Mutual Fund Archives - Page 26 of 26

How the Yes bank fiasco will affect your mutual funds

You must have heard about how India’s fifth-largest private sector lender, Yes Bank,
is facing many difficulties. While this will affect depositors and accountholders of Yes
Bank, there are many other entities that will get affected too. These include mutual
fund investors. First, let us look at how Yes Bank’s problems came about and what’s
happening now.

What happened at Yes Bank?

Rana Kapoor, a banking industry veteran, launched Yes Bank in 2003 and scaled it
up to make one of the top private sector banks. The bank’s troubles started in 2017
when the Reserve Bank of India (RBI) said that the bank’s bad loans were more than
what the bank had divulged. After an inspection of the bank, RBI denied the
extension of Kapoor who was the Chief Executive Officer.

The bank is said to have done high-risk lending by providing loans to those who
could not get funds elsewhere. In subsequent years new defaults came about. Some
of the big defaulters included IL&FS, Cox & Kings, Café Coffee Day, Essel group,
Essar Power, and Mantri Group.

The surging bad loans and mismanagement lead to more problems for the bank.
Kapoor’s successor Ravneet Gill managed to raise one round of funding through
share sale to institutional investors. However, those funds were not enough. RBI has
said that that the governance was lax too. Yes Bank wasn’t able to raise capital for
loan losses and resultant downgrades and that led to the banks’ decline.

What’s happening now?

RBI has taken over the bank’s management and has appointed an administrator. It
has capped cash withdrawal limit at Rs. 50,000 till April 3. However, RBI will relax
the withdrawal limit for those who have medical emergencies, higher education fees
or marriage expenses. The limit for this will be Rs 5 lakhs.

According to news reports, the RBI has informed Yes Bank to shut its ATMs and that
cash has to be given only through the bank’s branches. NPCI has already taken the
bank’s ATMs offline. Yes Bank customers cannot withdraw cash from other ATMs.

There are other entities affected by the Yes Bank downfall.

Indian stock exchanges have said that there will be no trading of Futures and
Options contract in Yes Bank from May 29 onwards. The existing contracts across all
expiries will expire on May 28.

Several companies use Yes Bank’s Application Program Interface (API) for
connecting with the Unified Payments Interface (UPI) platform. The APIs link third-

party companies’ payment page with Yes Bank’s back-end system. Many of these
websites/apps won’t be able to accept UPI payments.

Yes Bank accountholder using SIP

If you have a SIP through your Yes Bank account and it is more than Rs. 50,000, the
SIP won’t go through. You can change your auto debit mandate for SIPs if you need
to. If you have smaller SIPs, there won’t be any problems. There might be problems
if you want to go for a redemption with a Yes Bank linked account.

Fund houses are reaching out to those who have linked Yes Bank accounts to help
them change their bank account quickly. Fund houses are also allowing customers
to change their redemption account because the money will get locked in if it is
redeemed to Yes Bank.

Many of them such as Edelweiss Mutual Fund have stopped accepting redemption
requests from their funds into Yes Bank accounts. If you have a Yes Bank account
linked to your mutual fund investment, you can give a request for change of account
along with a cancelled cheque to any offices of CAMS/KFinTech.

Mutual fund exposure to Yes Bank

Debt exposure

As of Jan 31, 2020, there were 32 individual schemes of mutual funds that had
exposure to Yes Bank debt. The total exposure is pegged at Rs. 2,848 crores. Of
these, 28 schemes having exposure of Rs. 2,779 crores hold perpetual bonds or AT
1 (Additional Tier 1) bonds. These are bonds that pay interest and have no maturity
date. The rest of the exposure is to bonds with maturity date.

