lakhs for your retirement. This is assuming that your monthly expenses come to Rs. 25,000, your provident fund contribution per month is Rs. 3,600, inflation is 5% and your investments give you 12%.
However, if you expect to live till you are 80 years, you will need Rs. 2.5 crores when you retire, which is an increase of 187% in the corpus. You need to either save more money or invest in financial products that give you a higher rate of return on investments. This is where equity mutual funds can help.
Why equity mutual funds
People have many responsibilities in their working lives that includes children’s education, caring for aged parents, EMIs etc. That is why higher return on investment is one of the most important factors of wealth creation. Equity mutual funds help you get exposure to different asset classes and provide superior returns in the long run. Historical data reveals that equity can provide inflation beating returns in the long run.
In the last 10 years, the Nifty 50 has given returns of more than 125%. If you had started saving for retirement by investing in Nifty 50 using a Systematic Investment Plan (SIP)for the last 10 years, you will have Rs. 50 lakhs by now assuming you invested Rs. 25,000 every month. If you invested in the best of equity mutual funds such as the UTI Equity fund, your investment will be worth Rs. 79 lakhs.
How to invest in mutual funds for retirement
You need to start investing early for retirement. The earlier you start the better your returns will be. Compounding is a powerful tool. Your savings can generate good returns if you invest early and give the investment enough time.
You need to review the investment amount every year.An increase in income is usually used to increase one’s lifestyle. Along with lifestyle upgrades, you should look at increasing your investment amount whenever your salary increases. Let’s say you have a salary hike of 10%, then you can look at increasing your investment amount by at least 5% instead of keeping it constant. This will help you save more as years go by and you are closer to your retirement. Incremental savings can help you end up with a good retirement corpus. You can boost your savings by periodically adding a percentage of your annual bonus or other income.
When you are young and start saving for retirement, look at funds that will provide you with higher returns as you can afford to take higher risks.One of them is the thematic mutual funds. Read this article to know more about them – Should you consider thematic funds?. Mid and small cap funds can provide higher returns in the medium to long term. Funds such as the Axis Midcap fund have provided annualised returns of more than 16% in the past 3 years.
The most important aspect of retirement saving is to not touch your retirement savings until you retire. Regardless of the effort you make to generate a good amount for retirement, if the savings starts seeing withdrawals then there will be a negative impact on your savings. So, use different investments for the various financial goals such as your child’s education and marriage. If you earmark investments for your retirement, it will help you safeguard it until your retirement.
Mutual fund SIP is one of the easiest ways to invest for retirement planning. The money will be auto-debited from your savings bank account every month. It is a disciplined way of investing because you invest regularly. SIPs in equity mutual funds will average the cost of your purchase and help you tide overstock market volatility.
Want to invest in mutual funds for your retirement? Click here to invest in some of the country’s best mutual funds.
ICICI Prudential Mutual Fund has announced the launch of ICICI Prudential Business Cycle Fund. The new scheme aims to identify and invest in opportunities across sectors/themes/market caps, based on the prevailing business cycle. Read on to know more.
What is the scheme
ICICI Prudential Business Cycle Fund is an open-ended equity scheme that aims to provide long term wealth creation by investing in equity and equity related securities with a focus on riding business cycles through dynamic allocation between various sectors and stocks. The scheme will have a minimum of 80% in equity and equity-related instruments selected on the basis of the business cycle.
ICICI Prudential Business Cycle Fund will follow a top-down approach right from monitoring macro indicators (global and domestic), identifying business cycle followed by determining suitable theme/sectors and selecting the stocks within these theme/sectors.
Why business cycle investing
An ongoing business cycle may extend or shorten depending on the macroeconomic conditions and the fiscal and monetary policy response by the government and central banks during a business cycle. Such times can often provide appropriate opportunities for investment.
ICICI Prudential Business Cycle Fund offers a different style that focuses on macros. By investing, investors can gain access to appealing sectors at any particular point in time. It will further aim to achieve diversification within those sectors.
What’s special
During the early expansion phase, cyclical stocks tend to outperform. In the contraction period, the defensive groups like health care, consumer staples, etc. outperform because of their stable cash flows and dividend yields.
In the coming decade, volatility is expected to be elevated. So, the ICICI Prudential Business Cycle Fund promises to be nimble as the macro environment may change. It aims to move between themes quickly so that the portfolio should be able to prudently position between various themes.
Do note this is not a Value / Contra / Special Situation/ Growth style of investment.
Fund-house speak
Speaking on the launch of the product, Nimesh Shah, MD & CEO, ICICI Prudential AMC said, “Stock market sector returns generally are affected by the various business cycle phases. A typical business cycle will have 4 distinct phases viz., Growth, Recession, Slump & Recovery. While each phase is different, an investment approach that identifies and analyses key phases in the economy could help generate a positive investment experience.”
ICICI Prudential Mutual Fund has one of India’s largest and experienced investment team led by S Naren, who is well known for his calls on macros and market cycles.
