Stocks, Mutual Funds, Etf's etc

January 2017

The twelve most silliest things people say about stock prices ~ Part III

value investing, Peter Lynch Quotes, Pictures, Common Mistakes, Speculation, Trading, Gains, Losses, Indian Stock Markets  “All you need for a lifetime of successful investing is a few big winners, and the pluses from those will overwhelm the minuses from the stocks that don’t work out” ~ Peter Lynch ~ One up  on Wall Street.

 I have been reading ‘One up on Wall Street’ ~ Peter Lynch. The book is a classic and a must read for people interested in value investing.

This Part III is in continuation to earlier parts and thus completes the twelve most silliest things people say about stock prices as mentioned in the book. 

The earlier posts cover the previous 8 points of the common mistakes committed by investors which you can read here : Part I & Part II

I hope this trilogy will help you in your investing journey.

Thank you Peter Lynch for the wonderful book and  common sensical approach to stock investing.  Enjoy (points 9 through 12)….

9. What me worry, Conservative Stocks do not fluctuate much…
Peter Lynch gives examples of Utility Companies. Two generations of investors grew up on the idea that they could not go wrong with the Utility stocks. You could just put them in safety deposit and cash the dividend checks. However with the nuclear and the base rate problems, suddenly the nuclear plants became expensive and stocks fluctuated wildly over a couple of years.

Companies are dynamic and prospects change. There simply isn’t a stock that you can own and you can afford to ignore.

Near home, FMCG Stocks have always been considered conservative stocks with relatively low beta and good dividends. However, over the past 2 years most of the FMCG stocks have considerably outperformed the index. The valuations are stretched and stocks have literally become multi baggers. Can these stocks be considered be conservative any longer? Is anybody’s guess….

10. It’s taking too long for anything to happen
“PostDivesture Flourish”, a term coined by Peter Lynch, which means that after considerably waiting for a stock to do something, you give up, and when you finally sell the stock, the price of the stock starts to flourish and move northwards.

I have experienced this when I gave up on LIC Housing Finance in mid 2009 after holding the stock for almost 3 years. The stock went up almost 5 times in the next 2 years.
Learning ~ Do not give up on the stock if all is well with the company and the reasons for which I bought the stock have not changed.

The stock markets tests patience and rewards conviction.

It takes remarkable patience to hold on to an idea / stock that excites you, but which the market largely ignores. You begin to think everyone else is right, and you are wrong. But remember, where the fundamentals are promising, patience is more often than not ~ rewarded.

11. I missed that one, I will catch the next one
This is such a common mistake committed by a large number of investors.
Page Industries is one such stock, which has given phenomenal returns to investors over the past 3 years, and continues to do so. Investors who missed out on Page Industries are trying to catch onto other seemingly similar stocks like Lovable Lingerie.

This is a mistake because the performance of Page Industries is based on various factors like the company management, capital structure, earnings growth, streamlined and strategic supply chain, brand image, brand power and brand recall value, customer loyalty, vendor relationships, pricing power etc which is difficult for another company to imitate. The other company should be judged on it’s own merit for investment purposes.

It’s always better to buy the original good company at a higher price than to jump on to the next one at a bargain price. (Same logic applies when buying real estate as well…. I will talk about my views on real estate some other time though…)

12. The stock’s gone up, so I must be right or Vice Versa.
Peter Lynch terms this as the single greatest fallacy of investing. Believing that when the stock price is up, then you’ve made a good investment. Investors confuse prices with prospects.

If you purchase a stock at Rs 100 and it moves up to Rs 105, investors take comfort from this fact, as if it proves the wisdom of their purchase. Nothing could be further from truth. Investors commit mistakes based on this fallacy ~ Either selling a good company at a loss, believing that they committed a mistake or holding on to bad apples if the prices are up post the purchase.

Remember the Stock does not know that you own it.
Unless you are a short term trade looking for 20 odd % gains /loss the short-term fanfare means absolutely nothing.
A stocks going up or down after you buy only indicates that there was someone who was willing to pay more or less for the identical merchandise. That’s it

You can read the earlier posts here :  Part I & Part II 

With this I lay to rest the 12 mistakes committed by investors with the hopes that you, can avoid these common mistakes and in the process become a successful investor.

Happy Investing!!!