AT 1 bonds have higher interest rates than other bonds and also have higher risks.
The banks that issue these bonds have to maintain a common equity tier I ratio of
5.5%. If it falls below these bonds will get written down which might be the case with
Yes Bank. Note that AT1 bonds can get converted to equity as per information
memorandum of AT-1 bonds.
Nippon India Mutual Fund has the largest exposure of Rs. 627.8 crores. The funds
are Nippon India Strategic Debt Fund (21% of assets), Nippon India Credit Risk
Fund (11%) and Nippon India Equity Hybrid Fund (9%). Nippon MF has said that it
has written off its entire exposure to Yes Bank, and as per latest information, the
AMC has also segregated its exposure to Yes Bank as separate units (also called
sidepocket). Earlier, inflows into Nippon India funds with Yes Bank exposure have
also been restricted to Rs. 2 lakh per investor.

Here’s the list of funds with exposure to Yes Bank

Equity exposure

Mostly index funds have exposure to Yes Bank because it is a part of the Nifty 50 Index. Note that Yes Bank will be taken out of the Nifty on 27th March. DSP Equal Weighted Nifty 50 Fund has the highest exposure (1.60% of assets). Banking ETFs have exposure to Yes Bank too. ICICI Pru Private Banks ETF and Tata Nifty Private Bank ETF have exposure of about 1.3% of their assets.

Equity exposure is lesser than debt exposure. So, equity fund investors needn’t worry.

What is going to happen to debt funds?

Yes Bank bonds are getting downgraded. Already, Moody’s and ICRA have downgraded Yes Bank. While Moody’s has downgraded the bank’s long-term foreign and local currency bank deposit ratings, ICRA has downgraded bonds worth Rs. 52,611.70 crores to (ICRA) D.

Securities Exchange Board of India (SEBI) has allowed fund houses to create segregated portfolios or side-pockets if the rating of a bond falls below BBB.

As the Yes Bank bonds are downgraded, now the fund houses will make segregated portfolios. (Nippon India MF has already announced side pockets as we mentioned earlier.) Once this is done, investors will get the same number of units in the segregated portfolio as they hold in the base scheme. Both the units will have Net Asset Values (NAV). Note that segregated portfolio units may also be listed on the stock exchange. However, there is unlikely to be any trade. So, you cannot sell those units so easily. You will be paid the segregated portfolios’ value only when the fund house recovers its dues from the bond issuer.

What should you do if your mutual funds have exposure?

You have no choice but to stay invested in those mutual funds. Fund houses are likely to write off or side pocket their exposure. It is best to wait and watch till this happens. Also RBI has announced a draft rescue package for Yes Bank where State Bank of India will invest Rs 2,450 crore for a 49% stake in the bank. This is necessarily a depositor bailout rather than an equity shareholder or bond holder bailout. However, if this happens, the bank will remain a going concern and it will provide some relief to investors. Note that in case of AT1 bonds, the bond holders are treated like equity holders when the bank get liquidated or merged with another bank. So, repayment is not likely for these bonds. There may be a chance the ATI bonds will be converted into equity. There is no clarity on this yet. There are also reports of AT1 bondholders going to courts against writing down the bond value to zero.

If you are planning to invest in debt funds now, steer clear of all credit-risk funds. You could look at liquid funds and PSU bond funds that invest in short-term bonds.

If you are not sure, get in touch with your relationship manager at Wealthzi.com and our consultants can help you.

When to sell a mutual fund?

Invested in a 5-star rated fund? Then, you needn’t worry about selling it, right? That may not be so. The 5-star rated mutual funds do not remain at the top forever. Mutual funds are subject to changes like any other investment. Their performance might drop or the fund manager might leave. Or even their strategies could change. This could lead to the need to sell your fund. That’s why you need to monitor funds from time to time. There are certain things you should watch out for just to check if you have to sell the fund. Here’s what you should look at.

Fund size

Everyone loves to buy popular products be it the newest fashion outfit or the latest mobile. Mutual funds are no exception. With many investors wanting to invest in the best funds, the assets of the fund become bigger. Just like a hefty man cannot run as fast as a man who is fit, a fund with a big asset size cannot trade as quickly as a fund with a small asset size. So, over time funds with a big asset size become slow. Their returns might come down to average from good.

This is why some funds decide to stop accepting new investments when their assets become massive. You need to check if the fund is performing as before and is in line with your return expectations. If not, you might have to look at a similar fund offering better returns.

