Magic of Investment Compounding

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Starting to save at the age of 35 instead of 50 can mean retiring with four times the wealth

There are two kinds of investors in this world, those who understand compounding and those who don’t. Almost everyone who invests money claims to understand compounding but very few do.

In a way, that’s an unfair accusation. Compounding produces such unintuitive results that perhaps only a few mathematical geniuses can be expected to have a real feel for it. The rest of us must rely on calculations. What will grow your money more? 10 per cent a year for 15 years, or 33 per cent a year for 5 years? The answer is that the two will earn the same amount, about 4.18 times.

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But first, let’s define exactly what compounding is. In the textbook (or on Wikipedia), the term that is defined is ‘Compound Interest’.

Here’s the definition: Compound interest arises when interest is added to the principal, so that, from that moment on, the interest that has been added also earns interest. This addition of interest to the principal is called compounding. Although we use the word ‘interest’, the idea applies equally to all forms of returns, not just those that are called interest.

The biggest thing that investors should appreciate about compounding is the enormous value of time. As your returns themselves start earning, and then the returns on those returns themselves start earning, the profit starts piling up at an enormous pace.

The graph below illustrates the example above and shows this clearly. The green line starts rising slowly, but as compounding takes over, the extra time means a lot more income.

Translated into a human lifetime, it means that starting to save at the age of 35 instead of 50 can mean retiring with four times the wealth. The graph shows this clearly. If one has time to learn just one thing about investing, then it should be this.

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Invest Birla Sun Life Balanced ’95 Fund Online

Birla Sun Life Balanced ’95 Scheme Online

As volatility has become new normal in markets, themes that have the potential to generate stable and consistent returns are most sought-after.

Given this fact, balanced schemes offer reasonably good comfort for retail investors as by the very nature of the funds it offers to a large extent the best of two worlds: equity and debt.

Among the balanced schemes, Birla Sun Life Balanced ’95 scheme which has a performance record of over 20 years is a consistent and stable performer not only in bull phase but also in bear phase of the markets.

The scheme’s fund managers Mahesh Patil and Pranay Sinha follow a multi-cap approach (mostly large companies) when it comes to investing in equities. On the debt side, the scheme follows both accrual and duration strategies. In a falling interest rate scenario, duration strategy of buying bonds mostly shorter duration and in a stable interest rate scenario, the scheme buys and holds bonds.

Largely, the scheme invests in corporate bonds. Due to the multicap approach on the equity side, and accrual and duration strategies on the debt side, the fund has been able to beat its peers and benchmark by a fair margin.

On the debt side, the scheme has bonds with average maturity period of 16.4 years and on the equity side since the scheme has mostly large-sized companies, the scheme is best suited to a longterm conservative retail investor.

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Reliance Regular Savings Fund – Debt Option

Reliance Regular Savings Fund – Debt Online

Reliance Regular Savings Fund – Debt Option

  • Reliance Regular Savings Fund – Debt option primarily seeks to generate accrual returns through yield enhancing credit exposures along with capital appreciation due to the moderate duration in the portfolio.
  • The fund invests based on short to medium term interest rate view and shape of the yield curve. It typically maintains a moderate duration up to 2 years and invests in well researched credits/ structures for yield enhancement.
  • It is ideal for investors who have a low appetite for interest rate volatility and seeking accrual returns with moderate duration
  • The fund is intended for investors having a holding period return over 1 – 2 years.

Key Highlights

Positioning:

 High yielding debt oriented fund which endeavours to give consistent returns through accrual.

Investment Philosophy:

 Focus on high accrual income through investment in well researched

high yielding credit exposures diversified across rating profile

 Moderate duration up to 2 years leading to low interest rate volatility

Potential Source of Returns:

Accrual Returns: The main source is accrual returns which is

derived from maintaining relatively higher YTM

Capital Appreciation: Additional source of returns is through capital gains in a falling interest rate scenario

Dedicated Credit Research Team:

 One of the largest Credit Research Team of 6 credit analysts with cumulative experience of more than 35 years.

 A separate team within the Fund Management Department, which has parallel reporting to CIO – Fixed Income & Investment Committee

Lucrative Proposition Than Fixed Deposits:

Steady Returns: Investment in well researched high accrual credit exposures diversified across rating profile

Low Volatility: Maintains modified duration of up to 2 yrs leading to low interest rate volatility.

