CANARA ROBECO EQUITY DIVERSIFIED Fund

CANARA ROBECO EQUITY DIVERSIFIED Fund is a large-cap biased fund with a slight exposure to mid and small caps. It has been struggling to outperform peers in the past few years, but has shown signs of a turnaround this year.

The fund manager tweaked the portfolio a year ago, cutting down the number of holdings and bringing in more conviction. Its top bets are index heavyweights, but the fund is not an index hugger.

A shift in focus from industrials and pure banking to NBFCs and other sectors has led to a pick-up in performance. The manager focuses largely on compounding businesses with earnings visibility, scalability and competitive advantages.

The risk reward profile is inferior to many peers and investors should watch for sustained improvement in its returns.

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Dynamic Equity Funds



Although these funds contain market volatility better than others, they also give lower returns over time.

Equity investors pour more money into the markets when they are going up and stay away during downturns, which can hurt returns. To protect investors from such behavioural bias, there is a category of mutual funds called dynamic equity funds. As the name suggests, these funds dynamically manage their equity portfolios, investing more when markets are down and less when they are up. But are they useful?

Understanding dynamic funds

There are two categories to consider in this context: dynamic asset allocation funds and dynamic equity funds. The former usually have more flexibility to take extreme calls across asset classes. They may even go 100% in on an asset class, based on their strategy. They may also have sub-categories such as aggressive, moderate or conservative, and be an equity or debt-oriented fund accordingly. Some funds in this category also follow the fund of funds structure, whereby the fund invests in other equity and debt funds.

Dynamic equity funds, on the other hand, are largely equity-oriented, and tweak their exposure to equity and cash based on market valuations and other metrics. For instance, Axis Mutual Fund has launched a new fund offer in this category called Axis Dynamic Equity Fund. Based on market valuation, trend and risk, the fund’s equity allocation can be in the range of 30-100%. Given the current readings, the recommendation would be a net equity exposure of 50%. However, the fund will look to maintain a minimum of 65% in gross equity. Any net exposure reduction below that will be achieved through hedging using derivatives.

When does it work?

As dynamic equity funds tweak their exposure based on market levels, they may contain volatility better than diversified equity funds, which are fully invested across market levels and phases. By reducing equity exposure and increasing cash allocation at appropriate market levels, these funds ensure downside protection.

The lower volatility of these funds is also evident in their standard deviation (SD), which measures volatility in a fund’s return.The lower the SD, the less volatile the returns. Their 3-year category average SD is 10.32%, compared to 14.18% for diversified equity funds (see table). But it is higher than that of dynamic asset allocation funds.

When does it fail?

While the volatility of returns in these funds is lower than that in diversified funds, the returns are also lower. Dynamic equity funds have underperformed compared to diversified equity funds over time, as they also tend to time the market. The 5-year category average returns are at 14.57%, whereas that of diversified equity funds is 18.39%.

Further, dynamic equity funds tend to hold higher cash in prolonged rallies and can, therefore, underperform in long upmarket cycles. These funds may underperform during strong market conditions. To get the best out of dynamic equity funds, it is important to invest over a 3-5-year cycle.

Should you opt for it?

It is not easy for a small retail investor to understand the different models and variables used by dynamic equity funds to determine the asset allocation. Investors would be better off doing their own asset allocation at an individual portfolio level. Bala concurs, Asset-allocated portfolios can do a good job if investors look at the performance at a portfolio level instead of looking at individual fund volatility. Dynamic equity funds may be suitable for those who are very conscious of market valuations and are wary of over-valued markets. But diversified equity funds are a better bet, since they are simple to understand and offer higher returns over time.

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Diversified Portfolio can Grow your Wealth



It pays to take the mutual fund route to invest in equity. Your investments will be monitored by experts, allowing your wealth to multiply over time

A common accusation many readers make about this column is that while it encour ages investing in equity, it does not carry specific recommendations about where to invest and how much. That kind of specific investment advice is quite dangerous, though it admittedly makes life easier for the investor.Unless one is a financial adviser, and can take on the responsibility of monitoring how the recommended products are working, it is simply unethical to reel off names.