Who will manage the scheme
The scheme will be managed by Anish Tawakley, Ihab Dalwai, and Manish Banthia.
What is the benchmark of the scheme
The benchmark of the scheme is Nifty 500 TRI.
When will the scheme open, close
The New Fund Offer (NFO) opens on December 29, 2020 and closes on January 12, 2021.
Additional details
Plans: 1. ICICI Prudential Business Cycle Fund, 2. ICICI Prudential Business Cycle Fund – Direct
Options: Growth & Dividend
SIP / SWP / STP: Available
Minimum Application Amount: Rs. 5,000 (plus in multiples of Re.1)
Minimum Additional Application Amount: Rs. 1,000 (plus in multiples of Re.1)
Minimum Redemption Amount: Any amount
Entry Load: Not applicable
Exit Load: 1% of applicable NAV if money is redeemed within 12 Months
Mutual fund schemes have become one of the most prevalent investment avenues. In the last few years, mutual funds have assisted investors in achieving their financial goals.
Besides this, it has also offered better tax-adjusted returns than other traditional vehicles of investments.
However, did you know you can also use mutual funds to get a monthly income? Monthly income is important for retirees who no longer have a regular source of income.
Individuals can invest in mutual funds during their working years and redeem their investments and gains after retirement.
Options for monthly income
We know that different types of mutual funds have different investment objectives. And the investment objectives of debt and debt-oriented funds are income generation and capital protection. It also aims to give returns that beat inflation.
However, it is to be noted that mutual funds are linked to the market and cannot provide a stable monthly return like other traditional savings options.
Systematic Withdrawal Plan (SWP) is a facility that offers mutual fund investors the option to withdraw a specific sum of money over a timeframe. While this option is available for both equity and debt funds, setting up an SWP in debt funds is better, as debt funds are less volatile than equity funds.
Do mutual funds pay a dividend?
If you opt for the dividend option, your mutual fund will pay a dividend. Besides SWP, the dividend option
is also a way to get income from mutual funds. In the case of the dividend option, the fund houses distribute the gains to the investor. However, dividends are not distributed regularly and are under the fund house’s jurisdiction.
Unlike dividends received on direct equity investment, mutual fund houses can also distribute the dividends from the invested capital. After the dividend is announced, the unit price of the dividend plan reduces as per the distributed dividend. Dividends are not tax-free. It is added to the investor’s income and taxed as per its tax slab. The mutual fund house will also deduct a 10% TDS on the dividends amounting to more than Rs. 5,000.
Mutual funds growth vs dividend
You can choose the growth or dividend option when you invest in any fund. The dividend option is now renamed as Pay-out of Income Distribution cum capital withdrawal. In the case of a growth option, the fund manager reinvests the returns generated by the fund. Moreover, the dividend distributed will only be a small portion of the invested capital.
So, if we compare the dividend option and SWP, we will see that SWP is a better option than the dividend option.
This article will look at the best way to get income from mutual funds through SWP.
What is Systematic Withdrawal Plan (SWP)?
By choosing to go with the SWP system, you can effortlessly create a regular income through mutual funds. An SWP is the opposite of the Systematic Investment Plan (SIP). Here, you get to withdraw from your mutual funds in instalments. In simple words, the SWP lets you withdraw a certain amount of money from the mutual fund scheme at regular intervals.
Let’s understand it better with an example. Suppose you wish to withdraw Rs.20,000 on the 1st of every month. Thus, you can do so through SWP. You can also choose varying intervals through this facility, such as monthly, quarterly, half-yearly, and yearly depending on your preference.
In the same manner, the amount you would wish to withdraw can vary according to your need. For instance, some mutual fund houses offer you the option to take out only the gains while keeping the invested money intact in the mutual fund scheme.
Once you have selected the sum and the withdrawal frequency, the fund manager will sell units from the scheme on the pre-decided date. And then, the transaction to transfer the selected amount to your bank will get initiated.
Let’s take another example here. Using the AdvisorKhoj SWP calculator, let’s understand the working of SWP. Imagine you have invested a lump sum amount of Rs. 72,000 in SBI Magnum Income scheme – Regular Plan.
Let’s say you need Rs. 3,000 per month through SWP.
AMC
SBI Mutual Fund
Scheme
SBI Magnum Income Reg Gr
Lumpsum Amount
Rs. 72,000
Lumpsum Amount Investment Date
01-04-2019
Withdrawal Amount
Rs. 3,000
SWP Date
10
Period
Monthly
SWP Start Date
06-04-2020
SWP End Date
06-04-2022
Here’s how the monthly SWP will take place:
Now, throughout the entire period of your investment, there will be 24 monthly instalments. Also, you will get to withdraw Rs. 72,000 in these instalments. At 8.28% of the return rate, the fund will have Rs. 6219 on 10th March 2022 after the invested capital of Rs.72,000 is redeemed.