Fund manager changes

Behind every successful fund there is an efficient fund manager. They make the buy, sell, hold calls. The fund’s performance largely depends on the fund manager. If the fund manager of your fund leaves, should you exit the fund? This may not always be necessary. Here are the points you should consider.

If you have been holding the fund for less than a year, it’s best to wait so that you don’t have to pay short term capital gains tax. Understand that there is no guarantee that the returns from the new fund you have chosen is going to make up for the taxes.

Another thing is that the new fund manager might be better than the old. Wait and watch how the manager handles the fund. You could even check his investing experience.

The most important point is that some types of funds are not as affected by manager changes as others. For instance, fund managers of index funds are not picking stocks. They do passive investing. So, manager changes for index funds are not as important as manager changes for an actively managed equity fund.

You need to think about selling the fund only when you learn a good manager leaves from a fund family that isn’t very strong overall. You can hold on to the fund if the fund house has many talented managers and an excellent track record.

Takeovers

Mergers and acquisitions are part of the industry. Your chosen fund house may merge with another fund house or it may be taken over by a bigger fund family. Should you sell your funds? You might have to depending on the fund house that is dominant. Understand that there will be changes in the management, the responsibilities of managers, composition of board, etc.

The problem is that one fund manager might manage more than one fund. For instance, if a fund manager is asked to manage three/four funds, it may affect the performance of the funds adversely.

Another thing is that the policies of the fund family might change. For example, if a conservative fund family is taken over by an aggressive one, the fund managers are usually asked to be aggressive. Fund’s investment objectives might change. Sometimes new fund offerings might have more attention than other funds.

So, mergers and acquisitions can lead to a slowdown in performance of the funds. It takes some time for things to settle down. So, you will need to do some research on the fund house before you choose to exit the fund.

Tips

Selling a fund is an important decision and you need to keep track of your funds to understand when you need to do that. Here’s how you can do it.

Regularly visit fund house websites looking for news
You can visit SEBI for more information on the fund family.
Read analysis that appear in financial websites and newspapers to remain updated on the changes in the fund and the fund family.
Read reports on the funds every now and then to know things like the asset size of the fund, fund manager changes and strategy changes.

If you have any doubts, ask questions. Asking questions will help you understand things better. You can even take the help of a financial planner who will help you track your funds. For instance, at Wealthzi, we help you choose funds that suit your risk profile and financial goals. Our wealth consultants are also available for personalised consulting if you need help on purchase and sale of funds or any investment products. Needless to say, we also help you monitor your fund, thus saving time and efforts for investors. So, remember to stay updated about your funds.

What is mutual fund expense ratio?

You searched for the best performing mutual funds and are ready to invest. Wait! Have you checked its expense ratio? This is a mutual fund parameter that will help you check if the fund is being managed well. Note that a higher expense ratio could mean lower returns from the fund. Before we get to that, here’s what you need to know about the expense ratio of a fund.

What consists of expense ratio

A fund’s expense ratio measures the cost of managing the fund. It is expressed on a per unit basis. The formula for the ratio is the fund’s total expenses divided by the amount of assets that the fund is managing. In simple words, an expense ratio is the amount companies charge you, the investor, to manage the mutual fund.

Now, what are these expenses that a fund has to manage? Fund houses employ professionals for running the business. So, there you have the management fee. Then there are expenses for running the fund such as transfer fee and fees for registrar agents who are the entities that help in issuing mutual fund units and redeeming them. Other expenses include custodian charges, legal expenses and auditing expenses. It doesn’t stop there. Then there are marketing charges and distribution expenses. So, all these expenses together are expressed as a percentage of the fund’s assets. However, the amount of money that the fund house spends for trading, that is buying and selling of stocks and bonds, is not included in the expense ratio.

So, using the expense ratio, the fund is trying to recover all its costs from you. The ratio is calculated by the fund house and is published in its mutual fund reports twice a year.

How does it work?

