Equity Savings funds

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The relatively new ‘Equity Savings’ funds could fit a lot of needs that savers have by combining equity returns, income stability and zero capital gains tax

The exact nature of a lot of mutual funds are driven by the structure and rates of the capital gains tax that are applicable on them. The effect can be good, or it can be bad. Balanced funds were supposed to be low-risk alternatives to equity funds, but the logic of our tax rules has meant that equity-oriented ones have become too equity-heavy and risky. However, over the last couple of years, a new type of balanced fund has become prevalent that combines tax efficiency with a more conservative, safer exposure to equities.

So far, these funds used to be known by the rather odd name of ‘Equity Income Fund’. Now, under SEBI’s ‘Categorization and Rationalization of Mutual Fund Schemes’, they have officially been named ‘Equity Savings’ funds. Let’s see what’s different about these newly named funds, and how they can deliver lower-risk while having the same lower tax liability as the balanced or equity funds that investors are used to. Fund investors know that under the tax laws, capital gains from equity investments are zero if you stay invested for more than one year. At least, that’s the status right now, notwithstanding rumours that this could change in the coming budget. To qualify as an equity investment, a fund must invest more than 65 percent of its assets in equity. If the equity exposure drops below this level, then the risk will be lower, but investors will have a heavier tax liability, as for any income fund.

That’s the problem that Equity Savings funds solve. They deliver lower equity exposure, combined with the lower taxation of equity funds. They do this by utilising equity derivatives in such a way that the returns are predictable and safe, while the investment is still classified as equity for tax purposes. Therefore, if one creates a balanced fund where some of the equity exposure is in the form of arbitrage trades, then one gets the very useful combination of lower risk and lower tax.

The idea is straightforward. The fund manager looks for opportunities where there is a price gap between a stock price and its futures price. To take a simplified example, let’s say the market price of a stock is Rs 100, and the price of its futures a month hence is Rs 101. Then, the fund manager could buy the stock and simultaneously sell the derivative. Effectively, this is a predictable and safe gain of one per cent over the month. However, it is an equity trade, and therefore a fund composed of such investments would get classified as an equity fund, and its investors would pay no long-term capital gains tax. In principle, this kind of an investment does not have the safety level of the kind of investments that short-term debt mutual funds make, and definitely not of bank fixed deposits. However, in practice, they offer a much higher post-tax return in exchange for a small technical increase in risk.

There are now fifteen such funds. In comparison to balanced funds, their returns are modest–over the last year, an average of 14.3 per cent compared to 24.2 per cent. However, their potential for quick decline is also limited. The average decline in the worst month that equity savings funds have suffered is 4.5 per cent. The equivalent for balanced funds is 13.3 per cent.

Of course, as I mentioned earlier, the existence and utility of such funds depends heavily on the current tax laws. As it happens, the periodic rumours that there will be a change in the tax exempt status of long-term capital gains is particularly strong before this year’s budget. If they are true, there will be some readjustment in the approach to these funds, but their basic utility is unlikely to be dented.

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Top 10 Tax Saving Mutual Funds of 2018

Best 10 ELSS Mutual Funds to Invest in India of 2018

1. Tata India Tax Savings Fund

2. Mirae Asset Tax Saver Fund

3. DSP BlackRock Tax Saver Fund

4. Sundaram Diversified Equity Fund

5. Birla Sun Life Tax Relief 96

6. ICICI Prudential Long Term Equity Fund

7. Invesco India Tax Plan

8. Reliance Tax Saver (ELSS) Fund

9. Axis Tax Saver Fund

10. BNP Paribas Long Term Equity Fund

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Investing strategies for equity and debt funds

After a stellar rise to its all-time highs, the capital market has retraced a bit. However, most experts feel that the Indian stock market is the midst of a long bull run and will once again resume its upward move.