Here, you must remember that if the scheme NAV is appreciating at such a percentage that is higher than the withdrawal rate, the investment value will also get appreciated.
However, despite the fall in NAVs, you will still get the regular income until the end of the SWP period or until there is money in the investment scheme.
So, we have seen that the SWP amount remains fixed and doesn’t vary as per the market movement.
Benefits of SWP
SWP is the best option available for investors to receive a monthly income.
Flexibility
In such a plan, you get the utmost flexibility to select the frequency, amount and date according to your need. Also, you can even stop the SWP at any given moment. If you want, you can withdraw an extra amount above and over the fixed SWP withdrawals or invest additionally.
Capital Appreciation
If the withdrawal rate of SWP is lower than the fund return, your invested amount will appreciate, and you may be able to withdraw more money.
No Tax Deduction at Source (TDS)
One of the significant benefits of investing in an SWP is that if you are a resident of India, you will not have to pay any TDS on your gains.
Mutual Funds to Invest to Get Monthly Income
Mutual funds with low volatility and are capable of beating inflation are considered the best candidates for monthly income. You can put your money in Conservative Hybrid Funds that invest a minimum of 75% of the amount in debt instruments to create a monthly cash flow. Also, the remaining 25% goes into stocks that add better growth to your portfolio.
Furthermore, you can consider other debt fund categories, like Banking and PSU Debt Funds, corporate bond funds, or short-duration debt funds. These funds have the potential to beat inflation.
If not, you can also go with Equity Savings Funds that put a minimum of 65% of your amount in equity instruments such as derivatives. Derivatives are equity-related securities that take advantage of mispricings in several markets to earn risk-free gains by simultaneously purchasing and selling equities.
How to Select the Fund for Monthly Income?
In the previous paragraph, we have seen that debt and debt-oriented funds are best to set up SWP to get monthly income. Now, we will see some of the factors to consider when choosing the right fund:
Past Performance
When selecting a fund for monthly income, we need to look for funds that are not volatile and don’t take unnecessary risks.
As we are parking lumpsum money in a debt-oriented fund, we need to check the fund’s performance when the market is down. If the fund has consistently performed better than its peers during difficult periods, the fund can be a better option.
Expense Ratio
The expense ratio is referred to as the fee charged by the fund house for managing the fund. It includes fund management fee, marketing fee and commission to distributors. The expense ratio is subtracted from the returns generated by the fund.
While the percentage may seem low, it will considerably impact the total investment portfolio. So, it is better to look for a fund with a low expense ratio.
Exit Load
Exit load is the fee charged when exiting a mutual fund scheme. Depending on the fund, you will have to pay an exit load if you withdraw within a shorter period.
This fee is levied to avert quick exit and instant cash outflow from fund houses. Thus, as an investor, make sure you are going with mutual funds with zero or minimal exit loads.
Maturity Profile
The maturity period of the underlying debt instruments varies from one type of debt fund to another. Every debt funds have a different maturity profile. So, depending on your investment period, you can select the debt fund that matches your horizon.
Tax Implications of SWP
The redemption through an SWP is subject to taxation. If you have debt funds and your holding period is less than 36 months, the capital gains realised will be added to your overall income. Also, it will be taxed as per your income tax slab rate. However, if the holding period goes beyond 36 months, the capital gains will be regarded as long-term and taxed at 20% after the indexation.
Regarding equity funds, if the holding period is less than a year, the capital gains will be taxed at 15%. On the contrary, if the holding period goes beyond a year, it will be long-term capital gains and taxed at 10% without any indexation.
Who should look at getting monthly income or using SWP from mutual funds?
Generally, experts recommend SWP for ultra-conservative investors and retirees who wish to get a fixed sum of money.
Apart from this, freelancers and those with varying income can also withdraw money through SWP to cater to their regular requirements.
Key Takeaways
In the end, here are some key takeaways to keep in mind:
Mutual funds could be useful if you look forward to a regular cash flow to meet basic expenditures.
You can earn income from mutual funds by going with an SWP or dividend option.
SWP is a much-recommended option to earn a regular income, considering it is tax-efficient and can guarantee a specific amount at the end of every month.
With an SWP plan, you can select the amount, date and frequency according to your convenience.
FAQs on Monthly Income from mutual funds
Can I get monthly income from mutual funds?
Yes, it is possible to get monthly income from mutual funds. One of the best ways is to set up a Systematic Withdrawal Plan in a debt-oriented mutual fund scheme.
Which mutual fund is best for monthly income?
While trying to generate regular income from mutual fund investments, you must stay away from something that gets severely impacted by volatility. Thus, it is best to invest in conservative hybrid mutual funds or debt mutual funds that are less volatile than equity funds and beat inflation.
Which mutual fund gives the highest monthly dividend?
Dividends are generally distributed based on the surplus that the scheme has gained. Thus, there is no mutual fund that can guarantee a monthly dividend. However, if you still wish to get dividends, you can go with the Equity Saving Funds, Conservative Hybrid Mutual Funds or the Dividend Plan of Short Duration Debt Mutual Funds.