Suppose you have found a mutual fund whose NAV is Rs 10. You are investing Rs 2 lakhs in this mutual fund. Let’s say the expense ratio is 2%. Assume that you have got a return of 11% from the mutual fund after a year. So, the value of your investment will be about Rs 2.2 lakhs. However, after the expense ratio has been deducted, the value of your investment will be only Rs. 2.18 lakhs. So, you actually earn less because of a higher expense ratio.

What is a good ratio?

Whether an expense ratio is good or bad will depend on the type of fund you have chosen. For equity funds, the expense ratio might not have as much of an impact as for a debt fund. This is because debt funds give you single digit returns while equity funds usually give double digit returns. For debt funds, the expense ratio of the fund is crucial. Consider this: a debt fund is giving you a return of 7% every year. If the expense ratio for the fund is 2%. Your actual returns will be just 5%, which is not great. That is why you need to look for funds with a low expense ratio.

Is there a limit to these ratios?

The Securities Exchange Board of India (SEBI) has put in ceiling limits for expense ratios of mutual funds. If it is an open-ended equity fund, the fund house is allowed to have a maximum of 2.25% as the expense ratio. The figure is 2% if it is a debt fund. SEBI has said that the expense ratio of the fund will vary based on the Assets Under Management (AUM) of the fund. Here’s the table for equity funds.

AUM (Rs. Crores)	Maximum expense ratio (%)
0-500	2.25
500-750	2
750-2000	1.75
2000-5000	1.6
5000-10000	1.5
10000-50000	TER reduction of 0.05% for every increase of 5,000 crore AUM or part thereof
More than 50,000	1.05

Source: SEBI

Which funds have low expense ratios?

Index funds will typically have a low expense ratio because of their nature. These are funds that mimic an index and there is no strategy needed for managing these funds. So, the expenses for these funds are low.

Expense ratio for direct plans are lower. In a direct plan of a mutual fund scheme you buy directly from the mutual fund company, whereas in a regular plan you use the services of an advisor or distributor. The mutual fund company has to pay commission to the distributors in case of regular plans. This is added to the expense ratio. Hence, the expense ratio is higher for a regular plan.

Looking for the best performing mutual funds? Wealthzi.com can help you.

RBI Policy Review: Loans Cheaper Without Rate Cut

The Reserve Bank of India (RBI) in its monetary policy meet on 6^th February decided to keep repo rates unchanged at 5.15% as expected. This was because of price pressures remaining elevated. However, the central bank has come up with the range of liquidity tools to fuel the slowing economy. These were a series of measures that included relaxed cash reserve requirements for loans to retail customers and enhanced longer-term liquidity for banks. This is to give a fresh impetus to loan demand and to speed up consumption in the economy. Here are the details you need to know.

Cash Reserve Ratio (CRR)

Banks had to mandatorily set aside 4% of cash for every loan that they provide to retail customers. This included loans for automobiles, housing and loans to micro small and medium enterprise (MSME). In a bid to lower interest rates for these loans and push banks’ credit growth, RBI has relaxed the requirements for banks to maintain this CRR for these loans. The exemption will be for all bank credit to these sectors for a period of six months between January 31 and July 31, 2020. This will lower the funding costs for banks and will incentivize them to lend more.

External benchmark

The RBI had asked banks to link all new floating rate retail loans and floating rate loans to MSMEs to an external benchmark. This was with effect from October 1, 2019. Subsequently, most banks linked their lending rates to RBI’s repo rate. According to RBI, in the October-December 2019 quarter, there was reduction in the weighted average lending rate on fresh loans. While rates for housing loans declined by 18 basis points, there was a 87 bps fall in vehicle loans and 23 bps decline in loans to MSMEs.

So, now the central bank has extended the External benchmark-based lending rates to loans for medium enterprises. RBI has announced that starting April 1, 2020, pricing of bank loans to the medium enterprises will also be linked to an external benchmark. This is meant to further strengthen monetary transmission and reduce the borrowing costs of these enterprises.

Long-term repo

To improve long-term liquidity, RBI has announced long-term repos. Following on the lines of the European Central Bank’s Long-Term Refinancing Operation, the RBI announced a new long-term repo operations (LTRO) facility. RBI will conduct term repos of one-year and three-year tenors of up to Rs. 1 lakh crore at the policy rate. This will enable banks to borrow cheaply from RBI.