Tax Efficient: An efficient tax savings tool as compared to fixed deposit

DSP BlackRock Micro Cap Fund Online

As DSP BlackRock Micro Cap Fund is closed for Investing, Invest DSP BlackRock Small & Midcap Fund Online

The aim of the fund is to seek long-term capital appreciation by investing in a portfolio that is substantially constitutes of stocks that are not part of the top 300 companies by market capitalisation. Focus of the scheme is to deliver superior long term performance by selecting stocks of companies those are uncorrelated to broader markets & not sector specific.

Small-cap stocks have offered quite a bumpy ride to investors since 2008. But this is a fund which has navigated the ride very well to deliver a consistent out performance of the index throughout two market cycles. The consistent show has earned it a four-star rating from 2015, with an improvement in the ranking from three stars in the earlier years. About 75-85 per cent of its portfolio is invested in small caps, with a 15-20 per cent mid-cap allocation. The fund’s mandate requires 65 per cent of assets to be invested in stocks that are not among the top 300 companies by market cap, which gives it considerable flexibility in portfolio choices. In practice, the fund has been overweight on small caps relative to the peers and underweight on both mid- and large-cap holdings. It usually follows a buy-and-hold strategy, giving the small-cap bets enough time to pay off. In a category that has many funds that chase growth stocks, this fund doesn’t fight shy of buying cyclicals, provided it can see the prospects of a turnaround and an improving ROCE.

This is a rare small-cap fund to have beaten its benchmark in every one of the last eight years from 2008. It has also stayed ahead of the peers in every year but 2012. This gap has widened of late with five-year and three-year returns beating the benchmark by double-digit margins. The strong performance has seen the fund’s assets expanding rapidly and the fund has restricted fresh lump-sum investments.

This fund provides a great alternative to directly investing in the risky micro-cap segment of the market.

Mutual Funds Rollover

AMCs have been asking investors to extend the tenure of their close ended schemes

In the past 3-6 months, many asset management companies have been asking their investors’ permission to roll-over or extend the tenure of their close ended schemes, which range from fixed maturity plans to hybrid schemes and equity funds. In most cases, AMCs have asked for an extension of 1-2 years.

Fund houses when asked cite tax sops, the scope for higher yields and opportunity to get ‘reasonable’ returns over the next two years as the reasons for their requests.

Launched in November 2013, the close ended multi-cap ICICI Prudential Value FundSeries 1 is due to mature on November 07, 2016. The fund house is planning to roll over the scheme and urging investors to stay invested. The proposed roll over will lead to the fund’s revised maturity date being reset as December 31, 2018. So why the rollover? It can’t be poor performance. Since launch, the fund has delivered a good 25.77% CAGR (as of Sep 12). Year to date, the fund’s NAV has risen 9.23% versus 10.3% on the S&P BSE 500 and 13.5% of the category. But the fund has beaten both category and S&P500 in the last 1-year period.

Therefore, we believe that rolling over will allow investors to continue to benefit from earnings growth, coupled with macro improvements.

Some debt oriented funds have also been doing roll-overs. The extension period is often in excess of one year, but there are some funds where a mere extension of 15-30 days can fetch them a tax rebate. For instance, HDFC Mutual Fund asked investors to agree to roll over HDFC CPO-I-36M August 2013 (Capital protection oriented plan). It was originally due for maturity on Tuesday, September 06, 2016 but 7 days more will make it more tax efficient.

Rollover of 7 days shall make the units of the plan a long term capital asset thereby improving the tax efficiency of the returns of the plan.

The change in debt fund taxation, which made capital gains for less than a three year holding period liable for taxation at the slab rate, seems to be prompting such rollovers.

Funds like HDFC MF and ICICI Pru MF have also been asking investors to give their nod for more extended rollovers for FMPs. These rollovers seem to be prompted by the belief that interest rates in the economy are on their way down. By rolling over old funds, investors can lock into the current higher rates.

Take the example of HDFC FMP 1143D July 2013 (1), which is due for maturity on Wednesday, September 21, 2016. However, the AMC wants 365 Days extension. Others like ICICI Prudential Fixed Maturity Plan – Series 68 – 369 Days Plan K are eyeing a roll over for a term of 420 days. Most of these FMPs have given 8.5-9.5% returns (range) since inception.

In the last 2 months, Reliance MF has also sought rollover of Reliance Fixed Horizon Fund XXIV- Series 2,3,4,5,7 9,11, 13, 15?, Reliance Dual Advantage Fixed Tenure Fund IV- Plan A and Reliance Dual Advantage Fixed Tenure Fund IV- Plan A among others. The extension is for 650 to 1100 days in some cases.

Some close-ended funds are rolled over in order to provide the opportunity for investors to extend their existing investments by locking in prevailing yields / possible returns for the incremental investment period.