What are the safest fixed-income funds?
Among the fixed-income funds category, the overnight fund is the safest choice. It invests in securities that mature in one day. Thus, it doesn’t have any interest or credit risk. The risk of incurring a loss with overnight funds is almost zero. Additionally, you can also go with liquid funds as they only invest in money market securities that mature within 91 days.
Need help investing in mutual funds for monthly income? Get in touch with your consultant at www.wealthzi.com.
Equity investments are known to give higher returns when compared to other asset classes such as fixed income. However, many investors forget the fact that apart from the capital gains from equity investments, these investments provide dividends as income. A lot of companies in India provide their shareholders with dividends from a part of their earnings. While paying dividends to investors is not mandatory, many companies do it to make the investment in the company stock more attractive.
There are investors who think that direct equity investments are too risky. Those investors who want to enjoy the benefits of dividends can consider investing in dividend yield funds. Here is the info ondividend yield fundsand how they work.
What is a dividend yield fund?
Dividend yield funds are not those that pay regular dividends. They aren’t mandated to pay dividends. Dividend yield funds use dividends as a strategy. They invest in stocks that come with high dividend yields.
To understand this, let’s understand dividend yield. The dividend yield is the ratio of a company’s dividends when compared to the company’s stock price. This is a ratio that considers all the past paid dividends and compares them to the market price of the shares.
The comparison with the market price of the shares helps investors understand if the price of the shares is very high. So, dividend yield stocks are not just stocks that pay dividends, they are stocks that have value in them. The dividend yield helps choose stocks based on the dividends and price.
What are the features of a dividend yield fund?
A dividend yield fund invests most of its assets in stocks with high dividend yields. As per the guidelines by the Securities Exchange Board of India (SEBI), these schemes need to invest a minimum of 65% of their assets in dividend yielding stocks. So, the fund does not invest entirely in good dividend paying stocks. The fund manager can choose other stocks to invest the assets of the funds. When some of those stocks do not pay out dividends, the distributable surplus of the fund will be less.
The most important point is that the way dividend stocks are chosen is different for various funds. For instance, some funds use the Nifty 50 as benchmark for choosing dividend yield funds. If the dividend yields of the stock chosen by the fund exceed that of the dividend yield of Nifty 50, then the fund will consider the stock a high dividend yield stock. There are other funds that use the Sensex or the Nifty Dividend Opportunities index as benchmarks.
What are advantages of dividend yield funds?
Dividend yield funds can act as a hedge against market turmoil. How? This is because they invest in companies with a steady stream of revenues. If a company has reliably paid out healthy dividends over the years, this means it’s a stable company. Since these funds are always invest with such companies, they are considered safer for medium risk investors.
Dividend yield funds usually provide significantly better yield on investments in a bull run as mostly good stocks are in the portfolio.
Who should invest in dividend yield funds?
Those who are looking to invest in equity funds can consider dividend yield funds. This should not be chosen by those who have a low risk profile because the returns of dividend yield funds may not be stable. The fund can be volatile between bull and bear cycles.
Even those with an aggressive risk profile and looking for higher returns shouldn’t consider dividend yield funds as their long-term returns aren’t high. For instance, while Templeton India Equity Income Fund has provided investors with 16.9% in the past year, the 5-year return of the fund is just 9.27% which is much lower than that of other large cap funds such as Axis Bluechip Fund that has given 14%. Pure equity funds such as mid-cap and small-cap funds are a better choice for aggressive investors. Dividend yield funds can be used to diversify an investor’s portfolio.
As the 6 fixed income schemes of Franklin MF inch towards winding up, the half a dozen funds have collected Rs 330 crore from maturities, pre-payments, and coupon payments during the period November 28 to December. This fortnightly amount is lower compared to the preceding period. During Nov 28-Dec 15 period, 36% of the money came in as pre-payments, indicating the strength of the borrowers who even in a Covid-19 affected economy are repaying debt earlier than expected. Read on to know more.
Cash stash
The 6 schemes have received total cash flows of Rs 11,907 crore as of December 15, 2020 from maturities, pre-payments, and coupon payments since April 24, 2020.
Over the latest fortnight (November 28 – December 15), the 6 schemes received Rs 330 crore, of which Rs.118 cr was as pre-payments. The pre-payments should assuage some worries of investors about the portfolio health of the six embattled debt funds.
The cash available as of December 15, 2020 stands at Rs 7,488 crore for the four cash positive schemes, subject to fund running expenses. The four loan-free schemes are Franklin India Low Duration Fund, Franklin India Ultra Short Bond Fund, Franklin India Dynamic Accrual Fund, and Franklin India Credit Risk Fund.
