Category Archives: Mutual Fund

Fix your finances up!


We live in a world wherein the amount of trust one places into a fund or scheme is heavily dependent on the amount of monetary returns that it can reward you with. In such a scenario, people are increasingly likely to ditch highly risky schemes and instead look for a programme that doesn’t bleed more money than it generates each year. One such example of a fund is the fixed income scheme. Here are some things to know about them.

fixed income scheme

  • They are safe

Unlike the funds trusted by people to pay back larger magnitudes of money in comparison to the investment, fixed income products work on a very different premise. The amount pledged here is fixed in magnitude and does not suffer the whims of the market and its fluctuations like the other funds out there.

fis

  • They are user-friendly

Due to the optimum balance that they maintain between input, yield and the amount of liquidity (or cash) required, fixed income plans are perhaps the most suitable for those investors who are adjudged to have a very risk-averse profile, meaning that they ideally prefer to avoid the risk of losing money at all. Moreover, these plans allow for a regular and quantifiable return which is stable every time, thus appeasing those who are not too fond of unpredictable winnings (or losses, for that matter)

  • The working of a FIP

The plan intends to yield returns to the investor from a differing mix of debt as well as stock-related options wherein the money is invested. The positive is that one does not have to worry about market forces, interest rates or even larger investors throwing a spanner into their plans for growth, as the increase in returns here is constrained, regulated and incremental in nature.

  • Where to find one?

Most financial institutions will offer a variety of such plans. It is important to read the fine print to keep oneself aware of all obligations. Moreover, one should research thoroughly before committing to such a plan.

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Strategic Bond Fund


strategic_bond_fundStrategic Bond Funds has become one of the most popular means of investment among investors who wish to diversify their portfolio. This bond fund is more popular during a period of crisis or difficult market conditions when investors seek to hand over the allocation of their bond to an expert.  But it difficult to select the right one is not that simple because every strategic bond fund varies in its approach to market maturity and the interest-rate risk.  Also, a strategic bond shall differ in terms of the rewards for a younger investor and the stable income seeking retiree. Therefore, you need to keep certain things in mind before investing in a Strategic Bond Fund.

Bond exposure

You need to check your own bond exposure before taking a chance at the bond fund because you do not want an overlap of allocation with your current/existing bond funds. This can result in risks rather than diversification of one’s profile. By means of comparison you can check how you can decrease the risk factor rather than an increase.

Know your goals

This is required in order to know what you can achieve by investing in a Strategic Bond Fund. If your goal is to achieve a high-yield exposure, then aggressively positioned Strategic Funds are apt for you. Also, you need to be comfortable with an unpredictability that can be equivalent to an equity fund and a gilt fund. This way, you shall ensure higher returns. If you are only looking out for a Strategic Fund to diversify your portfolio, then a Strategic Fund that provides exposure to government bonds is the perfect option.

Strategize

You need to have a perfect understanding of your portfolio’s reward and risk profile. The following terms need to be kept in mind for a better strategy.

Credit Exposure: Earlier, one was required to hold a minimum of their assets in high-yield bonds but now things are a bit different. Funds nowadays are able to capitalise on opportunities and vary the credit quality.

Maturity: Strategic Bond Funds can make adjustments in the interest-rate exposure; therefore, it displays characteristics of flexibility.

Derivatives: Derivatives can increase the flexibility of the portfolio and also reduce transparency of the investment process.

Allocation

This is necessary to determine how much you’d wish to invest in your portfolio. It will all depend on the type of fund you have selected. If you think of high yield due to an aggressively positioned fund, then you need to be at a fairly modest position. Also, you need to reduce this exposure once you reach the point of retirement. If your fund is not that aggressive or as you can call it, mild mannered, then it shall be able to adapt it to the ever-changing market conditions. This shall also be helpful once you retire.

So you need to be sure the kind of investment fund you seek, so that you maximize on your gains and minimize on those risks.

Which Mutual fund to go with: Equity fund or Debt fund


There are many investment avenues available for one to park their money. However, many investors refrain from venturing into these territories. The major reason being a lot of investors really do not understand the entire working of many investment options available.