The question is not of expertise, but of the nature of the business of equity investing itself. Even the most intensive research can come up short when unexpected events impact businesses and markets.There is no telling in advance. It is not as if I hold b ack something precious from the readers of this column; it is just that I cannot forecast the future.

A very comforting emotion is the sense of control. Investors want to believe that the equity investments they make will behave in a manner that they can predict, understand, control, and therefore not worry much about. When they realise that things could go wrong; that their money could be at risk; or that their choices will perform poorly, not doing anything seems like a better place to be in. The comfort of a small fixed interest in the bank seems like a safer option. But that so harshly short changes your wealth.

Many investors know about the benefits of long-term investments in equity. What holds them back from acting, then? Two primary reasons I would think. First, the idea of a higher return must be associated with something concrete. The inability to associate a high return with a specific product makes them think that such examples are hypothetical.

Second, the lack of conviction in the process that can enable a higher return. When I point out that diversification is the only way to achieve better returns, I have lost my investor already. They want me to tell them whether they should buy stock A or stock B, and if I say that they should have both, and a dozen more, so they can manage risks better, investors fail to grasp the merit of this process.The adamant stance to know what can happen in the future clouds their decision-making process.

Let me offer a four-step process, which I hope will help many such investors who fail to make the decision to switch from low return fixed income products, to equity investing. Needless to add, equity is for the long run and for growth in the value of the investment. If you think you will need to draw the money in a short period of time, it is best left in the bank.

First, investing in equity is not about picking the right stocks. It is one thing to be amazed by the story of multi-baggers that made stupendous gains, but it is another to pick one before it becomes a winner. If you spend your time trying to pick stocks, you will have to allow for the many mistakes you will make in the process. The learning curve is steep and the lessons harsh. If you are a first-time investor, choosing to let money idle in the bank rather than invest in equity, you could make expensive mistakes trying to dabble in stocks.Equity means the market as a whole or the asset class that invests in growing businesses. That is the orientation you must keep.

Second, a portfolio of stocks is better than individual bets. Since you cannot foresee the future, you have to begin with a bunch of stocks, and weed out whatever is going bad as you go along. If you are buying stocks, you should hold 20-25 equity stocks to be able to cushion yourself from the wrong decisions you could make. Unless you run a company and are on its board as an inside investor, or have enough wealth to worry about risks, concentrated bets in a few stocks won’t take you too far. If you cannot construct and manage such a portfolio, buy an equity fund or an index fund. Define your search thus: You are looking for a portfolio of stocks, that will be actively managed to throw out what is not performing. You can buy and hold a portfolio passively, only if some one else is monitoring it for quality.

Third, equity investing involves both strategic and tactical choices.For example, if your intention is to be invested in large and wellknown companies that are market leaders in their segment, an investment in a large-cap equity fund or a narrow index like the Nifty will serve your purpose. You will find that large-cap funds tactically modify their holdings in sectors and stocks to do better than the index. The choices in equity funds and indices expands this choice of tactical holdings further, to midcap stocks, small-cap stocks, themes and sectors. Take a pyramid approach–more in strategic choices at the bottom and a tapered smaller holding in tactical portfolios. Fourth, the process of selecting a specific fund can be simplified.Each fund house offers a lengthy list of products, but you are looking specifically for large-cap funds, midand small-cap funds, and themes and sectors if you are taking tactical calls. Discard all names that sound complex, and products that mix up too many things. Look for a diversified portfolio and check if the fund has a 10-year track record. Compare its performance with the benchmark index year-on-year. If the fund has done better than the index in 7 out of 10 years, you should do fine.

I routinely receive queries that ask SIP or lump sum? How much should the SIP be? How many SIPs? In the larger scheme of things this will not matter; that you invested it in equity will. Once you begin investing, you will receive a folio number. You can add to it by buying at any time you wish, whenever you have surplus funds. Choose 4-5 funds or indices at the most. Begin investing and ensure that your money is not idle.

Over time, the benefits of having invested in equity, the merits of having your money in a portfolio, and the advantages of having someone to monitor the stocks in the portfolio, will all come into play to deliver wealth that you would be proud of accumulating. The bridge to cross is the conviction that a good process will deliver good returns, even if you cannot completely foresee or control it. That is the attitude to acquire.