The Golden Rules for Investing

10 rules for investing, Risk, Compounding, SIP, Greed, Fear, Taxes, Tips, Value Investing, Personal Finance, Financial Planning

The Golden Rules of Investing are essentially a common sensical approach which largely comes down to the emotional aspects such as Discipline, Patience, Greed & Fear. 

Remember these 10 golden rules of Investing.

1. Risk is inevitable – What is Risk?  Understanding Risk is the first part and then learning to Manage it. 
2. Start early – Benefit from compounding. Einstein has acknowledged Compounding as the 8th wonder of the world.
3. Have realistic expectations – Greed is bad. How much is too much. You never know what is enough, until you know what is more than enough.
4. Invest regularly – Not even God can time the markets. Timing/Forecasting the markets is an illusion.
5. Stay Invested – Be a marathon runner. Markets tests patience and rewards conviction.
6. Don’t churn your investments – It only increases costs. If you like gambling, go to a casino. For serious investing, stay put.
7. Spread your corpus – Each investment class is important. Don’t put all your eggs in one basket. 
8. Sell your losers – Hope doesn’t make money, Wisdom does. We are biased against actions that lead to regret. People attach too much weight to gains and losses rather than wealth. 
9. Hot tips usually burn your investments – Avoid them. Remember the reverse of TIP is PIT. So a tip usually dumps you in a PIT almost always. 
10. Taxes are important – But not at the cost of a bad investment. Only Death and Taxes are certain, true ~ But don’t make bad investments just to save tax. Don’t be Penny Wise Pound Foolish.

Happy Investing

June 2016

Types of Investors – What type are you?

Types of Investors , Conservative, Aggressive, Risk taker, Risk Profiling, Risk Averse, Savers, Specialists, Speculators

I came across this good article at http://www.threetypes.com/philosophy/investor-types.shtml and wanted to share. It essentially discusses the various types of Investors viz : Savers, Speculators and Specialists and then goes on to explain how becoming a Specialist, is something which generates immense wealth over lesser periods of time , but which also requires tremendous efforts on the part of the investor.

Go ahead and decide which type of investor you are and then invest accordingly. Enjoy Investing…..

Savers

Savers are those people who spend the majority of their life slowly growing their “nest egg” in order to ensure a comfortable retirement. Savers explicitly choose not to focus their time on investing or investment strategy; they either entrust others to dictate their investments (money managers or financial planners) or they simply diversify their investments across a number of different asset classes (they create “a diversified portfolio”). For those who create a diversified portfolio, their primary investing strategy is to hedge each of their investments with other “non-correlated” investments, and ultimately generate a consistent annual return in the range of 3-8% (after adjusting for inflation). Those who entrust their money to professional money managers generally get the same level of diversification, and the same 3-8% returns (minus the management fees).

Savers seek low-risk growth of their capital, and in return, are willing to accept a relatively low rate of return. While there is certainly nothing wrong with striving for consistent returns, what the Saver is doing is really no different than putting their money in a Certificate of Deposit, albeit with slightly higher returns. The bulk of Savers are investing for long-term financial security and retirement. They start saving in their 20’s and 30’s by putting money in 401(k) accounts, mutual funds, and other diversified investments, and in 30 or 40 years, they have enough to retire on.

Savers rely in a single force to grow their capital: time. Because their rate of return is generally consistent, a Saver’s primary mechanism to achieve wealth is to invest and wait. In fact, Savers often use The Rule of 72 to calculate long-term investment growth and plan their retirement. While passive investing is an almost surefire path to a comfortable retirement, it also generally means 30-50 years of work to get to that point.

Speculators

Unlike Savers, Speculators choose to take control of their investments, and not rely solely on “time” to get to the point of financial independence. Speculators are happy to forgo the relatively low returns of a diversified portfolio in order to try to achieve the much higher returns of targeted investments. Instead of just spreading their money across stock funds, bonds, real estate funds, and a variety of other asset categories, Speculators are always looking for an investing edge. Perhaps they get a hot stock tip and try to cash in on the next Google. Or perhaps they hear about all the real estate investors who have made a bundle flipping houses, so they go out and buy the first run-down house they see.

