New Fund Offers – NFOs

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Many investors are often attracted to new fund offers, as there is media coverage, publicity and push by the fund house and its distribution team.

NFOs could be for close end open end debt funds, fixed maturity plans, hybrid funds or equity.

What is an NFO?

New fund offer (NFO) is first time subscription offer for a new scheme launched by the asset management company . NFOs can be open end as well as close end. You can invest in a close ended NFO during the offer period only.

However, an open-end fund reopens for subscription and investors have the option to sub scribe anytime after that. It is launched to raise money for a scheme which will eventually buy securities like stocks, government bonds, etc. from the market. NFOs are offered for a stipulated period. This means the investors opting to invest in these schemes at the offer price (mostly fixed at `10) can do so in this stipulated period only .

After the NFO period, investors can take expo sure in these funds only at the prevailing NAV .

How is NFO different from equity IPO?

Initial public offering (IPO), is the first sale of stock by a pri vate company to the public.IPOs are often issued by companies seeking capital to expand, but can also be done by large privately-owned companies looking to become publicly traded. Often they are at a premium to the face value. A new fund offer is always available at `10. An NFO from a mutual fund just pools in money from investors and invests that in a set of securities (stocks or bonds or government securities and so on), based on a stated strategy .

Is there any advantage of investing in an NFO?

Existing schemes from fund houses have a past track record.

The portfolio is known, the fund manager’s style of investing is known.Such schemes are well researched and tracked by analysts. In comparison to this, in an NFO one does not know what the final portfolio will look like, what assets will the scheme garner and so on. Wealth managers suggest investors should invest in an NFO only if it has something different to offer from the existing funds universe. Many investors fall for the trap of NFO since it is priced at `10, compared to open-end schemes which could have higher NAVs (net asset value) which is wrong, say financial planners. Investors should realise that the NAV will ultimately grow based on the kind of portfolio the scheme holds.

Dividend Distribution Tax

There is no dividend distribution tax applicable on equity-oriented mutual funds. These are the funds which have at least 65% of their assets invested in equities.

However, in case of debt mutual funds, AMCs pay DDT at the rate of 28.33% (including surcharge and cess) of the amount of dividend.

What is CKYC?

What is CKYC?

Central KYC Registry (CKYCR) is a centralized repository of KYC records of customers in the financial sector with uniform KYC norms.

Government of India has authorized the Central Registry of Securitization and Asset Reconstruction and Security interest of India (CERSAI), set up under subsection (1) of Section 20 of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, to act as, and to perform the functions of, the Central KYC Records (CKYC) Registry under the PML Rules 2005, including receiving, storing, safeguarding and retrieving the KYC records in digital form of a “client”, as defined in clause (ha) sub-section (1) of Section 2 of the Prevention of Money Laundering Act, 2002.

As per the new KYC norms, once the customer completes the KYC process with an entity authorized to conduct KYC, the customer will be able to invest in all the financial products including Mutual Funds using the 14 digit KYC Identification Number (KIN) issued by CKYC.

As the mutual fund industry is already having KRAs, as a first step, CKYC is being implemented for “New Individuals” for whom KYC is administered by the Intermediaries, effective 1st Feb. 2017. There will be slight change in the KYC form, which encompasses KYC with KRA as well as CKYC.

What is changing?

AMFI circular has mandated that, with effect from 01-Feb-2017,individual investor who is new to KRA (i.e. a prospective investor whose KYC is not registered or verified in the KRA system) has to complete CKYC process by submitting duly filled & signed CKYC form to register KYC.

Kindly note, PAN is still mandatory for investing in Mutual Funds (except Micro KYC and other PAN Exempt scenarios). If an investor had complied with KRA-KYC and CKYC norms, then he/she will have to update the 14 digit KIN and also mention date of birth in the mutual fund application form. There is no change in terms of the documentary proof submission such as ID Proof and Address Proof for both KRA-KYC and CKYC.