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HDFC Short Term Opportunities Fund

HDFC Short Term Opportunities scheme seeks to generate regular income through investment in debt securities and money market instruments.

With one- and three-year returns at 8.7 per cent and 9.1 per cent, respectively, the fund has almost matched its benchmark returns over three years and is ahead of its category by 14 basis points.

HDFC Short Term Opportunities Fund mostly relies on short-term corporate debt for returns, with sovereign exposures at 10-12 per cent in the past one year. But it maintains a very conservative portfolio, both on credit quality and duration. Unlike some peers, the fund also minimises the interest-rate risk by maintaining a very low average maturity of 1.4-1.7 years in the last one year. This is lower than the category average of 2.4 per cent.

HDFC Short Term Opportunities Fund very reasonable expense ratio of 0.36 per cent on the regular plan is another contributor to good returns. The direct plan features a 0.21 per cent expense ratio.

HDFC Short Term Opportunities Fund asset size, at Rs 9,788 crore, makes it one of the biggest in the category.

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Know your Debt Instruments

There are different kinds of debt instruments. Some are riskier than others. Here’s what you need to know

Habitual investors may be familiar with conventional debt instruments – NCDs, commercial paper, G-secs, treasury bills and the like. Of these, Government of India bonds are obviously the safest, while all corporate instruments carry credit risks in some measure.

But the world of debt is lately getting more complicated, with some new-fangled instruments cropping up. Watch out for the acronym ‘SO’ or ‘structured obligation’ against debt instruments in your fund’s portfolio. This indicates that the rating agency has rated the instrument not on the strength of the issuer alone but on a guarantee provided by a reputed company/government/financial institution to meet this obligation in case the issuer fails to cough up. In SO ratings, the creditworthiness of the guarantor matters more than that of the issuer of the bond.

Similar risks exist with securitised vehicles such as pass-through certificates (PTCs), where lenders bundle a pool of loans and sell them to third-party buyers. PTCs pose challenges even for rating agencies because they need to make judgement calls about multiple borrowers and their aggregate credit worthiness, while assessing these securities.

For long, Indian investors have treated state government loans (SGLs) as ‘sovereign’ loans on par with G-secs issued by the Centre. But with the financial position of many state governments in a far more precarious state than the Centre, in recent years, smart investors have begun to make distinctions between sovereign bonds from the central government and those from the states. Lenders now demand a significant risk premium over the G-sec rate from individual states with shaky finances or high deficits.

Saddled with bad loans, many public-sector banks are now flooding the debt market with AT1 bonds offering attractive yields of 8-9 per cent and debt funds are investing in them. What can go wrong with a bond from a public-sector bank, you may ask. But AT1 bonds, intended to shore up the capital base of banks, allow the bank to skip interest payments, write down the bonds or convert them into equity shares. In short, they are akin to equity and can subject debt investors to a capital loss if the bank has big write-offs. They can be pretty illiquid, too, as apart from mutual funds, few other debt market participants have the wherewithal to take them on.

How well do you know your debt instruments?

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Top 10 Tax Saver Mutual Funds for 2017 – 2018

Best 10 ELSS Mutual Funds to Invest in India for 2017

1. DSP BlackRock Tax Saver Fund

2. Tata India Tax Savings Fund

3. Birla Sun Life Tax Relief 96

4. ICICI Prudential Long Term Equity Fund

5. Invesco India Tax Plan

6. Franklin India TaxShield

7. Reliance Tax Saver (ELSS) Fund

8. BNP Paribas Long Term Equity Fund

9. Axis Tax Saver Fund

10. Sundaram Diversified Equity Fund

Invest in Best Performing 2017 Tax Saver Mutual Funds Online

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BIRLA SUN LIFE TAX RELIEF 96 Fund

BIRLA SUN LIFE TAX RELIEF 96 Fund has no particular bias towards any market cap size and takes a pure bottom-up view in portfolio construction. The emphasis is on quality–the fund manager prefers businesses with strong moats and the ability to sustain or achieve leadership position over a decade.