Speculators recognize that they can have higher returns than Savers, and are willing to do or try anything to get those returns. They’re not scared to throw some money in an Options account and try their hand at derivatives trading; or run out and buy a bunch of inventory from a wholesaler they know and open up an eBay selling account. Speculators are always looking for the next great investment; for them, it’s all about being in the right place at the right time, and taking a chance on getting rich. If today’s investment doesn’t work out, there will always be another one tomorrow. (more…)

December 2015

How to avoid investing in MisManaged Companies – Understand Balance Sheet

How to avoid investing in mismanaged companies, Misallocation of capital, Successful Investing Tips

Most investors keep looking for the magic investing mantra which can keep compounding returns. Many burn their fingers by getting into wrong companies. The first step of successful investing and to avoid investing in MisManaged Companies is to Understand Balance Sheet of a company.

A balance sheet, also known as a “statement of financial position,” reveals a company’s assets, liabilities and owners’ equity (net worth). The balance sheet, together with the income statement and cash flow statement, make up the cornerstone of any company’s financial statements. If you are a shareholder of a company, it is important that you understand how the balance sheet is structured, how to analyze it and how to read it.

Here is a great starting point from Investopedia to understand reading a balance sheet. Another article talks about the due diligence that should be followed before choosing a stock to invest is another checklist which the investors should always keep handy when doing a first cut analysis before giving a ‘pass’ and research further.

Bala writes about a wonderful article on Misallocation of capital  which gives examples of why to avoid investing in companies which misallocate capital.

When you start looking at a balance sheet, a quick first cut analysis can help you eliminate researching further if you come across these common account red flags…

The Indian stock market, in aggregate, carries a relatively high risk that a minority shareholder will not realize the value in a listed firm because the controlling shareholder (or promoter as they are known in India) will appropriate value for himself, leaving little on the table. The risk is higher relative to certain other stock markets mainly because of limited regulation. In addition, lax enforcement indirectly encourages such behavior. Kimi writes on how one can avoid such landmines in his elaborate article peppered with examples.

Successful investing is all about avoiding the companies/ sectors/ industries which are mismanaged and going aggressively after the good ones…As Charlie Munger famously said “Tell me where I’m going to die, that is, so I don’t go there.”…..

Happy Investing….

May 2015

Understanding Systematic Transfer Plan (STP) & Benefits !!!

Systematic Transfer Plan Benefits, Equity Investments, Strategy , Tactical Allocation

Systematic Transfer Plan refers to Mutual Fund investment method where an investor is able to invest lump sum amount in a scheme and regularly transfer a fixed or variable amount into another scheme. Transfers are usually made from debt funds to equity funds if the market is doing well and vice versa if the market is not performing well.     

Why should one opt for STPs?

  • Time-saving: Instead of selling equity mutual funds units first and then waiting for sale proceeds before re-investing into any other scheme, STP provides you smooth transfer of your funds from one scheme to another of the same fund house. Its saves you time and reduces the cost due on transaction front
  • Consistent returns – Money invested in debt fund earns interest till the time it is transferred to equity funds.                                                                                           The returns in debt fund are higher than returns from savings bank account and assure relatively better performance. (more…)

December 2014

What are Bonus Debentures?

NTPC Bonus Debentures, Stock Market, Nifty, Sensex,

NTPC has recently announced bonus debentures in a bid to improve it’s capital structure and hence ROE. What are bonus debentures?

As an equity investor you may also be entitled to regular interest payments. Wondering how? Welcome to the concept of bonus debentures.

Companies usually reward shareholders by sharing a portion of the profits with them.

Cash dividends or bonus share issues are widely used as rewards. While dividend payments mean cash receipt for investors, bonus issues usually mean free shares credited to your demat account. Like bonus shares, companies have the option to issue bonus debentures to shareholders too. Hindustan Unilever was the first company to issue them in 2001.

HOW IT WORKS

Bonus debentures are issued out of the accumulated profits of the company (reserves and surplus). Just like free shares are credited to you when a company makes a bonus share issue, free debentures are credited to you when it makes a bonus debenture issue. Investors holding shares of the issuing company on the record date will be allotted bonus debentures. As an investor holding the bonus debentures, you are eligible to receive interest payments, similar to other debt instruments, until the maturity of the instrument. On maturity, you are entitled to receive the principal amount (face value).

Even if you sell all the shares of the issuing company prior to the maturity, you will still continue to receive interest payments regularly and principal amount on maturity of these debentures. Companies may choose to get the debentures listed in the stock exchanges. In such cases, you can cash-in by selling the debentures through the exchanges even before they mature.