In case of an investor who had got the CKYC reference number through non mutual fund route (outside KRA), he has to additionally be compliant of KRA-KYC as well, by submitting the application form, including IPV (In Person Verification) and PAN.

Debt Fund vs Fixed Deposit

Debt Fund vs Bank Fixed Deposits

Debt Funds are more Tax Efficient

Debt Mutual Funds are becoming an increasingly widespread rival to the hallowed Bank FDs. Here are their pros and cons vis-Ã -vis bank deposits

The bank Fixed deposits has been the instrument of choice of generations of low risk investors. However it is becoming harder and harder to ignore the challenge presented by debt funds. The two serve a similar function and are close rivals. The primary areas of difference are returns, safety, taxation, liquidity and returns with mutual funds holding the advantage in tax-adjusted returns and fixed deposits in safety.

Bank Deposits are one of the safest avenues for savers in India with an almost negligible chance of default (although there have been instances of co-operative and local banks defaulting). As with all mutual funds, there are no guarantees in debt funds. Returns are market-linked and the investor is fully exposed to defaults or any other credit problems in the entities whose bonds are being invested in. However, that’s a legalistic interpretation of the safety of your investments in mutual funds.

In practice, the fund industry is closely regulated and monitored by the regulator, Securities and Exchange Board of India (SEBI). Regulations put in place by SEBI keep tight reins on the risk profile of investments, on the concentration of risk that individual funds are facing, on how the investments are valued and on how closely the maturity profile hews to the fund’s declared goals. In the past, these measures have proved to be highly effective and problems have been infrequent such as during the 2008 crisis and more recently with Amtek Auto and JSPL. Another common risk faced by debt funds is interest rate risk with funds losing value in a rising rate scenario and vice versa. Fixed Deposits which have been locked in for long tenures also face this risk in terms of opportunity cost but there is no actual loss of value when the deposit is held to maturity.

The other big difference is that of taxation. Returns from bank fixed deposits are interest income and as such have to be added to your normal income. Since many investors are in the top (30 per cent) tax bracket, this takes away a large chunk of their returns. Banks also deduct TDS on interest income from fixed deposits. The tax rates are similar for debt funds held for less than 36 months (though TDS will not generally be deducted). However for debt funds held longer than 36 months, returns are classified as long term capital gains and are taxed at 20 per cent with indexation.

Turning to liquidity, open ended debt funds proceeds are credited within a period of 2-3 working days depending on factors such as whether an ECS mandate is registered. Fixed Deposits are also typically available at 1-2 day’s notice, but usually carry a penalty if they are redeemed before the maturity date. Debt funds also have exit loads or charges that are usually levied for redemptions, typically upto 3 years. These exit loads are not applied to liquid funds with just a few exceptions for very short periods of time.

As the returns of debt funds demonstrate, you can beat the bank by investing in debt funds. Debt fund investors assume both credit risk (lending to riskier borrowers) and interest rate risk (the risk of bond prices falling when interest rates rise) and are hence compensated by higher returns.

In summary, you can beat the bank by investing in debt funds instead. However you should be cognizant of the risks involved and choose the right fund in order get the best possible deal.

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Understanding Equity Mutual Funds

Equity Mutual Funds Online

You give money to a fund, which it invests in stocks. The gains or losses, whatever they may be, accrue to you. Equity funds are that simple

Expenses: Clearly, a mutual fund is a business and not a charity. It must be taking some money from you in order to meet its expenses as well as to make some profits and indeed it does. Equity funds are allowed, by law, to charge up to 2.25 per cent per annum of the money it manages as it’s expenses. Since the amount of money it manages goes up and down every day, the fund deducts a small amount from your money every day such that, on an average, the annual deduction comes to the above percentage. There are some complexities to this percentage–smaller funds are allowed sightly more. Also, in order to encourage financial inclusion, funds are allowed to charge a slightly higher amount if they get more investments from smaller towns and rural areas.