Investors should be cautious about extensions that seek to capture non-tax opportunities, feel some experts. On yields, unless one goes for lower-rated instruments, higher coupon rates are difficult to come by.

Hence, if higher yield is stated as a reason, investors will do well to understand the risk profile and where the fund intends to invest before taking a call. In my opinion, if an investor is looking at the investment from a return perspective, the open-ended debt funds can offer superior returns at this point as they can vary their portfolio maturity based on opportunities

Invest Mutual Funds Online

Scheme Name Launch Date Proposed Redemption Revised Redemption
Reliance FHF XXIII Series 8 25-03-2013 05-04-2016 10-04-2017
ICICI Prudential FMP Series 67 740 Days Plan H 02-04-2013 18-04-2016 24-05-2017
Axis Capital Protection Oriented Fund – Series 5 29-10-2012 02-05-2016 04-11-2019
DHFL Pramerica Hybrid Fixed Term Fund – Series 11 – Regular Plan 04-02-2013 09-05-2016 09-08-2019
DHFL Pramerica Hybrid Fixed Term Fund – Series 12 – Regular Plan 18-03-2013 23-05-2016 23-08-2019
ICICI Prudential Multiple Yield Fund – Series 3 – Plan C 16-05-2013 24-05-2016 15-04-2019
ICICI Prudential Multiple Yield Fund – Series 3 – Plan D 22-05-2013 30-05-2016 15-04-2019
Reliance FHF XXIII Series 12 12-06-2013 29-06-2016 17-07-2017
DHFL Pramerica Hybrid Fixed Term Fund – Series 14 – Regular Plan 24-06-2013 30-06-2016 05-07-2017
Reliance Dual Advantage Fixed Tenure Fund III – Plan C 31-05-2013 05-07-2016 30-07-2019
BNP Paribas Capital Protection Oriented Fund – Series I 30-04-2013 05-07-2016 05-07-2019
Reliance Dual Advantage Fixed Tenure Fund IV – Plan A 31-07-2013 10-08-2016 31-07-2019
Reliance FHF XXIV Series 2 24-07-2013 10-08-2016 16-09-2019
Kotak FMP Series 113 Reg 29-08-2013 07-09-2016 12-10-2017
Reliance FHF XXIV Series 15 29-08-2013 13-09-2016 02-07-2018
HDFC FMP 1143D July 2013 (1) Reg 05-08-2013 21-09-2016 21-09-2017
ICICI Prudential Value Fund – Series 1 31-10-2013 07-11-2016 31-12-2018

AMCs have been asking investors to extend the tenure of their close ended schemes

In the past 3-6 months, many asset management companies have been asking their investors’ permission to roll-over or extend the tenure of their close ended schemes, which range from fixed maturity plans to hybrid schemes and equity funds. In most cases, AMCs have asked for an extension of 1-2 years.

Fund houses when asked cite tax sops, the scope for higher yields and opportunity to get ‘reasonable’ returns over the next two years as the reasons for their requests.

Launched in November 2013, the close ended multi-cap ICICI Prudential Value FundSeries 1 is due to mature on November 07, 2016. The fund house is planning to roll over the scheme and urging investors to stay invested. The proposed roll over will lead to the fund’s revised maturity date being reset as December 31, 2018. So why the rollover? It can’t be poor performance. Since launch, the fund has delivered a good 25.77% CAGR (as of Sep 12). Year to date, the fund’s NAV has risen 9.23% versus 10.3% on the S&P BSE 500 and 13.5% of the category. But the fund has beaten both category and S&P500 in the last 1-year period.

Therefore, we believe that rolling over will allow investors to continue to benefit from earnings growth, coupled with macro improvements.

Some debt oriented funds have also been doing roll-overs. The extension period is often in excess of one year, but there are some funds where a mere extension of 15-30 days can fetch them a tax rebate. For instance, HDFC Mutual Fund asked investors to agree to roll over HDFC CPO-I-36M August 2013 (Capital protection oriented plan). It was originally due for maturity on Tuesday, September 06, 2016 but 7 days more will make it more tax efficient.

Rollover of 7 days shall make the units of the plan a long term capital asset thereby improving the tax efficiency of the returns of the plan.

The change in debt fund taxation, which made capital gains for less than a three year holding period liable for taxation at the slab rate, seems to be prompting such rollovers.

Funds like HDFC MF and ICICI Pru MF have also been asking investors to give their nod for more extended rollovers for FMPs. These rollovers seem to be prompted by the belief that interest rates in the economy are on their way down. By rolling over old funds, investors can lock into the current higher rates.