To understand this better, let us consider the bonus debenture proposal by Dr Reddy’s Labs.

For every 1,000 shares of Dr Reddy’s held by the investor in March 2011, the company allotted 6,000 bonus debentures with a face value of Rs. 5, carrying an interest rate of 9.25 per cent. The debentures are redeemable at the end of the third year (i.e. March 2014). The interest payment works out to Rs. 2,775. On maturity, an investor holding 1,000 shares will receive the principal amount of Rs. 30,000. (more…)

December 2013

Top 10 ELSS Mutual Fund Investments for 2014!!!

Section 80C investments, ELSS, Mutual Funds investments, Tax saving , Tax planning

Most of the investors have begun to ask about investing in ELSS Mutual funds as we are nearing March. As you are aware, ELSS investments can be claimed as deduction u/s 80C (up to a max of 1 lac)

Here is the list of top performing ELSS Mutual funds.The list is based on past 5 years performance One can also choose and invest based on past 3 years performance. Since the ELSS as locked in products for 3 years, it does not make a lot of sense to compare or invest based on performances of less 1 year.

Top 10 ELSS based on 5 years performance are :
Scheme Name
1. ICICI Pru Tax Plan 25%
2. Canara Robeco Equity Tax Saver 22.4%
3. Quantum Long Tax Saving 22.2%
4. HDFC Long Term Advantage 21.8%
5. Franklin India Tax Shield 21.1%
6. L&T Tax Advantage 20.9%
7. Reliance Tax Saver 20.6%
8. IDFC Tax Advantage 20.4%
9. DSPBR Tax Saver 20.3%
10. Birla SL Tax Relief 96 19.7%

Happy Investing…..

 

Investors can take advantage of Investing in Double Indexation FMP’s

Double INdexation Tax benefits, Fixed Maturity Plans, FMP's, Inflation adjusted Bonds

Fixed Maturity Plans are closed ended funds and are available as NFO’s. They are open for very short periods of time (generally 4 – 5 days). FMP’s are ideal tax saving vehicles and suited for investors in the highest tax brackets, who are conservative, looking to park lump sum funds for about 1-2 years, in return for a Fixed Income similar to FD’s.  There is no TDS deduction in FMP’s , which is an obvious drawback in FD’s as the TDS deducted in FD’s does not earn any interest. Thus Longer duration FD’s suffer in terms of returns.

Please note that the drawback of investing in FMP’s is illiquidity, hence only surplus funds should be parked which will not be required to meet any financial goals during the said timeframe.

Double Indexation FMP’s are round the corner which offer tremendous tax advantage vis-a-vis FD’s . Smart Investors take advantage of investing in FMP’s which offer the safety of capital similar to FD’s and also the tax advantages.

What is double indexation and how does it work? Here is a simple example.

Investors can claim double indexation benefit if the holding period is over three financial years. Consider the case of a 500-day FMP, which starts on 20 Dec 2013 and matures on 04 May 2015. Since it is spread over three financial years-2013-14 (investing year), 2014-15 (holding year) and 2015-16 (redemption year)-the indexation will be for two years . In this case, in all probability, one can report a long-term capital loss (instead of gain) and it can be set off against other long-term capital gains reducing the tax liability further.

Leading Asset Management Companies (AMC’s)  like HDFC , ICICI , Birla Sun Life, Kotak, Reliance etc. typically come up with Double indexation FMP’s starting December of every year through March. You can find the open NFO’s at the AMFI Website : NFO’s

Investors having surplus funds which can be locked away for 1.5 yrs should plan on investing in FMP’s

The advantage of investing in FMP’s over FD’s in terms of returns is a no brainer. Current 1 year FD returns are at around 9% and so the post tax returns (for the highest tax bracket) is pathetically around 6%

Here is an ET article dated Dec 20 2013 which talks about the benefits of investing in FMPs : Long term FMP a good bet

The tax advantages of investing in FMP’s is mentioned in detail here (What-are-fixed-maturity-plans-fmps-advantages-disadvantages) and I will not elaborate on that further.

Happy Investing and tax savings this season.