Mutuality: The word ‘mutual’ in the name means exactly what it implies. A mutual fund is composed of the money that a large number of people have invested in it. The way law, rules and regulations are formulated, all investors are exactly equal financially. and are treated the same way.

NAV and Units: In terms of relevance to an investor, the NAV (Net Asset Value) of a fund and the number of units that he owns are two of the least useful, most misunderstood and most over-valued numbers. A mutual fund is made up of all the money that its various investors have invested, combined. Here’s an example: A fund is launched and a 1000 investors each invest R10,000 in it. In all, the fund has R1 crore of assets under its management. Just for convenience, a fund is divided into ‘units’ of a certain value, which is set to a round number initially. Typically, this is R10. In the above fund, each investor is said to own a 1000 units and in all, the fund has issued 100,000 units.

Now we come to NAV. NAV stands for Net Asset Value. It basically means the current value (on any given day) of each unit of the funds. In the current example, the fund manager invests the R1 crore of assets in various stocks. In the beginning, the NAV is R10 and each unit is worth R10.

Let’s say that after an year, the investments have done well and theR1 crore grows to R1.1 crore. Now, the NAV of each unit is R11 (1.1 crore divided by 100,000). Each investor owns 1000 units so the value of his investments has grown to R11,000. It is important to understand that the only relevant thing here is that the total assets have grown by 10 per cent and therefore the investors have had a gain of 10 per cent. If the fund had initially had a face value of R100, then the NAV would have grown to R110 or if the face value had been R1 then the NAV would have grown to R1.10. From the investors’ point of view, only the percentage change in the NAV is important, not the actual number.

Whenever an investor has to invest or redeem his money, he either buys fresh units or sells them at the NAV at the point. Under some circumstances, there might be a small extra charge at the time of redeeming. Also, some funds allow entry and exit at any time while others allow entry only when the fund is launched and exit only after a pre-determined period when the fund is terminated.

Public Sector ETF – CPSE ETF

While the fund promises a lucrative play on India growth story, there are a few pitfalls
The government is set to launch a new exchange-traded fund (ETF) based on the central public sector enterprises (CPSE) index. Managed by Reliance Mutual Fund, this will be the second CPSE ETF, the first being launched in March, 2014.

The fund aims to provide investors the opportunity to invest in a diversified basket of public sector companies and benefit from the growth potential over the long term.

It will mirror the performance of the CPSE Index while the portfolio will comprise shares of the 10 biggest PSUs: ONGC, GAIL, Coal India, Indian Oil, Oil India, Power Finance Corporation, Rural Electrification Corporation, Container Corporation, E n gi n eer s In di a a n d B harat Electronics.

To find out if it’s a good idea to invest in the fund, one shouild consider how the first CPSE ETF has been performing. When it was launched, the government had offered an upfront discount of 5% on the issue price to sweeten the deal for investors.

A year later, the government issued `loyalty’ units in the ratio of 15:1 to eligible retail investors who remained invested since the new fund offer, which amounted to an additional discount of 6.66%. It is expected that the new CPSE ETF will also offer similar discounts and bonus, providing an attractive entry point for retail investors. The low valuations of the underlying shares also make it a compelling offer–the stocks that form the CPSE ETF are trading at a much lower Price to Earnings (PE) ratio and have higher dividend yields than the broader market.

While the CPSE Index trades at a PE multiple of 11.44 and dividend yield of 4.07%, the Nifty 50 index is available at 22 times and 1.35% respectively .A low expense ratio of 0.065% also ensures that costs do not eat into the gains made by the scheme over time.

The ETF claims to offer investors a play on the India growth story through a diversified basket of PSU stocks. But a closer inspection of the composition of the underlying index suggests that the portfolio is far from diversified. Three stocks — ONGC, Coal India and IndianOil–together constitute around 63% of the entire portfolio.