RBI has introduced LTRO to ensure that durable liquidity is available to banks at reasonable cost and to further encourage banks to improve credit flows to productive sectors. RBI said that it will conduct LTRO from the fortnight beginning February 15. This will bring down short-term rates and help boost investments in company bonds.

RBI will also withdraw the daily fixed rate repo and four 14-day term repos that it has been conducting every fortnight. RBI said that it will ensure that there is adequate provision of liquidity as needed because of evolving market conditions — unrestricted by quantitative limits— at or around the policy rate.

This might put pressure on banks to improve their liquidity management rather than depending on RBI. There might be volatility in overnight call money markets once RBI implements this.

Commercial real estate

The RBI has allowed a one-year extension on the date of commencement of project loans provided to the commercial real estate sector. This is for projects that have been delayed for reasons beyond the control of promoters. This extension will be allowed without classifying the loan account as a Non-Performing Asset (NPA).

Earlier lenders couldn’t extend further credit to borrowers classified as NPAs since the guidelines said that any fresh lending be also classified as bad loans. Now, lenders can extend credit to these real estate borrowers. This will help them be in line with other project loans in the non-infrastructure space. Since the repayment cycle for these projects starts from the date of commencement, an extension will allow the companies to use any income in completing the project rather than sticking to repayments.

The RBI will review the regulations for housing finance companies too. RBI recently took over their supervision from the National Housing Bank.

Debt restructuring

The RBI has extended the cut-off date for the MSME one-time debt restructuring scheme till December 31, 2020. This was supposed to be till March 31, 2020. This scheme is meant for loans that were in default but “standard” as of January 1, 2019. This extension will help speed up monetary policy transmission and improve credit flow. This will benefit the eligible MSME entities which could not be restructured under the provisions of the circular dated Jan. 1, 2019 and the MSME entities which have become stressed thereafter.

However, the eligible loans that can be restructured under the scheme will now been reduced to only those companies that are GST registered. This was not mentioned in the January 2019 circular.

Here’s what each of these measures will mean:

Measure	Impact
Lower CRR	Cheaper auto, home and MSME loans
Long-term repos	Lower funding costs for banks, better loan rates
Extension of debt restructuring	Relief for eligible MSMEs
Protection for realty projects	Lesser delays in project completion

Look out for lower loan rates from banks in the coming days and keep your eyes on bond yields if you are investing in company bonds.

Understanding different kinds of debt funds

Mutual funds gather money from a lot of investors and create a corpus to invest in equity or debt or in both. Debt mutual funds are funds that invest in in fixed income instruments like corporate bonds, government securities and money market instruments. Debt funds strive to minimise risk by picking the least risky types of securities depending on each debt fund’s strategy and objectives.

Unlike equity mutual funds that seek to gain capital appreciation, debt funds attempt to give stable and relatively less volatile returns that are usually better than fixed deposits. They are mainly classified by their maturity and type of underlying instruments in the portfolio.

Debt funds classified as per their maturity are:

Up to 3 months – Liquid funds, money market funds
3 months to 1 year – Ultra short-term funds
1-3 years – Short term funds
More than 3 years – Income funds

Another way to classify debt funds is using their underlying portfolio (holdings). This will include funds such as gilt funds and credit opportunity funds.

Here are the different funds that are available.

Income Funds

These are a type of debt funds that attempt to provide stable rate of returns in all market scenarios. They primarily invest in an array of debt instruments of medium to long term maturities. Income funds run the risk of generating negative returns. The fund might invest in lower rated securities for higher returns. Income funds are suited for investors who have a higher risk appetite and longer investment horizon.

Dynamic Bond Funds

These funds seek to maximise the returns to investors by switching the investment portfolio depending on market conditions and fluctuations. They are dynamic in terms of the portfolio composition and maturity profile. These funds are an alternative for those wishing to ride the interest rate cycles. Fund managers choose securities as per the anticipated change in rates. For instance, during a falling interest rate scenario, the fund will invest in long-term instruments like government bonds.