October 2013

Sensex Gainers and Losers over the last 1 year

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Here are the Sensex Gainers and Losers over the last 1 year. Prices are as of Oct 04 2013. Clearly the Pharma and IT sector has outperformed the others by leaps and bounds.

The Gainers in the Sensex pack are :

Company Name

Sun Pharma Inds.

Curr Price

600.6

Last 1 yr

349.2

% Change

71.99

TCS

2032.8

1315.05

54.58

Dr Reddys Lab

2368.55

1718

37.87

Tata Motors

349.75

274.2

27.55

Wipro

482.9

383.05

26.07

ITC

340.1

275.1

23.63

Bharti Airtel

328.15

269.55

21.74

Bajaj Auto

2119.1

1765.25

20.05

Cipla

438.1

366.4

19.57

Infosys

3015.45

2575.4

17.09

Hero MotoCorp

2032.85

1831.1

11.02

Hindustan Unilever

608.05

555.6

9.44

Sesa Sterlite

187.25

175

7

Maruti Suzuki

1427.65

1391.2

2.62

HDFC Bank

640.35

630.95

1.49

HDFC

798.65

788.2

1.33

Reliance Industries

853.4

852.75

0.08

Mahindra & Mahindra

859.15

859.05

0.01

The Losers in the Sensex pack are : (more…)

September 2013

Guidelines – Mutual Fund investments in the name of a minor

Guidelines ,Mutual Fund investments,in the name of a minor, KYC requirements for investing in India, HDFC , ICICIOne can invest in a mutual fund scheme on behalf of a minor. In fact, many funds have plans exclusively targeted at investments for minors. Here are the details.

What are the guidelines regarding investments in the name of a minor?

The minor should be the first and the sole holder in an account. That is, there cannot be a joint holder along with a minor. Joint holder details are not considered

The date of birth of the minor would have to be provided in the application form along with a photocopy of supporting documents such as birth certificate/passport/school leaving certificate.

The guardian in the folio on behalf of the minor should either be a natural guardian (i.e. father or mother) or a court appointed legal guardian and this must be mentioned in the space provided in the application form.

Appropriate documentary evidence would have to be provided in case the guardian is a court-appointed guardian.

Details of documents to be provided are available along with the application form/Key Information Memorandum.

In case the documents and details as mentioned above are not provided, the application will not be processed.

What is the procedure to change the status when a minor becomes a major?

When the units are held on behalf of a minor, the ownership of the units rests with the minor. (more…)

June 2013

Increase in Dividend Distribution Tax from June 01 2013 in Debt Mutual Funds – Impact

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In the FY14 Budget the Finance Minister has proposed to increase the Dividend Distribution Tax (DDT) on Debt Mutual Funds (other than liquid and money market funds on which the DDT was already 25%) from 12.5% to 25% (plus surcharge and cess) for individuals and HUFs. The hike is proposed to provide uniform taxation for all types of funds other than equity oriented mutual funds in the Mutual Fund Industry.
This amendment will take effect from 1st June, 2013.

Classification of Funds: As far as tax implications on Indian mutual funds are concerned, they are classified as three parts as ‘Equity oriented Funds’, ‘Liquid and money market Funds’ and ‘Debt Funds other than Liquid Funds’.

In ‘Equity Oriented Funds’, the categories coming under are Equity Diversified, Equity Sector, Hybrid – Equity Oriented (more than 65% equity) and Arbitrage Funds.

Liquid Funds and Liquid ETF are coming under ‘Liquid Funds’ while Ultra Short Term Funds, Floating Rate Funds, Short Term Income, Dynamic Income, Income Funds, Gilt Funds, Fund of Funds, Hybrid – Debt Oriented (less than 65% equity), MIP, FMPs are coming under ‘Debt Funds other than Liquid Funds’.,

Summary of Changes proposed :

Classification of Debt funds , Short term taxation , dividend distribution tax DDT, Effective yield


Tax on distributed income:Given the tax provision on the distributed income, fund houses pay taxes on the dividend distributed to the investors. Fund houses deduct DDT from the Dividend. So the dividends are tax free in the hands of investors.
Existing tax structure on DDT:As per the existing structure, there is no tax levied on the dividend distributed by Equity oriented mutual fund schemes for any investors. But, Liquid and money market Funds are liable to pay the DDT of 25% (plus surcharge and cess) for retail investors while the funds other than Liquid and money market funds are liable to pay DDT of 12.5% (plus surcharge and cess).