Funds Type

Today, we shall try and understand the difference between Debt Funds and Liquid Funds. Also, try to decipher the tax treatment both the entities are liable to. However, before we proceed with the different kinds of funds. Let us try to understand the term “Dividend Distribution Tax”.

Dividend Distribution Tax (DDT)

Dividend received from a mutual fund is tax free, but only at receiver’s hand. However, mutual funds have to pay a tax on that dividend to government before giving it to us. So actually the tax is paid by mutual fund on behalf of us. This tax is called DDT.

Let us try to understand Equity, Debt and Liquid Funds.

Equity Funds

Equity Funds are the type of funds where about 65% of the corpus is invested in equity shares of different companies. The dividend acquired from these funds is exempted of DDT. Therefore, the unit holders receive 100% of the dividend declared to them. However, it isn’t any form of extra income. It is very much your invested money that you receive after the dividend.

Debt Funds

These funds invest in medium-to-long term debt securities like government bonds and corporate bonds/debentures. These funds are subject to DDT at the rate of 12.5%. A surcharge and cess of 10% and 3% respectively is applicable as well. These funds come with an effective tax rate of 14.16%.

Liquid Funds

Liquid funds are usually short-term debt securities. They invest in commercial papers, certificates of deposit and call money, where the duration is less than a year. The income incurred from such funds is subject to DDT of 25%. Like the debt funds, these funds too are liable to pay a surcharge and cess of 10% and 3% respectively on the tax.

Well, there are different types of funds available in the market. Each comes with its own benefit and purpose. One needs to invest in a fund that best suits their needs.

How to Calculate Returns from Systematic Investment Plan


There are various modes of investments in mutual funds available. However, investing in mutual funds through systematic investment plans (SIPs) is the most considered avenue of all.

One major reason being, SIP helps to tackle the market volatility better. Investors can buy more units when there is volume gain and fewer when the value rises. Amidst, all this there is one question that every investor ponders upon: How are SIP returns calculated?

systematic-investment-plan

It is an easy task to calculate returns when lump sum investments are made. As the entry and exit of the investment is defined, along with the expected returns. However, when it comes to SIP, where the exit date is confirmed, but there are multiple investments made at different intervals.

In such case, internal rate of return or IRR method is of great help. IRR is useful not only for SIP returns but also for estimating returns from money back insurance policies and bond yields. This calculation method equates the discounted value of the stream of investments (also known as cash outflows) to the discounted exit value of the investment (cash inflows). The discount rate that equates the present value of cash out flows and the present value of cash inflows is the rate of return earned by an SIP.

What is IRR?

IRR or internal rate of return

internal_rate_of_return

Internal rate of return (IRR) is the interest rate at which the net present value of all the cash flows (both positive and negative) from a project or investment equal zero.

Internal rate of return is used to evaluate the attractiveness of a project or investment. If the IRR of a new project exceeds a company’s required rate of return, that project is desirable. If IRR falls below the required rate of return, the project should be rejected.

Diversify Your Investments with Different Types of Mutual Funds


People are inclined towards savings and for the same purpose they seek different kinds of financial instruments. Bank term deposits and governments bonds may have been the favourite of investors in past, but the scenario is changing rapidly with many moving towards equities and mutual funds.

Mutual funds are professionally managed collective investment vehicles that gather funds and channelize them towards market instruments. Unlike equities, they carry no direct risk as fund managers use their expertise and knowledge to make wise investment decisions.

Depending on the nature of underlying instruments used to channelize funds, there are different types of mutual funds that will help to diversify market risk and gain capital appreciation.

Types of Mutual Funds

  • Growth Fund:

Growth funds are also called as Equity funds as the underlying instruments used are stocks or equities of private sector companies. The primary objective of such investment is long term capital appreciation. Such funds target the high-paying stocks from small-cap, mid-cap and large-cap equity segments and exploit market movements to book profits. The pay-out is significant (above 15to 20%) while the risk is moderate.