Liquid Funds

Investors who want to maintain a high degree of liquidity and invest their surplus cash for a short time can choose these funds. This fund invests in securities and instruments that have a maximum maturity period of 91 days. Usually, only very highly-rated instruments are invested in, through liquid funds. These funds give higher returns than savings accounts and attempt to provide a similar level of liquidity.

Credit Opportunities Funds

These are riskier debt funds that invest in lower-rated securities to generate potentially higher returns. Anticipating a rise in ratings of papers, these funds invest in instruments rated under even “AA” in the hope that they will become higher-rated over time and increase in value. So, these funds primarily generate returns from interest accrual by investing in higher yielding but lower rated corporate bonds.

Ultra-short-term and Short-term Funds

Looking for a short-term investment with minimal risk exposure? Then, consider these funds. The securities that are invested in have a maximum maturity of three years and usually a minimum maturity of one year. The investment horizon of these funds is longer compared to Liquid Funds but shorter than Medium-term Income Funds. These funds generate higher returns when the short-term interest rates are high. These funds are best suited for low risk investors looking at an investment horizon of nine to 12 months.

Gilt Funds

These schemes invest in government securities which have a very low level of risk. These securities are also called gilts. So, the funds are called Gilt Funds or G-Sec Funds. Since only government securities are invested in, the default rate is very low and sometimes non-existent. However, the performance of these funds is highly dependent on the interest rate movements. So, they might give higher returns when interest rates are falling.

Fixed Maturity Plans (FMP)

These funds have a mandatory lock-in period that varies depending on the scheme. The investment can be done only once during the initial offer period. After this further investment cannot be made in the scheme. You cannot redeem directly through the fund house before the maturity date. However, you can sell them on the stock exchanges as the FMPs are listed. Since the volumes on stock exchanges are low, FMPs are fairly illiquid till maturity. The returns of FMPs are usually in line with the prevailing yields on fixed income instruments or fixed deposit rates.

Floating Rate funds (FRF)

These funds invest in securities that offer a floating interest rate. Floating rate securities are linked to a benchmark rate such as MIBOR. The interest rate is reset periodically based on the market movements. The primary objective of the fund is to minimise the volatility of returns.

Investing in debt funds

If you want to invest in debt funds, you should understand interest rate movements and bond market dynamics. For instance, when interest rates fall, bonds offering high interest rates gain. Bonds with more years left till maturity will gain more than the ones which have fewer years left to mature. When interest rates rise, the securities with shorter maturities are preferred so that they can be redeemed to buy new bonds offering higher interest rates. You need to look at the credit ratings too. The higher the rating of the debt instruments chosen, the lesser the risks the fund will have. So, choose your debt funds based on your risk profile and the investment horizon.

The mutual funds ratios you need to know

Statistical analysis of mutual funds requires a fundamental knowledge of quantitative measures. These measures include Beta, R-squared, Alpha, Sharpe Ratio, Expense Ratio and other ratios. Here’s a primer on them.

Beta

Beta is a measure of a fund’s movements (ups and downs) compared to the overall market. In simple words, beta denotes the sensitivity of the fund towards market movements. It is a measure of the volatility of the fund’s portfolio to the market. Here, the market refers to the benchmark index the fund follows.

The beta of the market or the benchmark is always taken as 1. A beta of 1 indicates that the fund’s Net Asset Value (NAV) will move in step with the market. Any beta of less than 1 denotes lower volatility and higher than 1 denotes more volatility compared to the benchmark index. For instance, if a fund’s beta is 1.2, it is theoretically 20% more volatile than the market.

If you wish to preserve your capital, you should focus on funds with low betas and if you are willing to take on more risk for higher returns, you could look for high beta funds.

R-Squared

R-squared is the percentage of a fund’s movements that can be explained by movements in its benchmark index. An R-squared of 100 indicates that all of the fund’s movements can be explained by movements in the index. R-squared values range from 0 to 100. Usually, a mutual fund with an R-squared value between 85 and 100 is closely correlated to the index. A fund with an R-squared of 70 or less typically does not perform like the index.