Take the example of HDFC FMP 1143D July 2013 (1), which is due for maturity on Wednesday, September 21, 2016. However, the AMC wants 365 Days extension. Others like ICICI Prudential Fixed Maturity Plan – Series 68 – 369 Days Plan K are eyeing a roll over for a term of 420 days. Most of these FMPs have given 8.5-9.5% returns (range) since inception.

In the last 2 months, Reliance MF has also sought rollover of Reliance Fixed Horizon Fund XXIV- Series 2,3,4,5,7 9,11, 13, 15?, Reliance Dual Advantage Fixed Tenure Fund IV- Plan A and Reliance Dual Advantage Fixed Tenure Fund IV- Plan A among others. The extension is for 650 to 1100 days in some cases.

Some close-ended funds are rolled over in order to provide the opportunity for investors to extend their existing investments by locking in prevailing yields / possible returns for the incremental investment period.

Investors should be cautious about extensions that seek to capture non-tax opportunities, feel some experts. On yields, unless one goes for lower-rated instruments, higher coupon rates are difficult to come by.

Hence, if higher yield is stated as a reason, investors will do well to understand the risk profile and where the fund intends to invest before taking a call. In my opinion, if an investor is looking at the investment from a return perspective, the open-ended debt funds can offer superior returns at this point as they can vary their portfolio maturity based on opportunities

Invest Mutual Funds Online

Scheme Name Launch Date Proposed Redemption Revised Redemption
Reliance FHF XXIII Series 8 25-03-2013 05-04-2016 10-04-2017
ICICI Prudential FMP Series 67 740 Days Plan H 02-04-2013 18-04-2016 24-05-2017
Axis Capital Protection Oriented Fund – Series 5 29-10-2012 02-05-2016 04-11-2019
DHFL Pramerica Hybrid Fixed Term Fund – Series 11 – Regular Plan 04-02-2013 09-05-2016 09-08-2019
DHFL Pramerica Hybrid Fixed Term Fund – Series 12 – Regular Plan 18-03-2013 23-05-2016 23-08-2019
ICICI Prudential Multiple Yield Fund – Series 3 – Plan C 16-05-2013 24-05-2016 15-04-2019
ICICI Prudential Multiple Yield Fund – Series 3 – Plan D 22-05-2013 30-05-2016 15-04-2019
Reliance FHF XXIII Series 12 12-06-2013 29-06-2016 17-07-2017
DHFL Pramerica Hybrid Fixed Term Fund – Series 14 – Regular Plan 24-06-2013 30-06-2016 05-07-2017
Reliance Dual Advantage Fixed Tenure Fund III – Plan C 31-05-2013 05-07-2016 30-07-2019
BNP Paribas Capital Protection Oriented Fund – Series I 30-04-2013 05-07-2016 05-07-2019
Reliance Dual Advantage Fixed Tenure Fund IV – Plan A 31-07-2013 10-08-2016 31-07-2019
Reliance FHF XXIV Series 2 24-07-2013 10-08-2016 16-09-2019
Kotak FMP Series 113 Reg 29-08-2013 07-09-2016 12-10-2017
Reliance FHF XXIV Series 15 29-08-2013 13-09-2016 02-07-2018
HDFC FMP 1143D July 2013 (1) Reg 05-08-2013 21-09-2016 21-09-2017
ICICI Prudential Value Fund – Series 1 31-10-2013 07-11-2016 31-12-2018

Right Debt Funds for you

Invest in Debt Mutual Funds Online



Mutual fund investments are subject to market risk, we all know.

But can the risk be mitigated through a prudent approach of managing investor’s money?

The answer is, YES.

Just as equities are subject to market conditions and valua tions are volatile, fixed income too is subject to interest rate risk and credit risk. In interest rate risk, the degree of volatility varies with duration. Gilt funds carry a high interest rate risk and money market funds like liquid funds and ultra short-term funds carry relatively low risk. In the case of credit risk, bonds are assigned a credit rating through rat ing agencies based on their ability to finance debt obligations based on a thorough assessment of business metrics and available cash flows that can fund interest and principal repayments. AAA equivalent rating is considered to be of the highest quality with negligible risk on default on payment. Against the backdrop of recent credit linked developments which have impacted investors confidence in debt mutual funds, it is probably the right time for investors to understand the best practices of the fund management,

A. Maintain minimum cash level

To meet redemptions, an asset manager can maintain an overdraft position on a continuous basis. This is usually most common in liquid funds which have a higher exposure to CPs. This is followed to ensure that higher-yielding papers in the portfolio are not required to be sold to meet redemptions and instead, the bank borrowing lines are used to meet the redemption pressures. This practice exposes the fund to two types of risks;

Liquidity Risk

In a stressed liquidity scenario, the fund manager would find it difficult to sell CPs as they tend to become illiquid. A stressed liquidity scenario would be the exact time when the investors in a liquid fund are most likely to look to redeem.