In such a situation, if you are a mutual fund investor looking to capture the market trend to make gains through equity funds, you must be wondering what your investment strategy should be. Should you invest in funds through a systematic investment plan (SIP) or lump-sum?

Most advisors suggest SIP is the best way to approach the market since it helps you to average out the purchase price of the units over a period of time. However, this may not be true in all market conditions, especially when the stock market is moving up on a sustained basis.

If you are a risk-averse mutual fund investor looking to park your money in debt funds for gain to avoid stock market volatility, there are many options. However, choosing a debt fund can also be tricky and would depend on various factors including your risk-profile, your financial goals and time horizon.

Your investment needs alter drastically as you approach retirement with your time horizon getting reduced and your risk appetite shrinking. So as your retirement approaches, how do you allocate your money among various assets to generate a decent return and maintain a healthy lifestyle?

Financial planners suggest that one needs to be careful with risks as one approaches retirement or is retired. So, cutting down on direct exposure to equity and raising debt investment for regular income is one of the main pillars of a good asset mix. As a thumb rule, retirees should have an asset allocation which is based on their needs and not age

On the homebuyers’ front, attempts have been made to assuage homebuyers who are struggling after Jaypee Infratech was declared insolvent recently. The National Company Law Tribunal (NCLT) appointed an Interim Resolution Professional (IRP) for the company in the form of Anuj Jain, who during the week clarified that the company will obtain homebuyers’ claims from the firm’s records and verify the amounts with them if they fail to submit the claim forms by August 24 deadline.

However, the bad news is that things could get worse on the real estate front for homebuyers. With the Real Estate (Regulation and Development) Act 2016 (RERA) tightening the noose around the developer community, some of them may have found liquidation proceedings or the bankruptcy law as an avenue to escape the ambit of the state regulator, say legal experts.

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Kotak Select Focus Fund

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Kotak Select Focus Fund scheme aims to generate capital appreciation from a diversified portfolio of equity and equity related instruments, generally focused on a few selected sectors.

A late entrant to the multi-cap category, this fund has been a consistent performer in difficult markets. It has beaten the benchmark and the peers in all the seven years since launch.

Kotak Select Focus Fund believes that different sectors of the economy perform varyingly over different economic cycles. It attempts to take focused bets on select sectors that are likely to outperform. The fund generally maintains four-nine sectors in its portfolio, selected on a top-down basis.

Kotak Select Focus Fund large-cap exposure has climbed above 80 per cent in recent times, leading to an overweight position relative to the category. Mid caps make up about 18 per cent of the portfolio. The fund can take concentrated bets at the sector level (maximum exposure at 33 per cent) complemented by a diversified approach at the stock level (generally around 50 stocks in the portfolio). The flexible market-cap mandate allows mid/small-cap exposure between 25 and 50 per cent but the fund has typically maintained it at 20 per cent or less lately. The fund selects companies that have proven business models, which are scalable in nature, where capital efficiency is high and that have reasonable competitive edge in their respective areas of business.

Kotak Select Focus Fund performance is yet to be tested in a big market crash, given its limited record, but it did manage to contain downside well in 2011, losing less than the benchmark and peers. The fund’s three- and five-year returns are a healthy 7-8 percentage points ahead of the benchmark returns and 3-4 percentage points above category returns.

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SUNDARAM MIDCAP Fund

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SUNDARAM SELECT MIDCAP is a mid-cap focused fund has shown remarkable consistency in outperforming both its benchmark index and the category over many years. It takes a sharper tilt towards mid-caps compared to its peers.

While the fund manager used to take large positions in his conviction picks, he has moderated exposure to his top bets over the past year. He has also chosen to stay away from capital guzzling businesses instead favouring those with efficient capital allocation practices.

SUNDARAM SELECT MIDCAP fund boasts of a superior risk-reward profile compared to many of its peers, and while it has underper formed slightly over the past one year, its proven track record in the hands of a capable fund manager provides comfort. It remains a worthy pick in the midcap basket.