Scheme level scan
Individually, Franklin India Low Duration Fund, Franklin India Ultra Short Bond Fund, Franklin India Dynamic Accrual Fund, and Franklin India Credit Risk Fund have 49%, 48%, 34%, and 16% of their respective AUM (assets under management) in cash.
Borrowing levels in Franklin India Short Term Income Plan and Franklin India Income Opportunities Fund continue to come down steadily and currently stands at 1% and 16% of their respective AUM. These two schemes can return monies to investors only after paying all the obligations/ liabilities towards borrowings/ expenses/provisions.  Franklin India Short Term Income Plan is expected to be the 5th scheme to attain cash-positive status soon, as borrowing levels have come down to just Rs 43 crore from Rs 943 crore.
Winding-up process
The Supreme Court permitted the Trustee of Franklin Templeton Mutual Fund to seek the consent of the unitholders for the winding up of the six schemes. The Trustee has issued a notice dated 6 December 2020 for seeking the consent of unitholders. The e-voting for the same will held from 26-28 December 2020 followed by a unitholder meet on 29 December 2020.
Redemptions will continue to be suspended till the date of the next hearing scheduled in the third week of January 2021. We believe that the order issued by the Supreme Court will be helpful in ensuring orderly monetization and distribution of scheme assets, Franklin Templeton MF said.
The Indian Finance Minister Nirmala Sitharaman in her Union Budget speech this year had proposed a debt Exchange Traded Fund (ETF) consisting of government securities. The aim behind this was to improve participation in the government securities (G-Sec) market. Sitharaman said “This will give retail investors access to government securities as much as giving an attractive investment for pension funds and long-term investors.â€
Recently, Motilal Oswal mutual fund launched Motilal Oswal 5-year G-Sec ETF (MO5GS). This is not the first G-Sec ETF. LIC Mutual Fund had launched LIC MF GSEC Long Term ETF in 2014. The maturity for these securities were more than 9 years. However, MO5GS is for a shorter term of 5 years. Investors with a low risk profile can consider this. However, there is a need to understand the difference between gilts funds and ETFs.
How ETFs help the G-Sec market?
Retail participation in the secondary G-Sec market is very negligible at present. G-Sec ETFs can help improve participation. How?
As you might know, an ETF is a basket of securities that tracks an underlying index. A G-Sec ETF investing primarily in government securities will mean that the government may prefer to borrow directly through ETFs from the secondary markets. Why? This is because ETF liquidity will be high as ETF investors will be pension funds and domestic institutions. Since ETF are listed in the market, the secondary market for G-Sec ETFs will improve and the better liquidity will help retail investors.
How are G-Sec ETF different from gilt funds?
Gilt funds and Gilt ETFs invest in a basket of G-Sec. Read this article to know more about gilt funds – Are gilt funds as good as bank deposits? A Gilt ETF is a passive fund that tracks an index of G-Sec.
Gilt funds are available as open-ended funds or close-ended funds. ETFs are close-ended funds. So, you can invest in them during the New Fund Offer (NFO) tenure or you can buy them from the secondary market.
Since Gilt ETFs need to be purchased and sold through a brokerage account, you will need to hold them in the demat account. You don’t need a demat account for gilt funds.
ETFs are traded through the day. So, ETF prices can fluctuate and vary sharply in the short term. Extreme price fluctuations are possible if there is market volatility. Gilt funds are less volatile when compared to G-Sec ETFs.
Here are points where G-Sec ETFs score over gilt funds.
Most gilt funds do have an exit load. If the redemption is done within a few months of purchase, exit load might apply. There are no exit loads for G-Sec ETFs. So, redemption comes ta no cost for ETFs.
Gilt funds do not disclose their portfolio holdings on a daily basis. You will need to see the fund fact sheet at the end of the month for the data. ETFs need to disclose their portfolio holdings on a daily basis. So, G-Sec ETFs are more transparent than gilt funds.
The expense ratio of ETFs is much lower as they are passively managed funds. So, gilt ETFs have lower management fees when compared to that of gilt funds. The lower cost of G-Sec ETF compared to gilt funds works in favour of investors, especially in a low interest rate regime. This also makes G-Sec ETFs potentially more attractive to investors who want to remain invested for the long term.
Note that gilt funds and ETFs have low minimum investment requirements. This makes them more suitable for retail investors.
Should you consider G-Sec ETF?
Understand that G-secs are long duration papers and are highly sensitive to interest rate movements. So, investors make money when interest rates fall. At present, interest rates have already been brought down by the Reserve Bank of India (RBI) to stimulate the economy. Rising inflation and revival of the Indian economy may push the yields up. This will push down the prices of government securities. This means that mark-to-market losses cannot be ruled out for G-Sec ETFs. So, if you can match the time horizon of your financial goal with that of the G-Sec ETF, you can stay invested and gain from the investment.
However, if you are looking for active fund management that will help you take advantage of government securities market movements, gilt mutual funds might be the ideal investments.