R-squared helps you check how similar a particular fund may be to a given index. For instance, if you already have a Nifty 50 fund in your portfolio, you won’t want to add another fund with an R-squared of 0.99 because this indicates a correlation of 99% to Nifty 50. The chosen fund will perform almost identical to the Nifty 50 fund already in your portfolio. Your portfolio will not be diversified.

You should avoid actively managed funds with high R-squared ratios. Why? It makes no sense to pay fees for professional management when you can get the same or better results from an index fund.

Alpha

Alpha is a measure of a fund’s performance on a risk-adjusted basis. It gives you an idea of how much value the fund manager adds to or subtracts from the fund. The excess return of the fund relative to the return of the benchmark index is its alpha.

Alpha can be negative or positive. An alpha of 1 means that the fund has outperformed its benchmark index by 1% and an alpha of -1.0 will indicate an under-performance of 1%. So, the higher the alpha the better.

Standard Deviation

Standard deviation is the deviation or dispersion of the data from the mean or average. For mutual funds, a fund’s standard deviation tells you how much the return from your fund is straying from the expected return. This is based on the fund’s historical performance.

For instance, if a fund has a standard deviation of 7% and gives returns of 16% on an average, it means that it has a tendency of straying by 7% from the expected average return and may give returns between 8% to 23%. Standard deviation is used to measure volatility too as it is directly proportional to the volatility of the fund.

Sharpe Ratio

The Sharpe ratio uses standard deviation to measure a fund’s risk adjusted returns. It is calculated by subtracting the risk-free rate of return (govt. security rates) from the fund’s rate of return and dividing the result by the fund’s standard deviation.

Using this ratio, you can see how well the return of a particular fund compensates you for the risk taken. For instance, high returns for taking an average or below-average risk is favourable. So, the higher the Sharpe Ratio, the better.

Average Maturity

This is applicable only for debt schemes. Debt funds invest in securities with varying maturities. The average maturity of a fund indicates the average maturity of all debt securities in a fund.

Long maturity funds are more sensitive to market movements because the market prices of long-duration securities are more sensitive to movements in interest rates. You should avoid funds with long maturity if interest rates are likely to rise. In a falling interest rate scenario, such schemes can give higher returns

Portfolio Concentration Ratio

This ratio shows where and how much the fund has invested. Normally 30%-40% allocation to top stocks and 30%-60% exposure to top sectors is expected to be good. It is best to choose funds with lower concentration ratio if you have a low risk appetite.

Portfolio Turnover Ratio

This ratio shows how frequently a scheme trades (buys or sells). While it will be low for passively managed funds, it can go up to 500% for actively managed equity schemes. If you are a passive, long-term buy and hold investor, go for low turnover ratio schemes.

Treynor’s Ratio

This ratio indicates the return per unit of market risk taken by the scheme. Higher than the category average Treynor’s ratio indicates that the fund manager was able to generate higher return.

You can combine the inferences from all of the above methods of measuring risks with information such as the fund’s history, past performance and expense ratio to identify the mutual fund schemes best suited for your risk profile and investment objectives.

Sortino Ratio

Sortino Ratio is one step ahead of Sharpe Ratio. Sortino Ratio is the excess return of a portfolio above the risk-free rate relative to its downside deviation. It considers the amount of inherently bad risk, or downside deviation. In financial terms, it helps to determine an investment’s risk-adjusted returns as it relates to downside risk.

When applying the ratio to an investment, a higher number is better. That high number signifies the amount of return per unit of bad risk. So, a higher number represents a higher return as it relates to that investment’s risk. This can help investors. Generally speaking, a rational investor wants compensation in the form of higher returns when taking on extra risk. This ratio may help an investor find investments with a higher return per unit of downside risk.

While managers often like to highlight their absolute returns, whether over other funds in the category or the market as a whole, as an investor it is incredibly important to also take into consideration the amount of risk that was undertaken to achieve these returns and to make sure that you are compensated appropriately for taking on this risk. Sharpe and Sortino ratio are two statistics that allow us to effectively do just that.