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How to Choose a Best Debt Fund

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The debt mutual fund category is a happy hunting ground for corporate treasuries, institutional investors and high net-worth folks. This is why retail investors, like us, often feel lost while trying to select the right fund. But here are five steps to choose a good debt fund.

Match your maturity
Fund houses classify their debt funds into different categories based on the average maturity of the bonds they plan to invest in. This is why the first step to buying a debt fund is matching your own holding period to the fund’s maturity profile. Are you looking for a debt fund to park your temporary money (replacement for your savings bank account)?

Then you must invest in liquid funds or ultra short-term bond funds that typically invest in bonds that mature within three to six months.

If you can hang onto the fund for one to three years, short-term debt funds and short-term gilt funds, which usually maintain portfolio maturities of one to three years, will suit you well. If you are planning on a holding period of three to five years, income funds and credit opportunities funds will be a good fit.

If you have no fixed horizons in mind but can hold on for five years or more, medium to long-term gilt funds, dynamic-bond funds, income funds and credit-opportunities funds may prove a good choice. You can also use any of these categories to take care of the debt allocation in your child’s education portfolio or retirement portfolio.

Assess your risk appetite
Unlike bank deposits, debt funds can suffer temporary NAV losses and wild swings in returns on a year to year basis. Therefore, it is not just your holding period that should decide your choice but also your risk appetite. High returns in the debt-fund category, just like in any other asset class, come with high risks. Therefore, it is important to understand how much duration or credit risk a fund has assumed to make its returns. Duration risk entails holding long-term bonds in the portfolio for capital gains when interest rates fall. Credit risk entails betting on lower-credit-rated corporate bonds to earn higher interests.

Typically, medium to long-term gilt funds, dynamic-bond funds and some income funds take on duration risk to bump up returns. Credit opportunities funds, some income funds, short-term debt funds, ultra short-term debt funds and liquid funds take on credit risk in their portfolios for higher returns. Your decision to take on duration or credit risks will depend on the state of interest rates in the economy. If rates are high, then, after a rising interest-rate cycle, duration funds may pay off as rates fall. If you are close to the bottom of a rate cycle, credit funds can deliver better returns.

However, both duration risks and credit risks can backfire leading to lower returns. Therefore, it is essential to assess the average maturity of your debt fund’s portfolio and its break-up into government and corporate bonds of different ratings before choosing. If you hate bumpiness in your debt-fund returns, liquid or ultra short-term debt funds with safe portfolios (only G-secs and AAA bonds) will be the best choice.

Check scheme track record
Picking up the fund that is leading in the one, three or five year categories is not the sure shot way to choose a good debt fund. Just like equities, some debt funds are better at navigating bull markets than bearish ones. So, it makes sense to check out a debt fund’s track record over two complete interest-rate cycles to assess its performance.

Today, looking back at an eight-year track record for a debt fund would cover two rate cycles. In this eight-year period, 2008, 2014 and 2016 were big bull years for bond markets, and 2009 and 2013 were bearish years. Assess if a debt fund has fared better than its peers in both the phases. Another shortcut to assessing both its track record and risk profile is to take stock of its best and worst one-year performance in the last eight years to 10 years if track records are available. The difference between the two numbers can provide a good approximation of the risk-return trade-off you’re taking with the fund.

Watch the expenses
While the last three years have seen debt funds deliver exceptional returns, the 10 year CAGR across different categories of debt funds ranges between 7.5 and 8.5 per cent. This is why the annual expenses you incur on your debt fund can make a big difference to your returns. Assuming a debt fund owns a portfolio with an average yield of 8 per cent today, over the next one year, a 1 per cent expense ratio will reduce your effective returns by 12.5 per cent a year. But a 2 per cent expense ratio will take away a fourth of your returns.