For institutions and corporates, DDT on Equity funds is nil while 30% (plus surcharge and cess) in case of the dividends from the investments in Liquid Funds and debt funds other than Liquid funds.

Proposed Structure: From June 01, 2013 onwards, retail investors who invest in all debt funds (other than equity funds) are liable to pay DDT of 25% (plus surcharge and cess) on the dividend income. The DDT for corporate investors has been kept unchanged at 30% (plus surcharge and cess).
Increase in Surcharge: Further, the surcharge on Dividend Distribution Tax for all mutual fund schemes has gone up from 5% to 10%.
Impact: This move will make dividend options in Debt Mutual Funds unattractive for retail investors. Because the net post tax return in the hands of the investors from dividend plans would be lower as the DDT charged on the debt funds has been increased from 12.5% to 25% (plus surcharge and cess). Meanwhile, the Growth options in the Debt Mutual Funds will become attractive for retail investors who redeem the investments after a year, taking advantage of long term capital gains.

Capital Gain: Since the DDT is applicable for Dividend plans, Capital Gains tax is applicable to Growth plans. The gains from the debt mutual scheme (growth option) are taxed depending on the period the investments in the mutual funds are kept. If the debt mutual fund units are redeemed after a year, then the gains thereon are liable to Long Term Capital Gain tax while the proceeds from the investments which redeemed before one year are taxed as Short Term Capital Gain. For long term capital gains in debt funds, the investor has to pay the tax @ lesser of 10% without indexation or 20% with indexation; (plus education cess). Short Term Capital Gain is taxed as per the normal slab of the investors. (more…)

May 2013

March 2013

Investing in Dividend Yield Stocks

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One of the most traditional form of investment, which involves identifying such stocks that are likely to give good dividends. The dividends get paid no matter what direction the stocks move and can provide a higher yield on investment in any market.

Hence, even if the market remains volatile, going ahead, an investor can still expect to get a decent return on investment. Such stocks can be identified by studying the dividend history, cash position, and macro economic condition.

Some of the stocks which have had a past record of good dividends are :

Company
 Price 01.03.2013
Yield
Dividend Per Share
FY10
FY11
FY12
Clariant Chemicals (I) Ltd.
552.15
11.01
25
30
60
HCL Infosystems Ltd.
31
8.7
7.8
7.9
3
SRF Ltd.
185.75
7.04
14
14
14.1
Gateway Distriparks Ltd.
128.95
4.44
3.5
6
6
VST Industries Ltd.
1579
3.85
30
45
65
TATA Steel Ltd.
341.1
3.29
8
12
12
Rural Electrification Corp
213.6
3.12
6.1
7.5
7.5
Power Finance Corporation
191.65
2.94
4.5
5.2
6
Karur Vysya Bank Ltd.
466.95
2.91
12
12.1
14
JK Bank
1282.2
2.57
22
26
33.5
Needless, to say one needs to use his own judgement before picking up stocks. So please consider your current investment scenario, risk profile before taking any actions.
Source : Geojit BNP Paribas

January 2013

Top ELSS mutual funds for investing in 2013

Top ELSS funds for investing 2013, Mutual Funds, Tax Saver Mutual Funds, HDFC Tax Saver, ICICI Pru Tax saver

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The following ELSS mutual funds can be considered by investors this tax season. Well, actually the best mechanism for investing is to do a SIP throughout the year.

However, incase you are planning on investing in the last few months until 31st March 2013, you can consider the following top performing ELSS funds. And also, if possible continue to SIP for the rest of the year as well for the next financial year.

I have provided the performance measures alongside which will help you make a informed decision.

The article on “How do you compare and evaluate Mutual Fund Performance” might be helpful in case you would like to know more about evaluating mutual funds.