How to make the most of your SIP

SIP or systematic investment plan is comparable to your bank recurring deposit. You invest an equal amount of money every month. Only for SIP, you will be investing in a mutual fund. There are no tenure restrictions for the SIP. You can do SIPs in equity funds that invest in stocks or debt funds that invest in debt instruments like government and corporate bonds. Sounds simple? It is easy to set up a SIP. Most people start a SIP and don’t bother about it. However, you can maximise the returns from your SIP by taking some steps. Here’s how to take advantage of your SIP.

Align it with your goals

Before you invest in a SIP, assign it to a financial goal. This will help you stay disciplined because you will want to reach the goal. Also, you will not be tempted to dip into the investment for any other purpose because you have earmarked the SIP for a particular purpose. For instance, for a short-term goal such as going on a vacation, SIPs in debt mutual funds are best suited and for long term goals such as your kid’s higher education, SIPs in equity funds are ideal.

If the SIP is goal oriented, you will know the exact timeline when you will need to encash the investment. It is easy to plan for your goals. Consider this: if you need Rs. 7 lakhs in 5 years, you would need to invest Rs. 8,571 if the equity markets are returning 12% every year and just about Rs. 7,903 if you get 15% every year. There are many SIP calculators for calculating the SIP amount needed for the goal.

Step up your SIP

Whenever you get a salary hike or when your lifestyle improves, ensure that you step up your SIP. This way you can ensure that your investment is in line with your standard of living. You can use a Top up SIP for this.

As your income goes up, you will be able to set aside a higher surplus for investing. A SIP Top up allows you to increase the monthly SIP investment amount periodically. You can specify this as a percentage or a fixed amount every year. The minimum amount is usually Rs. 500 and in multiples of Rs 500.

Let’s take an example. Let’s say you invest Rs. 5,000 every month and estimate that you will get 12% every year, you will have more than Rs. 45 lakhs in 20 years. How will this change if you use Top up SIP? If you top up your SIP investment by 10% every year, you can get that Rs. 45 lakhs in less than 16 years. So, you can achieve your goal 4 years earlier if you increase your SIP contribution by 10% every year.

By topping up your SIP, you can invest in the fund that you have already chosen, tackle rising inflation, reach your goals faster and align your investment to your standard of living.

Keep reviewing your funds

Just like exams are a way to measure your knowledge, review of your SIP will help you understand whether you invested in the best funds. You should keep a check on your SIPs at least once in 6 months to measure their performance. Continuous downfall in any of the funds will indicate the exit from that scheme and moves towards other funds or sector for a while.

Even if you did thorough research before choosing funds for SIP, you need to keep reviewing the funds. Check if they are performing in line with their peers. Ensure that they are doing better than the category average. If you find anything amiss, see if you should be switching funds. If you find it difficult to make an informed decision, a financial expert can help you. For instance, at Wealthzi, you get a financial dashboard to monitor and review your portfolio and insights into growing your portfolio value and net worth.

Book your profits

There are many times you might feel that your fund has gained a lot and you want to preserve those gains. You can use the Trigger facility in a SIP for this. This facility enables investors to set targets based on pre-specified date, price and index levels. For instance, you can use the trigger facility to request the fund house to transfer your profits to an income fund once your fund has given 20%.

You can request for a transfer even if your investment hits a pre-determined point on the downside. Suppose you don’t want a loss of more than 10% on your fund, you can ask the fund house for a transfer to the income scheme when the NAV falls to Rs.9 from Rs. 10.

You can also redeem your entire investment or transfer the full portion in any scheme after hitting a pre-specified target.

Don’t stop SIPs

To get the best return from your SIP, you shouldn’t stop your SIP until your financial goal that is linked to the SIP is reached. However, you could consider switching funds if the fund you are investing in, is underperforming. Compounding works only in the long run. So, stay invested for at least 3 or more years to gain from your SIPs.

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Keep reviewing your funds

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Don’t stop SIPs

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