There are many mutual fund ratios that investors can use to assess mutual funds before they invest in them. This includes Beta, Sharpe ratio, R-Squared, Alpha, and so on. Read this article for more information on these ratios – The mutual funds ratios you need to know. The Sortino ratio is one of the ratios that investors can use.
Sortino ratio was named after Frank A. Sortino who was the professor of the U.S. Pension Research Institute. Sortino ratio is most often used by conservative investors. While it provides risk adjusted returns, it differentiates harmful volatility from total overall volatility of the fund.
Sortino ratio uses the fund’s standard deviation of negative portfolio returns. This means that it considers only the downside deviation instead of the total standard deviation of the fund’s returns. So, the Sortino ratio is a useful way for investors to evaluate a fund’s return for a given level of bad risk. The reason why many investors choose the Sortino ratio over Sharpe ratio is that it uses only the downside deviation as its risk measure for calculating risk adjusted returns. There is little need to use total risk or standard deviation because upside volatility of the fund is beneficial to investors and it is not a factor to consider for risk averse investors.
How is Sortino ratio calculated?
The Sortino ratio takes the fund’s portfolio return and subtracts the risk-free interest rate from it. Then, it divides that amount by the fund’s downside deviation. In simple words, the ratio will tell investors if the fund manager has been able to cap the downside to the fund’s portfolio.
Just like the Sharpe ratio, a higher Sortino ratio is better than a lower one. A higher Sortino ratio means there is less probability of downturns in the mutual fund scheme.
When looking at two funds, an investor should choose one with the higher Sortino ratio. This is because a higher Sortino ratio means that the fund is earning more returns for every unit of the bad risk that it takes on.
Sortino Ratio = AR – RF/ Downside deviation, where AR is the annualised return; RF is the risk-free rate of return. For instance, let’s say Mutual Fund A has an annualized return of 14% and a downside deviation of 11%. Mutual Fund B has an annualized return of 12% and a downside deviation of 7.5%. We are assuming the risk-free rate is 4%. The Sortino ratios for fund A and fund B will be calculated as:
Sortino ratio for Mutual Fund A = 14% -4% / 11% = 0.90
Sortino ratio for Mutual Fund B = 12% – 4% / 7.5% = 1.07
Looking only at the fund returns, mutual fund A might seem a good choice as it provides 2% more than mutual fund B. However, even though fund B is providing more on an annualized basis, it is not earning that return as efficiently as fund B. This is after considering their downside deviations. Based on the Sortino ratio of the funds, an investor will decide to choose fund B over fund A.
Note that most of the time risk-free rate of return is used to calculate Sortino ratio, investors can also use expected return for calculating the ratio.
Difference between Sortino and Sharpe ratio
The Sortino ratio isolates the downside volatility from the total volatility. Sharpe ratio considers the good risks as bad risks, even though they provide positive returns for investors. Those investors who want to consider all risks irrespective of the outcomes may use Sharpe ratio. However, since Sortino ratio gives more importance to the downside of the investment, it might be preferred by conservative investors.
Points to note
Sortino ratio is based on historical returns and cannot be interpreted in isolation. You need to assess it in comparison with another comparable fund. It is good to use it in the context of the fund’s investment time horizon and your risk profile.
Therefore, Sortino ratio is best suited for conservative or risk-averse investors who are concerned about downturns. It provides a better view of the fund’s risk-adjusted performance because it takes the positive volatility as an advantage for the fund.
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.
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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.
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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.
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.
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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.
Equity MF investors seem to be in cashing-out mode. As stock markets hit new life-time highs on a regular basis in November 2020, monthly net outflows occurred in all the 10 equity fund categories totalling Rs 12,917 crore. This is the biggest monthly outflow number registered in equity MFs in many months. Though markets swiftly changed mood after hitting lows in March 2020, flows in equity funds have dried up and have been in the red for five consecutive months (July to November), shows data from mutual fund industry lobby AMFI.
November saw largecap funds witnessing the biggest monthly outflows among the 10 equity fund categories, with a net Rs 3,289 crore flowing out. Largecap funds were followed by multicap funds (-Rs 2842 crore), value/contra funds (- Rs 1,323 crore), midcap funds (-Rs 1,317 crore), smallcap funds (-Rs 1,031 crore). Sectoral thematic funds saw net outflows of Rs 987 crore, followed by ELSS/tax-saving funds (-Rs 804 crore), focussed funds (-Rs 637 crore), large & midcap funds (-Rs 615 crore) and dividend yield funds (-Rs 70 crore).
November 2020 has been one of the better months for equity markets with Nifty 50 at all-time high and a very strong recovery in the mid and small cap indices, with mid and small caps after three years of negative returns turned positive for the CY 2020. The markets are clearly pricing in the positives of recovering economic data points, lower interest rates and sign of vaccine coming out very soon and all of this leading to a very positive impact on earnings in coming quarters and more specifically FY 22, says Akhil Chaturvedi, Associate Director & Head of Sales, Motilal Oswal AMC said.