The portfolio is also skewed towards a few sectors, with energy, metals and financial services making up 90% of the portfolio. This lends a higher risk element despite the fact that the stocks are some of the biggest names in their respective sectors.

The performance of the first CPSE ETF has been impressive. Since its inception, the fund has clocked 14.5% annualised return while the Nifty 50 index gained 7.5% during the same period. After adjusting for loyalty units, retail investors have made a gain of 17.2%. Over the past year, the fund delivered 17.43% return even as the Nifty 50 index clocked 2.8%.

This effectively makes it the best performing large-cap fund. But this performance needs to be put in context. The fund reached its peak NAV within two months of launch supported by factors such as government oil price deregulation and a fall in crude prices.

Investors also believed that the efficiency of public sector companies would improve under the Modi government. The fund’s returns have been driven by commodity price trends as the index is skewed towards commodity businesses.

Experts argue that this is a speciality fund an not a diversified equity fund. Investors should treat this as a sector or thematic fund. You can opt for partial allocation within the 10% tactical allocation in the portfolio.

Any changes in the policies of the promoter could have a bearing on the entire basket. Retail investors should not over-expose their portfolio to such a concentrated bet. Most private sector businesses in the respective sectors are run far more efficiently, and are therefore awarded expensive valuations.

MF Alpha

Alpha, as you may know, is the first letter of the Greek alphabet. But when analysts use it in the context of modern portfolio theory, Greek is far from their mind.

Alpha tells you whether the fund has produced returns justifying the risks it is taking. It does this by comparing its actual return to the one ‘predicted’ by the beta. Say, a fund can be expected to earn a return of 15 per cent in a year (based on its beta). However, it actually fetches you 18 per cent. Then the alpha of the fund is 3 (18 – 15 = 3). In other words, alpha is a measure of selection risk (also known as residual risk) of a mutual fund in relation to the market. A positive alpha is the extra return awarded to the investor for taking a risk, instead of accepting the market return.

Alpha can be seen as a measure of a fund manager’s performance. This is what the fund has earned over and above (or under) what it was expected to earn. Thus, this is the value added (or subtracted) by the fund manager’s investment decisions. A passive fund has an alpha of 0. That’s why index funds always have-or should have, if they track their benchmark index perfectly-an alpha of 0. An active fund’s alpha is a measure of what the fund manager’s activity has contributed to the fund’s returns.

Alpha is the portfolio’s risk-adjusted performance or the ‘value added’ provided by a manager. Mathematically, alpha is the incremental difference between a manager’s actual results and his expected results, given the level of risk. A positive alpha indicates that a portfolio has produced returns above the expected level–at the same level of risk–and a negative alpha suggests the portfolio under performed given the level of risk assumed. So two fund managers may beat the same benchmark, but only one may outperform on a risk-adjusted basis. That one has got the alpha.

Alpha is one of the five technical risk ratios used in Modern Portfolio Theory. The other four are beta, R-squared, standard deviation and the Sharpe Ratio. All these statistical measurements help investors determine the risk-reward profile of a mutual fund.

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Canara Robeco Infrastructure Fund

Canara Robeco Infrastructure Fund Invest Online

With just weeks to go for the Union Budget, there is an increasing expectation from the government to boost capital expenditure across various sectors under the broad `infrastructure’ theme. Given this, it makes sense for investors to consider funds which have consistently stuck to various sectors in infrastructure. One of the few five-star rated infrastructure schemes investors can consider investing in is Canara Robeco Infrastructure Fund.

The fund, managed by Yogesh Patil, has been one of the few schemes which follow infrastructure theme closely.This is one of the key reasons why, over a long term, the scheme has beaten its peers by a fair margin. In a five-year period, the scheme gave returns of close to 11%, while its peers returned in the range of 8-9%. More importantly, in the past ten years, the scheme has beaten its benchmark by a considerable difference. Its benchmark, S&P BSE 200 has given 9% returns, while the scheme has given 12%.