The fund manager does not believe in index hugging, and is comfortable taking large posi tions in his top bets, most of which are not a part of the benchmark index. This lends an element of aggression to the portfolio. However, the strict focus on quality ensures there is no junk in the portfolio.

In fact, many of the top picks are from the MNC space. Boasting among the best risk-return profile in its category, the fund’s proven track record makes it a worthy pick.

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Beta and R-Squared

Mutual Fund Beta and R-Squared

For a given change in the market, what returns can you expect from a fund? Beta and R-squared answers this question

How often have you tuned into a business channel or opened the pages of a pink paper to be told where the markets are headed? The word currently going around is that markets should move up by approximately 25 per cent in the next year. This seems so reassuring. Wouldn’t it be equally reassuring if one could get an indication of how a fund would perform in the future? Especially when all performance data is just an indication of how a fund has performed in the past. And more so when this ‘past performance’ is accompanied by the warning that it may or may not be replicated in the future.

There are statistical tools, which can give you an idea of how a fund will move in relation to the market. Beta is a statistical measure that shows how sensitive a fund is to market moves. If the Sensex moves by 25 per cent, a fund’s beta number will tell you whether the fund’s returns will be more than this or less.

The beta value for an index itself is taken as one. Equity funds can have beta values, which can be above one, less than one or equal to one. By multiplying the beta value of a fund with the expected percentage movement of an index, the expected movement in the fund can be determined. Thus if a fund has a beta of 1.2 and the market is expected to move up by ten per cent, the fund should move by 12 per cent (obtained as 1.2 multiplied by 10). Similarly if the market loses ten per cent, the fund should lose 12 per cent (obtained as 1.2 multiplied by minus 10)

This shows that a fund with a beta of more than one will rise more than the market and also fall more than market. Clearly, if you’d like to beat the market on the upside, it is best to invest in a high-beta fund. But you must keep in mind that such a fund will also fall more than the market on the way down. So, over an entire cycle, returns may not be much higher than the market.

Similarly, a low-beta fund will rise less than the market on the way up and lose less on the way down. When safety of investment is important, a fund with a beta of less than one is a better option. Such a fund may not gain much more than the market on the upside, it will protect returns better when market falls.

So beta seems to be just what the doctor ordered. But as in the case of all things which seem to be too good to be true, there is a catch. The problem is that beta depends on the index used to calculate it. It can happen that the index bears no correlation with the movements in the fund. Thus if beta is calculated for large cap fund against a mid-cap index, the resulting value will have no meaning. This is because the fund will not move in tandem with the index.

Due to this reason, it is essential to take a look at a statistical value called R-squared along with beta. The R-squared value shows how reliable the beta number is. It varies between zero and one. An R-squared value of one indicates perfect correlation with the index. Thus, an index fund investing in the Sensex should have an R-squared value of one when compared to the Sensex. For equity diversified funds, an R-squared value greater than 0.8 is generally accepted to mean that the underlying beta value is reliable and can be used for the fund.

Beta and R-squared should thus be used together when examining a fund’s risk profile. They are as inseparable as risk and return

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INVESCO INDIA MID & SMALL CAP Fund

INVESCO INDIA MID & SMALL CAP Fund has a mandate to invest in mid and small-cap firms, and retains the flexibility to switch exposure depending on the prevailing risk return scenario.

The fund manager adopts a pure bottom-up approach to portfolio construction, with a clear bias towards growth. The focus is on quality companies that have sustainable business models backed by managements with proven track record and sound capital allocation policies.

The portfolio was pruned a year ago, allowing it to take healthy exposure to individual stocks.

INVESCO INDIA MID & SMALL CAP Fund return profile has dipped recently owing to its position on certain stocks, but its proven longer-term record of outperformance under an experienced fund manager provides comfort.

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Balance in your Investment Portfolio

Balanced Advantage Funds

Volatility can’t be avoided, but choosing the right fund can ensure your investment is least affected.

Volatility can’t be avoided, but choosing the right fund can ensure your investment is least affected. Asset allocation scheme that dynamically allocates between Equity and Debt instruments by means of quality stock selection and active portfolio rebalancing.

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