“Now, optically from the lows of March 2020 correction markets have given some stupendous returns and leading to the belief that markets are over-heated and therefore outflow from equity mutual funds to the extent of Rs 35k cr highest ever seen. Adjusted for inflows of 17k cr (50% of which would be SIP flows) the net redemptions have been almost Rs 18k cr,” estimated Chaturvedi speaking on November AMFI data.
In the hybrid funds segment, the net outflows in November 2020 is Rs 5,249 crore. Hybrid funds invest in both debt and equities, but the blend changes as per fund type mandate. Balanced hybrid funds were the worst hit, with outflows touching Rs 3,731 crore, which is even bigger than the worst hit on the equity side i.e. largecap funds. Dynamic asset allocation funds saw Rs 734 crore flowing out, followed by Rs 407 crore in equity savings funds, Rs 338 crore in arbitrage funds, Rs 178 crore in multi asset allocation funds. The only hybrid fund category which saw net inflows in November 2020 was conservative hybrid funds at nearly Rs 140 crore.
Meanwhile, debt funds saw net monthly inflows Rs 44,983 crore led by ultra short duration funds, short duration funds and dynamic bond funds.
N S Venkatesh, Chief Executive, AMFI took a different view of things and said: “Investors are aligning their allocation in Debt schemes more towards duration schemes and corporate bond funds to maximize their debt returns, and on the other hand booking their profits in equity funds owing to surge in equity valuations. It is also significant to note that there has been a healthy addition of 3.39 lakh SIP accounts.
Finally, gold prices have come down from their highs. Gold prices had touched Rs. 57,950 per 10 grams this year. Now, they are around Rs. 49,000. If you want to invest in gold, gold mutual funds might be better investments than physical gold. You can redeem your investment easily and also benefit from higher gold prices.
What are gold mutual funds?
Gold mutual funds are open-ended funds that invest in Gold Exchange Traded Funds (ETF). The net asset value (NAV) of gold mutual funds are linked to performance of the underlying ETFs. If you didn’t know, gold ETFs gather money from investors to invest in gold bullion that are having purity of 99.5 per cent. The aim of ETFs is to track the price of domestic physical gold prices. The ETF represents gold in terms of units and are listed on the stock exchanges. On the stock exchange, one can buy and sell the ETF units.
Do gold funds reflect gold prices?
Yes. There’s an indirect link between gold mutual funds and the gold prices. Any fluctuation in gold prices will affect gold ETFs which in turn will impact the NAVs of the gold mutual funds.
As gold mutual funds invest in gold ETFs, gold mutual funds make returns based on the movement in the gold ETFs. So, the NAV of the funds change based on the price of the gold ETFs in which they have invested. So, by investing in a gold mutual fund, you will benefit from the change in gold prices.
Why gold funds may be better than gold ETFs?
It’s easier to invest in gold mutual funds when compared to gold ETFs. You can approach the fund house or invest online in gold mutual funds through a distributor. However, to invest in gold ETFs, you need to have a demat account.
Another advantage with gold mutual funds is that investors can choose to invest in them through the Systematic Investment Plan (SIP) route while this facility is not available with gold ETFs. So, only seasoned investors who can time the market might prefer investing in gold ETFs. Gold mutual funds are preferred by retail investors who want to lower their investment costs.
The minimum investment for gold ETFs is higher as there is no SIP. You will need to invest at least one unit of gold if you choose gold ETFs as your investment. This is about Rs. 4,900. You can invest in gold mutual funds for Rs. 1,000 which is best suited for retail investors.
Gold ETFs invest mostly in gold bullion only. They don’t have any other investments. 90 to 100 per cent of the assets of a gold ETF are invested in 99.5 per cent pure gold while the remaining is invested in debt. Gold mutual funds can keep their investments flexible and can reduce their gold ETF investments when markets touch highs.
The value of your gold mutual funds is in terms of rupees as the gold investments are based on the NAV of the fund. For gold ETFs the minimum investment is based on the grams of gold you invest. So, it is easy to get the value of your investment.
Investors can choose the dividend option in gold mutual funds. These dividends are usually paid out of realised gains of the funds and not from the income of the fund.
How are gold mutual funds better than gold bonds?
The Reserve Bank of India-backed Sovereign gold bonds allow you invest in gold online and offer an annual 2.5% interest over and above the price of gold on the day of maturity. However, gold bonds do not offer the SIP option. Also, gold mutual funds are more liquid than gold bonds. Why? This is because gold bonds have a tenure of 8 years.
What about gold mutual funds taxation?
Investments in gold mutual funds are regarded as long-term if they are for more than three years and the gains from the investments are called long-term capital gains (LTCG). The LTCG on gold mutual funds are taxed at 20% with indexation benefit. Short-term capital gains (STCG) on gold mutual funds are taxed as per the tax bracket applicable to the investor.
How to choose gold mutual funds?
You will need to look at the returns that the gold mutual fund has provided in comparison to physical gold. If the returns are higher or similar to that of physical gold, it means that the fund is worth considering. You can look for the average returns generated by other gold mutual funds just to make sure that you have chosen the best one. You will need to look at the expense ratio of the gold funds. The lower the expense ratio, the higher will be your returns from the fund.
If you don’t have the time to choose gold ETFs, need professional fund management and are looking for smaller investment amounts, you might find gold mutual funds are a good investment avenue.