The Rs 5,760 crore multicap fund from PPFAS AMC, Parag Parikh Long Term Equity Fund, is now becoming Parag Parikh Flexi Cap Fund from January 13, 2021. The recategorisation move, which was anticipated, is good news for investors since the fund retains the freedom to dynamically invest across largecap, midcap and smallcap stocks.
For investors, there is nothing to worry. Parag Parikh Flexi Cap, famous for being a local fund with global focus, has not announced any other investment strategy or framework change. This means your fund, for all practical purposes, remains the same. The scheme continues to be managed by Rajeev Thakkar, Raunak Onkar and Raj Mehta. In fact, most of the erstwhile multicap funds are also converting themselves into flexicap funds. The biggest of them all, the Rs 32,000 crore Kotak Standard Multicap Fund was the first to announce the migration from ‘multicap’ to ‘flexicap’.
Flexicap name is more true to label than multicap. Flexicap retains the flexibility of investing across the entire cap spectrum. Multicap, as the name suggests, indicated all types of caps (large, mid and small) are present in the portfolio at all times. This was not accurate because many funds did not have smallcap at all, and adopted a more largeap bias or large & midcap bias.
Ever since market regulator SEBI in September announced change in the previous multicap fund definition, there has been disquiet in fund circles. The reason is not difficult to understand. Multicap mutual funds, which had enjoyed the blessing of a loose ‘at least 65% equity investment’ definition, felt the screws being tightened on them as eligible funds for the category were directed to have a minimum 25% investment each in largecap, midcap and smallcap stocks. Since most multicap funds, including Parag Parikh Long Term Equity, did not have the separate 25% allocation to largecap, midcap and smallcap sticks, funds had no other option but to rejig its labelling if they were to comply with new norms.
The only way out, was in fact, provided by SEBI a few weeks later. In November, the regulator introduced a brand-new ‘Flexicap’ equity mutual fund category. As per norms, a Flexicap fund was required to have a minimum 65% total assets in investment in equity & equity related instruments. This is exactly the same definition that erstwhile Multicap funds had. The loose definition — minimum 65% of assets — does not specify investment in any specific sub-limit or cap bucket. So, there is leeway for funds to remain flexible in terms of market cap-based investments.
If you would like to know more about mutual fund investing, open a free account at www.wealthzi.com.
Here is the NFO roundup of the week where we talk about the important schemes that are currently open for subscription. Read on.
Invesco India – Invesco Global Consumer Trends Fund of Fund (FoF)
Invesco MF has launched this fund of fund. The scheme aims to provide long-term capital appreciation by investing predominantly in units of Invesco Global Consumer Trends Fund, an overseas fund. The underlying global fund covers a wide range of investment themes – from e-commerce, entertainment, Internet services, autonomous driving to active lifestyles and invests in companies like Amazon, Netflix, Uber, Electronic Arts, Nintendo etc. that are boosted by the technology-driven changes in consumer lifestyles, and offers targeted exposure to global companies that may benefit from changed consumer trends.
The underlying global fund has a long established performance track record of over 26 years with AuM of over US$ 2.76 bn or Rs 20,416 crore (as at 31st October, 2020).
The Invesco India – Invesco Global Consumer Trends Fund of Fund (FoF) closes for subscription on December 18. If more than 10% of the units are redeemed / switched out within 1 year from the date of allotment, exit load of 1% will be charged.
Thematic FoFs are usually a no-no as core portfolio allocation. However, given the underlying fund’s long track-record, investors may consider investing if they desire returns from global consumer investing, which is a multi-decade opportunity in many markets.
ITI Large Cap Fund
This is a largecap offering from new fund-house, ITI. Despite domestic market valuations near peaks, many sectors and stocks are trading at cyclical bottom. Development of vaccines can improve the economic growth outlook. The largecap fund appears to have a GARP-bias as it reasons 35 out of 50 stocks in Nifty50 Index are still undervalued.
The ITI Large Cap Fund will focus on most of the attractively valued stocks are trading below their historical average. Large caps being cash rich can potentially surprise on growth in a good economic environment. Largecap funds are core to any good investment portfolio.
The fund will invest in largecap stocks that meet SQL investment philosophy, are beneficiaries of formalization of the economy, are trading at cyclical bottom, face maximum macro headwinds and can reverse and can potentially attract global liquidity. Normally, the fund would be invested minimum 90% and no major cash call would be taken. In terms of sector weights, the fund can take freedom of 7% over benchmark. At least 80% of the 40-stock portfolio will be of core stocks and tactical bets will not be more than 20%.
The largecap NFO closes for subscription on December 18. In term of exit load, there will be 1% if redeemed or switched out on or before completion of 12 months from the date of allotment of units.
Nippon India Passive Flexicap FoF
While it’s confusing to decide the right allocation between Large, Mid and Smallcap stocks, it is even tougher to identify the best stocks/funds to invest in, within these categories. To address this problem, Nippon MF has come out with a unique combination of active + passive investing.