  • Debt Funds

Popular as bond or income funds, these schemes predominantly invest in the low-risk instruments like stocks, bonds, CDs, warrants, etc. The risk associated with such instruments is very low, and the pay-out is assured. Such schemes are best suited for conservative investors who look for steady returns over a long period of time. The returns offered by such funds lie in range of 8 to 15%.

  • Money Market funds

These schemes are designed for individuals who look out for high liquidity in investments along with moderate gains. These schemes specifically invest in short term debt instruments like Treasury Bills. The return rate is around 6%, but the risk associated with the investment is very low. Unlike other schemes, these funds can be redeemed within a single day.

  • Balanced Funds

These are special funds that have a moderate risk profile. The fund managers of such schemes have a diversified portfolio that consists of equity as well as debt instruments. The ratio of this combination varies from scheme to scheme. Based on the underlying portfolio combination, balanced or hybrid funds are also categorized as growth and income funds. The return rate offered is around 12 to 15%.

  • Index Funds

To mitigate the risk of equities and to assure better returns to investors, certain fund managers invest directly in the index-related instruments of the stock market. This distributes market risk and investors get better assurance of returns.

The Many Avenues of Investment


The Many Avenues of Investment

You have finally fetched yourself a good job. And the best part is it also pays you well. Now comes the most important agenda when you reach this stage of earning and that is savings. But in today’s ever inflation growing world mere saving isn’t the solution.

One has to even make the right kind of investments in order to build their wealth for the future needs and emergencies. Let us put light on some of the avenues one can bring to use to not only park their money safely but also to build the right kind of wealth.

This option is one of the hot favourites among Indians. There are some good reasons to it though, the major one being the rate of interest incurred from the investment made through this avenue within a year’s time. The rate of interest however depends from person to person but on an average 10% is provided by many of them. The best part of FDs is that they are completely risk free.

If you wish to  venture into the stock market but want to go slow on the risk factor than mutual funds are meant for you. They comparatively come with less risk and the rate of earnings is comparatively higher than that of FDs.

They are as equal to buying gold however on papers. They appreciation and depreciation happening on them are as per the ones happening in the actual metal market. So if you don’t wish to take care of the security of the jewellery you can always opt for these bonds.

  • Real Estate

 One of the hottest avenues to invest into especially in India. The ever soaring property rates have surely made it difficult for the upper class to give it a thought. But the once who can afford it must surely give it a shot. Some have even experienced 100% appreciation to their investments.

3 In-depth Ways of Calculating Mutual Fund Performance


Mutual fund Calculation

Savings form an important part of everyone’s life and you may not be an exception to this belief. There are several saving schemes in the market, which allow you to invest and multiply your savings. But, in the end, only the ones linked with equity markets offer substantial returns.

Direct investment in equities can be risky, so you can prefer buying the mutual funds. These funds are linked with capital market instruments, and the funds gathered through them are managed by experts, who have in-depth knowledge of stock market movements. Still, you will always have a doubt whether your investments are growing or not.

To solve all your doubts to assess mutual fund performance, take a look at these 3 in-depth, number crunching methods that help in assessing the growth in a better way.

Mutual Fund Performance

1.   Absolute Returns

This method is also called as point-to-point method of evaluating the growth of mutual funds. It is commonly used to calculate returns and is one of the easiest methods of all. According to mutual fund definition, NAV is the net asset value of the scheme for a particular day. In this method, NAVs on two dates are used to assess returns.

The formula is: Absolute Returns = (NAVend – NAVstart / NAVstart) x 100

2.   Total Return

This method includes the dividends received over underlying stocks for a particular MF scheme. It is better than the Absolute Return method, and is calculated by summing up dividends for a particular period to the absolute change in NAV.

The Formula is: Total Return = (Dt / NAVstart) x 100 + Absolute Return

3.    CAGR (Compound Annual Growth Rate)

This method is very intensive and is applicable for holding periods of more than one year. It eradicates the fluctuations and inconsistencies experienced during short term holding periods and offer a solid picture to the investors.

These are the three number intensive techniques, which help in assessing mutual fund performance in a better way.