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HDFC MID CAP OPPORTUNITIES Fund

HDFC MID CAP OPPORTUNITIES Fund has delivered superlative results over the past few years. A much lower portfolio average market capitalisation than its peers indicates that the fund is more focused on the mid-cap space. Its approach remains consistent under a skilled fund manager who has managed it since inception.

The focus on bottom-up stock selection and emphasis on quality continues to be the mainstay for the fund. With increased corpus, the portfolio has become large and the diversification allows modest exposure to its top bets and a longer tail.

While its performance has dipped slightly this year, its track record over many years shows the fund is adept at delivering superior returns over market cycles.

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DSP BlackRock Opportunities Fund

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DSP BlackRock Opportunities Fund scheme seeking to generate long term appreciation and whose secondary objective is income generation and the distribution of dividend from a portfolio constituted of equity and equity related securities concentrating on the investment focus of the scheme. The aim of this scheme is to strongly outperform plain vanilla equity funds which are far more diversified in their portfolio weightage, to minimise risk.

A very steady performer in the multi-cap category, DSP BlackRock Opportunities Fund has retained a three-star rating almost all the time for the last 13 years, climbing to four stars in the last one year.

DSP BlackRock Opportunities Fund is a flexi-cap fund with no pre-defined market capitalisation limits. However, the fund has had a bias towards large caps. In recent times, the fund has maintained a 70 per cent plus large-cap exposure, with mid-cap stocks at about 20 per cent. It is overweight on large caps relative to the category.

DSP BlackRock Opportunities Fund doesn’t like to cling to the ‘growth’ or ‘value’ styles. Key parameters looked at while identifying an investible stock are the growth potential of the business, confidence on predictability of business variables, return on equity, management quality and stock valuation (relative to the stock’s history and peers).

DSP BlackRock Opportunities Fund contains risks through a maximum portfolio weight of 10 per cent in a stock and has a cap of 7.5 per cent on its cash levels.

After a short blip in 2012, this fund has pulled up its socks to deliver significant outperformance in the last five years. Its three- and five-year returns are 6-7 percentage points ahead of the benchmark returns and 3-4 percentage points more than the category returns. Looking back, the performance shows that the fund has contained losses well relative to its benchmark in the bear years of 2008 and 2011. But it has trailed the index in a few bull years such as 2007 and 2012. This could be indicative of its conservative approach to valuations.

DSP BlackRock Opportunities Fund is A predictable performer in the multi-cap category.

SIPs are when Stock Market is high volatile. Invest in Best Mutual Fund SIPs and get good returns over a period of time. Know Top SIP Funds to Invest Save Tax Get Rich

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Dividends Option in MFs

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What does dividend option mean in a mutual fund?

A mutual fund scheme be it equity or debt can declare dividend for its unit holders from realised profits in its portfolio. Realised profits are the gains made from instruments by selling them at a price higher than what they were purchased for or when the securities held in the scheme receive dividend or interest (in the case of debt funds) from the instruments they hold. Unrealised profits from the securities/instruments held in the portfolio cannot be used to pay dividends.

Dividends in mutual fund schemes

excite investors. In fact many of

them apply just before the

declaration date to earn that

dividend. Retirees prefer the

dividend option as it gives them

intermittent cash flows.

How does dividend payment work? What happens to the NAV once the dividend is paid?

So assume you have invested in a fund at the NAV of Rs 14 and opted for dividend option. The scheme performs and after appreciation the NAV reaches Rs 16. The fund house may decide to pay out Rs 2 as dividend. So you receive Rs 2 and simultaneously the NAV will fall back to Rs 14. Schemes of mutual funds can decide their own frequency to pay a dividend. This could be daily, weekly, monthly, quarterly or annual or just when they have surplus money to declare a dividend. Dividend is not assured by a scheme and there is no guarantee of its payment, but most of them endeavor to pay dividend and stick to their respective mandate. For example, several liquid and ultra short term funds endeavor to pay a daily dividend, some hybrid or balanced funds pay monthly dividends while some equity funds pay quarterly and annual dividends. However, investors need to keep in mind, dividends are not certain and the amount is not fixed.