Reliance Tax Saver
Scheme 1 yr 3yr 5yr
Reliance Tax Saver 25.45% 9.34% 8.44%
Inception 22-Sep-05
AUM (31-Dec 2012) 2105 crs
Fund Mgr Ashwani Kumar
Beta 0.98
Std Deviation 19.72%
R squared 89.95
Sharpe Ratio 0.31
Portfolio Turnover 60.80%
Expense 1.90%
Benchmark BSE 100
ICICI Pru Tax Plan
Scheme 1 yr 3yr 5yr
ICICI Pru Tax Plan 24.27% 9.19% 8.51%
Inception 19-Aug-99
AUM (31-Dec 2012) 1468 crs
Fund Mgr Chintan Haria
Beta 0.92
Std Deviation 17.58%
R squared 95.84
Sharpe Ratio 0.26
Portfolio Turnover 148%
Expenses 1.99%
Benchmark S&P CNX 500
Franklin India Tax Shield
Scheme 1 yr 3yr 5yr
Franklin India Tax Shield 22.83% 11.40% 8.37%
Inception 10-Apr-99
AUM (31-Dec 2012) 942 crs
Fund Mgr A Radhakrishnan
Beta 0.79
Std Deviation 15.26%
R squared 95.36
Sharpe Ratio 0.36
Portfolio Turnover 53.60%
Expense Ratio 2.10%
Benchmark S&P CNX 500
Canara Robeco Tax Saver
Scheme 1 yr 3yr 5yr
Canara Robeco Tax Saver 21.82% 6.92% 8.89%
Inception 31-Mar-93
AUM (31-Dec 2012) 456 crs
Fund Mgr Krishna Sanghvi
Beta 0.82
Std Deviation 17.07%
R squared 83.09
Sharpe Ratio 0.15
Portfolio Turnover 45.20%
Expense Ratio 2.33%
Benchmark BSE 100
HDFC Taxsaver
Scheme 1 yr 3yr 5yr
HDFC Taxsaver 17.40% 7.72% 7.17%
Inception 31-Mar-96
AUM (31-Dec 2012) 3448 crs
Fund Mgr Vinay Kulkarni
Beta 0.83
Std Deviation 16.11%
R squared 93.39
Sharpe Ratio 0.17
Portfolio Turnover 25.20%
Expense Ratio 1.85%
Benchmark S&P CNX 500

 ** The Volatility / risk performance measures are of 3 years. Happy Investing.

Understand the Risks in Debt Mutual Funds

risks in debt mutual funds, credit risk, interest rate risk, reinvestment risk, yield curve, YTM, yield to maturity

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Debt funds carry indexation benefits and hence are more tax efficient than FD’s. Many financial planners recommend debt funds as a replacement for FD’s. However the debt funds do carry certain risks.

And it makes sense to be aware of those risks.

Investments in debt funds are subject to various risks like credit risk, interest rate risks, liquidity risks, market risks, reinvestment risks etc. Let us look at what these risks mean and how understanding these risks can make you a better investor.

1. Credit Risk : This refers to the risk that the issuer of a fixed income security may default (which means that, he will be unable to make timely principal and interest rate payments on the security)

2. Interest rate risks : This risk results from the change in demand and supply of money and other macroeconomic factors and creates price changes in the value of debt instruments. Hence, the NAV of the scheme may change due to the fluctuations. Prices of long term securities generally fluctuate more in response to interest rate changes than do short term securities. Thus, this risk may expose the schemes to capital erosion.

3. Liquidity Risk : This refers to the ease with which the security can be sold at or near to it’s valuation yield-to-maturity (YTM).

4. Market Risk : Market perception of interest rate sensitivity, general market liquidity, credit worthiness etc. may cause price volatility and hence lead to capital erosion.

5. Reinvestment Risk : This risk refers to the interest rate levels at which cash flows are received for the securities in the scheme is reinvested. The risk is that the rate at which the interim cash flows can be reinvested may be lower that that originally assumed.

So, how do fund managers try to mitigate these risk factors :

a. Interest rate risk : By keeping the maturities of the schemes in line with interest rate expectations. (Note the key here is expectations, so if the expectations go wrong, the strategy can mis fire).

b. Credit Risk or Default Risk : By investing in high investment grade fixed income securities rated by SEBI registered credit rating agencies. Eg: investing in AA/A rated securities carry a higher credit risk compared to AAA rated securities. Note, historically, though , the default rates for investment grade securities (BBB & above) has been less.

c. Reinvestment Risk : This is limited to the extent of coupons received on the debt instruments, which will typically be a very small portion of the portfolio

d. Market risks : The schemes may take positions in interest rate derivatives to hedge this risk.

Understand the risks, become aware and deal with these risks to make informed decisions towards building wealth.

You can read more about debt mutual funds here.