Interest Cost

The interest cost of such overdrafts could become prohibitively expensive in a tight liquidity scenario.

Mandatory maintenance of a minimum overnight cash level of 10% in each liquid fund would ensure there is a prescribed level of liquidity to help meet redemption pressure. This is in line with the global best practices.

B. Ensure high-quality portfolio

Funds should focus on the highest credit quality exposure, which is defined by A1+ short term ratings. Any ratings lower than these could potentially expose the portfolio to liquidity risk in extreme market conditions. Globally, only the highest quality credits such as A1P1, which are the highest short-term ratings of S&P and Moody’s, are eli gible for liquid funds. These ratings typically represent long term ratings of up to A or at best A-(Single A or single A-) on global rating scale.

The best short-term rating in the Indian context is A1+ translating into A+ rating in the long term.Only highest A1+ ratings would ensure the highest credit quality .

C. Make it Diverse

Since the objective of a liquid fund is to provide liquidity, safety and then returns, the requirement for diversification needs to be stronger as compared to other fund categories. Globally, regulation tends to follow a 5% or 10% single issuer norm, with funds typically having a 2-3% single issuer exposure.

D. Keep Less of Fixed Deposits

A fund manager is allowed to invest in bank fixed deposits up to 15% – 20% of the fund’s NAV . The rationale of this guideline is to ensure that there is enough liquidity maintained in the portfolio to meet redemption pressure.

However, there’s often a breach of this requirement by investing more in fixed deposits leads to benefit from the higher yield during quarteryear ends. Violation of this guideline defeats the purpose of investing in the fund.

Choosing the right debt fund need not be a complicated affair. Simple way to identify the right fund for your debt investment horizon is based on the four pointers.

HDFC Retirement Savings Fund

HDFC Retirement Savings Fund – Invest Online

An open ended notified tax savings cum pension scheme with 5 year lock-in.

Long term Investment vehicle targeting retirement corpus for you / your investors. Choice of 3 plans – depending on age and risk profiles Equity Plan – investments predominantly(80%-100%) in equity and equity related instruments. Hybrid Equity Plan – investment predominantly in equity and equity related instruments(60%-80%) and balance(20%-40%) in debt and money market instruments. Hybrid Debt Plan – investment predominantly in debt and money market instruments(70%-95%) and balance(5%-30%) in equity and equity related instruments. Investments in the scheme qualify for benefits U/s 80C of the Income Tax Act, 1961. An exit load of 1% is payable if units are redeemed/switched out of the scheme before completion of 60 years of age. NO Exit Load shall be imposed for switching between above investment plans at any time.

How Can an NRI, PIO or OCI Invest in Mutual Fund?

Investing in Mutual Fund by NRI, PIO or OCI

Only a few mutual funds are accepting investments from US persons and Canadian citizens at the moment

Overseas Citizens of India (OCI) and Persons of Indian Origin (PIO) are treated on par with Non Resident Indian (NRIs) in all transactions barring the purchase of agricultural or plantation property. That means an OCI and POI can invest in Indian mutual funds. However, only a few mutual funds are accepting investments from US persons and Canadian citizens at the moment.

You can download a soft copy of the KYC form available on the websites of mutual funds, Amfi and KYC Registration Agencies (KRAs). You have to submit this form, along with the necessary documents, to a KRA’s point of service in person. You can also be send it by post/courier to the KRA agency if the In-Person Verification (IPV) is completed. In the case of NRIs/PIOs, the IPV should be completed by the distributor, who is certified by NISM/Amfi and has complied with the know your distributor (KYD) formalities, or a scheduled commercial bank.

Here is a list of documents you may require to complete the process: A recent photograph, PAN card, identity and address proof, a certified copy of the passport, overseas and permanent address, and PIO card (for PIOs) need to be submitted. NRIs or PIOs can get the above documents attested by authorised officials of overseas branches of scheduled commercial banks registered in India, public notaries, court magistrate, judge, or the Indian embassy/consulate general in the country that they reside. If the proof of identity/address or other specified documents are in a foreign language, they have to be translated into English before submission.

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