How are dividends taxed in the hands of the investor?

Dividends received from all mutual fund schemes be it equity, debt or hybrid is tax free in the hands of the investors. However, in the case of debt funds, the fund house pays a dividend distribution tax of 28.84% which includes surcharge and cess. In an equity mutual fund, there is no dividend distribution tax.

Should investors going for SIPs in equity funds opt for the dividend option?

For those looking to build wealth over the long term through equity mutual fund systematic investment plan (SIP), it is better to go with growth option. This is because the compounding benefit is lost when dividend is paid, unless the amount is invested immediately in a higher than equity yielding asset. For those needing regular income from equity or balanced funds, financial planners advocate systematic withdrawal plan as a better tool for regular flows compared to dividends.

What dividend option should investors use while using a debt fund?

For those in the highest tax bracket investing for a period less than three years, could opt for the daily dividend option in liquid / ultra-short-term funds as the dividend distribution tax is 28.84% compared to their individual tax slab of 30.9%.

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Invesco India Growth Fund

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It is that time in markets when being invested with large-sized companies makes sense as they are showing better earnings growth. One mutual fund that plays this theme is Invesco India Growth Fund.

Invesco India Growth Fund is managed by Taher Badshah and Amit Ganatra. The investment style of the fund can be summed up in one expression: all-weather equity fund. Through bottom-up approach, the fund managers take controlled risks in all directions. There are two aspects to this:

One, with respect to the benchmark index ( S&P BSE 100), the fund managers are up to 50% overweight on a sector or underweight.

There is no deviation from this norm. The second aspect is that they also accommodate companies based on growth and value themes. This protects investors from severe downside in times of bear phase of markets. The fund managers choose stocks whose valuations are reasonable compared with its growth prospects.

In a portfolio of 36 stocks, the scheme has 75% dedicated to the growth theme while 25% is dedicated to value theme. With this strategy, the scheme has outperformed its peers and the benchmark by a good margin. In the past three year and five-year periods, the scheme has delivered 15.2% and 19% returns, in contrast to 10% and 13% returns respectively by the S&P BSE 100 in the same period.At present, the scheme is overweight on consumer discretionary and financials, industrials indicating that the fund managers are banking on the big consumption and economy recovery themes.

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SBI Bluechip Fund

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SBI Bluechip Fund scheme would invest in stocks of companies whose market capitalization is atleast equal to or more than the least market capitalised stock of BSE 100 Index.

SBI Bluechip Fund has managed to beat its benchmark and category in each of the last five years. A creditable show in 2014 and 2015 lifted its ratings to five stars and it has since held onto these ratings.

Despite its name, the fund tilts towards a multi-cap approach in its allocations. It invests in the top 100 companies in terms of market capitalisation, with the flexibility to invest up to 20 per cent in mid-cap stocks. The minimum market capitalisation it owns is the last stock in the BSE 100, which currently has stocks in the range of Rs 2,500-6,000 crore. In the last one year, the fund has had lower large-cap allocations (75-80 per cent) than those of peers, with 15-20 per cent in mid-cap stocks. This is likely to have propped up performance relative to the category. The maximum overweight/underweight on a sector, relative to the benchmark, is capped at 8 per cent and for individual stocks, at 5 per cent.

SBI Bluechip Fund has trailed its benchmark and category by about 1-2 percentage points in the last one year, probably on account of the quality bias. Over three and five years, the returns are 6-7 percentage points higher than the benchmark returns and 5 percentage points more than the peer returns. The investment style leans towards growth investing. The fund does take debt calls, with the non-equity portion amounting to 15-16 per cent in the beginning of 2017 but falling to 8-9 per cent levels in the recent months.

It lost less than its benchmark in the market falls of 2011 and 2015 after slipping behind the index in 2010.

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