At present, the scheme has companies which have relatively better balance sheet, reasonably good order book, high market share, hard-to-replicate business model and proven financial performance. Some of these firms are UltraTech, Sadbhav Engineering, Orient Cement, VA Tech Wabag & Bharat Forge.


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Franklin India Corporate Bond Opportunities Fund

Invest Franklin India Corporate Bond Opportunities Fund Online

· Open ended income fund that endeavors to provide regular income and capital appreciation by investing predominantly in corporate bonds

· Average maturity of the fund is capped at 36 months with no exposure to dated government securities permitted

· Fund may also invest in Securitized Debt as it offers advantage in terms of credit strength, potential for yield pick up and risk diversification

· The fund is positioned as an income fund that focuses on securities with higher accrual and potential for capital gains given its maturity profile

· The fund has a retail focus with restrictions on large inflows/ outflows (currently an investment cap of Rs 20 crore by an investor in each plan per application per day)

· This fund is suitable for investors with a medium to long term time horizon (at least 30 months and above) who would like to invest in the steadily developing corporate bond market which is likely to offer attractive risk reward opportunity

· This fund is also suitable for investors who would like to potentially benefit from high accrual and the prospect of capital appreciation of the fixed income securities over the long term

Fund Details
Average Maturity 1.92
YTM 10.52%
Duration 1.56

Load Structure:

Entry Load: Nil

Exit Load: 3% if redeemed within 12 months from the date of allotment, 2% if redeemed after 12 months but within 24 months from the date of allotment, 1% if redeemed after 24 months but within 36 months from the date of allotment

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Birla Sun Life Balanced Advantage Fund

(BSL Balanced Advantage Fund erstwhile BSL Dynamic Asset Allocation Fund)

Historically, Equity is known to be a volatile asset class but the only asset class that beats inflation handsomely and helps you create wealth. This is a fact proven the world over.

It is also however equally proven thatevents can have a deep impact on your returns from equities as experienced in the recent past such as Brexit, US Fed rate hike, Chinese slowdown etc. In today’s world no country survives in isolation and is bound to be impacted in some way or the other when a global event occurs and in general, markets are expected to remain volatile.

So, should one exit or remain invested?

Invested off course, since volatility also creates opportunities, that can potentially add to your returns. Investors, however, need stability, reassurance and predictability of growth. They basically seek solutions that aim to provide reasonable returns even in volatile markets and decent participation in bullish markets, also known as Stable Compounding over a longer term period.

What is the way out?

§ A solution that helps investor with emotion free investment in Equities that enables Buying Low & Selling High.

§ A solution that protects the investors money from market shocks but selects companies that continue to generate strong returns across market cycles.

Presenting, Birla Sun Life Balanced Advantage Fund that seeks to address the above problems for the conservative investor and offers a solution that actively manages your equity exposure in response to market movements. The fund was acquired from ING Mutual Fund in October 2014 and has been tested well to achieve its objective of stable compounding.

How does this work?

Birla Sun Life Balanced Advantage Fund runs a well tested P/E based model that drives the ‘Net Equity Exposure’. This determines the level of aggression that the fund carries in any market situation. While being invested in long equity at all times, it uses derivatives to reduce the ‘net’ exposure to equities, allowing fundamental research driven approach to selection of stocks that continue adding alpha over a longer period of time. Some of the key features of the fund are –

ü A fund that seeks to generate steady returns with lower volatility

ü Advantage of active portfolio management by asset allocation and stock selection

ü Emotion free investing: disciplined investing approachbased on extent of valuations – P/E ratio, a proven measure of market valuation

ü Equity Taxation: Invests in both equity & debt asset classes, but seeks to maintain gross equity exposure of 65%

ü Endeavor to provide month-on-month tax free dividends

ü Smart Withdrawal Feature

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