Nippon India Passive Flexicap FoF aims to follow the collective wisdom of the market to decide appropriate allocation across market caps. Then, it invests your money in appropriate low cost ETFs/ Index Funds. Do understand that investments in this new fund will be at moderately high risk. While you are always invested in the entire market with this fund, you do not miss out on any opportunity.
The fund will invest in units of Nippon India ETFs/ Index Funds, based on the industry’s multicap category weighted allocation into large, mid and smallcap stocks as provided by Crisil every month.
This product endeavors to eliminate individual fund manager biases towards market cap allocation and sector / stock selection. It also aims to generate returns relative to markets with relatively lower volatility. The new fund offer period closes on December 24. There is no exit load. Ends
As the size of individual wealth portfolio increases, a slice of property always finds its way in. But the old concept of directly buying, holding, and managing real estate is fraught with various problems. This is why Real Estate Investment Trusts (REITs) provide an easy way in terms of gaining exposure to real estate to investors without physically dealing with them.
The first real estate investment trust (REIT) listing in India was from Embassy Office Parks in 2019. Then, came the 2nd REIT in the form of Mindspace Business Parks. But, that’s a very limited basket if you want to invest only in Indian REITs. Investors want choice and for those who want to gain from a wider universe such as Asia-Pacific real investment trusts (REITs), Kotak Asset Management Company has launched ‘Kotak International REIT FoF (Fund of Fund)’.
This new product, which is open for subscription till Dec. 21, is India’s first global REIT FoF. To be clear, the money you invest in Kotak International REIT FoF will get invested in units of SMAM ASIA REIT Sub Trust Fund and/or other similar overseas REIT funds. In this article, we will tell you more about the Kotak International REIT FoF so that you can take an informed decision about investing.
Q: What is REIT
A: REITs, or real estate investment trusts, are companies that own or finance income-producing real estate across a range of property sectors. Most REITs trade on major stock exchanges, and they offer a number of benefits to investors.
Typically, REITs invest in real estate property including offices, apartment buildings, warehouses, retail centres, medical facilities, data centres, cell towers, infrastructure and hotels.
Q: How REITs make money
A: Most REITs lease space and collect rent on its real estate. In this way, the company generates income which is then paid out to shareholders in the form of dividends.
There are some REITs who don’t own real estate directly, but they finance real estate and earn income from the interest on these investments.
Q: Why invest in REITs
A: Historically, REITs have delivered competitive total returns. This is on the basis of steady dividend income and long-term capital appreciation.
Also, REITs are said to have a comparatively low correlation with other assets, which makes them an excellent portfolio diversifier.
Q: Why invest in REITs outside India
A: SMAM ASIA REIT Sub Trust Fund is the Largest Asia Pacific (ex Japan) REIT Fund. At this moment if you invest in the two listed REITs in India, you will get exposure to majorly the Office sector in 5-6 cities.
In comparison, Kotak International REIT FoF through SMAM ASIA REIT Sub Trust Fund offers exposure to varied REITs across geographies through the underlying fund. Your money gets you exposure to properties including offices, residential, data centres, logistics, warehouses. Also, you get multi-country exposure viz. properties in Singapore, Australia, Hong Kong, New Zealand, Thailand, India etc.
Q: How will Kotak International REIT FoF invest
A: The Kotak International REIT FoF can invest 95-100% in units of SMAM ASIA REIT Sub Trust Fund and/or other similar overseas REIT funds.
Also, it can invest 0-5% in debt and money market instruments and/or units of debt/liquid schemes of domestic mutual funds.
Q: Why SMAM ASIA REIT Sub Trust Fund
A: As mentioned previously, this the largest Asia Pacific (excluding Japan) REIT fund. We think this is one of the main reasons Kotak International REIT FoF has chosen it to be the underlying fund. Because this is a Fund of Fund, the Indian fund manager hardly has any role in terms of investments. So, some attention is required to be given on the underlying fund.
Secondly, this underlying fund offers a gateway to capturing attractive dividend yields, which are higher than government bonds, normal stocks, and REITs in other regions.
Thirdly, the SMAM ASIA REIT Sub Trust Fund offers a decent combination of Asian REITs (mostly in Singapore and Hong Kong) to take advantage of relatively higher dividend yield, and Pacific REITs (mostly Australian REITs) to form a portfolio that produces stable dividend yields from well-established markets.
Fourthly, in the Post-Covid world, the world of real estate investments could operate very differently. The SMAM ASIA REIT Sub Trust Fund has zero exposure to hotels (the highest impacted area due to Covid). The underlying fund is underweight on the Retail sector as well. Instead, it has chosen to bet big on the least impacted by Covid disruption (Industrial 34%, Diversified 23% and speciality 11%).
Q: Why not other region REITs
A: Dividend yield levels of Singapore and Australia are higher than those of UK, US and Japan.
Also, at this point in time, Indian MF investors have no pure-play way to get exposure to US, UK, Japan REITs.
Additionally, Asia Pacific REITs offer exposure to the highly organized real estate sector, strong growth potential, and an expanding market.
Q: What returns can be expected from Kotak International REIT FoF
A: The Kotak International REIT FoF is a new product, and has no history of returns. It however will invest in an underlying fund which has been around for about 10 years.
The average dividend yield of SMAM ASIA REIT Sub Trust Fund is 4.3% (as of the end of October 2020).
According to Freefincal, the returns of the underlying fund have swung from -4% to 14% over three-year rolling windows and from 2% to 10% over five-year rolling windows.
In short, the returns of Kotak International REIT FoF can be more debt like than equity.
Q: Is this a high-risk product?
A: The risk-o-meter given along with the product indicates ‘high risk’.
Q: What will be the cost to an investor in Kotak International REIT FoF
A: The underlying scheme will have a total expense ratio of around 0.77% per annum of daily net assets. Any other costs will be added to this. Do note that the 0.77% amount is not fixed and could change in the future.
Q: What is the exit load in Kotak International REIT FoF
A: There will be 1% exit load charged for redemptions / switch outs (including IP/STP) within 1 year from the date of allotment of units, irrespective of the amount of investment.
Q: How will your returns in Kotak International REIT FoF be taxed
A: Short-term capital gain tax will be levied according to the income tax slab of the investor if units are sold before 36 months.
If the units are sold after 36 months, a long-term capital gain tax of 20% with indexation will be levied.
Even as the Trustee of Franklin Templeton Mutual Fund in India prepared to approach unitholders to seek consent for the orderly winding up of the six fixed income schemes, the Supreme Court in an interim order has provided further clarity on how the process will be carried on.
According to Sanjay Sapre, President, Franklin Templeton Asset Management (India), as per the interim order, the redemptions continue to be stayed till the date of the next hearing scheduled in the third week of January 2021.
Redemptions being stayed till 3rd week of January means that no money can be redeemed by the unitholders of the six Franklin debt schemes till that date. This is important because previously there was an understanding that if the majority voted against winding up, the six schemes would be required to reopen immediately and cater to redemptions. In essence, the staying of redemptions means that even after the voting is done on Dec. 28, no redemptions can be done for a minimum of three weeks.
“SEBI will appoint an observer to monitor the voting process under regulation 18(15) (c). The voting results and the report of the observer will be submitted to the Hon’ble Supreme Court in a sealed envelope,” Sapre said.
With a court-appointed observer in place, the voting process for seeking consent will be done under strict compliance to apex court norms. Since the Supreme Court has asked the observer to share the report and voting results in a sealed envelope, this could mean that the court will take a call on voting results. Do note that Franklin Trustee had appointed J. Sagar Associates, a reputed law firm, as the scrutiniser to monitor the e-voting process.
These developments assume significance because if a majority of unitholders vote ‘NO’, then there is a fear that a rush of redemptions could be precipitated, forcing a distress sale of the portfolio securities and the resultant reduction in the net asset value (NAV) of the schemes and substantial losses for unitholders.
Way forward
Franklin will continue to proceed with the next steps to seek unitholder consent for the winding up of the six schemes under regulation 18(15)(c) of SEBI (Mutual Fund) Regulation 1996. The schemes are Franklin India Low Duration Fund, Franklin India Ultra Short Bond Fund, Franklin India Dynamic Accrual Fund, Franklin India Credit Risk Fund, Franklin India Short Term Income Plan, and Franklin India Income Opportunities Fund.
In order to ensure maximum participation, the process of seeking unitholder’ consent will be through an “Electronic Vote†followed by a meeting through video conference. The Portal will remain open for voting from 09:00 a.m. (IST) on December 26, 2020 till 06:00 p.m. (IST) on December 28, 2020. The electronic voting / e-voting facility will be available at https://evoting.kfintech.com
This will be followed by the Unitholders meeting through Video Conference on December 29, 2020. Unitholders who have not voted previously and are attending the Unitholders meet will be allowed to vote during the time of the meeting.
Over the next few days, unitholders will receive the user id and password from KFin Technologies on their registered email address.
The cash available (for distribution) as of November 27, 2020 stands at Rs 7,226 crore for the four cash positive schemes, subject to fund running expenses.
As of date, there are four cash positive schemes. Individually, Franklin India Low Duration Fund, Franklin India Ultra Short Bond Fund, Franklin India Dynamic Accrual Fund and Franklin India Credit Risk Fund have 48%, 46%, 33% and 14% of their respective AUM in cash right now. Borrowing levels in Franklin India Short Term Income Plan at Rs 943 crore or 17% of AUM and Franklin India Income Opportunities Fund at Rs 497 crore or 29% of AUM continue to come down, but they are not cash positive yet. In fact, the absolute borrowing amount for both the schemes has remained constant since October 29. Each scheme can return monies to investors only after paying all the obligations/ liabilities towards borrowings/ expenses/provisions.
