In th debt category of mutual funds, one important variety is Floating Rate Mutual Funds.
Objective
To provide stable rate of return without much volatility arising out of interest changes.
How it works?
Unlike a typical debt fund which buys a govt security or a corporate bond at a fixed rate of return, floating rate funds invests in debt instrument which offers a variable rate of return depending on the interest rate in the market.
Eg. A debt fund would invest in a govt sec giving a return of 6%. When the interest changes to 8%, the govt sec would still give you only 6%. However a floating rate debt instrument will adjust its return to 8% as per the inflation rate in the market.
When it works well?
It works well in an increasing rate scenario as what had happened in last 2-3 years. When you invest in a floating rate fund when interest rate is at 6% and when it increases to 8% in a year, you stand to get benefited.
However in a falling rate scenario, you would lose your return on your investment.
Who should buy?
People who want to leverage the interest rate changes in a increasing interest rate scenario.
How to select a mutual fund?
There are more than 500 schemes in mutual fund to choose from. An investor is fed with too many choice to choose from,but, a wise investor should consider certain criteria before investing in a fund.Lets go through the criteria.
1. Performance
The performance of the fund should be checked against its own benchmark which is mentioned in the fund document. The fund's performance should also be compared against its peers in the same category. A tech fund should not be compared with a pharma fund or a diversified fund.
2.Risk-Return Ratio
The ability of the fund to generate optimal returns for the risk level that fund is taking up. A balanced fund should deliver a moderate return since its risk level is not that high as a equity fund. The equity fund should be able to deliver a higher return owing to its risk taken in investing in equities. There are good indicators for risk-return ratio of a fund.We can see that in the coming posts.
3.Portfolio
To analyse the porfolio of a fund, the should be in existence for a significant period of time.So go for a good track record fund.Check if the fund is a large cap or midcap or smallcap fund and choose a fund which aligns with your requirement of investment.
4.Fund Management
A fund's track record is nothing but the track record of the fund manager. So track his presence in the mutual fund.However fund houses don make a fund reliable totally on a single fund manager, it still makes an impact when a top fund manager leaves a fund.No need for panic redemption when a fund manager leaves,stay put and analyse the fund before and after fund manager's exit and take a decision.
5.Cost
Two funds A and B with a similar returns in the past but with varying costs makes a difference.A fund with a lower costs stands better than a higer cost fund.The cost of a fund is expressed in terms of expense ratio.Go for a fund with lower expense ratio.
1. Performance
The performance of the fund should be checked against its own benchmark which is mentioned in the fund document. The fund's performance should also be compared against its peers in the same category. A tech fund should not be compared with a pharma fund or a diversified fund.
2.Risk-Return Ratio
The ability of the fund to generate optimal returns for the risk level that fund is taking up. A balanced fund should deliver a moderate return since its risk level is not that high as a equity fund. The equity fund should be able to deliver a higher return owing to its risk taken in investing in equities. There are good indicators for risk-return ratio of a fund.We can see that in the coming posts.
3.Portfolio
To analyse the porfolio of a fund, the should be in existence for a significant period of time.So go for a good track record fund.Check if the fund is a large cap or midcap or smallcap fund and choose a fund which aligns with your requirement of investment.
4.Fund Management
A fund's track record is nothing but the track record of the fund manager. So track his presence in the mutual fund.However fund houses don make a fund reliable totally on a single fund manager, it still makes an impact when a top fund manager leaves a fund.No need for panic redemption when a fund manager leaves,stay put and analyse the fund before and after fund manager's exit and take a decision.
5.Cost
Two funds A and B with a similar returns in the past but with varying costs makes a difference.A fund with a lower costs stands better than a higer cost fund.The cost of a fund is expressed in terms of expense ratio.Go for a fund with lower expense ratio.
What is Monthly Income Fund?
MIPs or Monthly Income Plan would be suiting for retired people who would need a monthly income plan but they have not opted for assured pension during their working life period for various reasons.
Let us go through more in detail about the Monthly Income Plan
Objective
To generate regular monthly income to investors in the dividend plan.
Asset Allocation
Fixed Income Instruments = 80-85%
Equity = 15-20%
Assured Return?
As with mutual funds , the monthly dividend payout is not assured but there are certain good funds which has a good track record of giving monthly dividens without fail.
Taxation
For a person in the 30% income tax slab, MIP scores over other debt products by having a Dividend Distribution tax of 19% instead of 30% in bank FDs.
Suitable Investors
Those who are nearing retirement or attained retirement
To find the list of funds in this category, check out @ http://www.valueresearchonline.com/funds/h2_typecomp.asp?type=1&objective=19
Let us go through more in detail about the Monthly Income Plan
Objective
To generate regular monthly income to investors in the dividend plan.
Asset Allocation
Fixed Income Instruments = 80-85%
Equity = 15-20%
Assured Return?
As with mutual funds , the monthly dividend payout is not assured but there are certain good funds which has a good track record of giving monthly dividens without fail.
Taxation
For a person in the 30% income tax slab, MIP scores over other debt products by having a Dividend Distribution tax of 19% instead of 30% in bank FDs.
Suitable Investors
Those who are nearing retirement or attained retirement
To find the list of funds in this category, check out @ http://www.valueresearchonline.com/funds/h2_typecomp.asp?type=1&objective=19
How to plan tax early?
Most of the tax payers prepare tax planning only at the eleventh hour when the taxman blows his whistle,but it can be easily avoided by starting your tax planning early.The following steps are involved for planning your tax early
1. Estimate your tax after deducting all tax exemptions from your gross salary.
2. Declare your 80(c) and 80(d) tax exemptions details with your employer during the start of the financial year.
3. Collect all bills for medical bill reimbursement upto 15000 and get it remibursed as n when you get bills.
4. Pay yours n your dependent's medical insurance premium and get exempted upto 20,000 under section 80(d).
5. Get all the bills/receipts for investments under 80(c).
6. Get your rental agreement and rent receipts ready.
7.If you had opted for ELSS, go for SIP and have your SIP statements ready.
8. For home loan borrowers, get the interest and principal breakdown of your EMI payment from your bank.
9. Figure your if there are any capital losses for the financial year and it can be deducted from tax.
10. Include all interest gained from bank fixed deposits in the taxable income.
11. In May, when you get form 16, file the tax by e-filing or with your auditor.
1. Estimate your tax after deducting all tax exemptions from your gross salary.
2. Declare your 80(c) and 80(d) tax exemptions details with your employer during the start of the financial year.
3. Collect all bills for medical bill reimbursement upto 15000 and get it remibursed as n when you get bills.
4. Pay yours n your dependent's medical insurance premium and get exempted upto 20,000 under section 80(d).
5. Get all the bills/receipts for investments under 80(c).
6. Get your rental agreement and rent receipts ready.
7.If you had opted for ELSS, go for SIP and have your SIP statements ready.
8. For home loan borrowers, get the interest and principal breakdown of your EMI payment from your bank.
9. Figure your if there are any capital losses for the financial year and it can be deducted from tax.
10. Include all interest gained from bank fixed deposits in the taxable income.
11. In May, when you get form 16, file the tax by e-filing or with your auditor.
Warren Buffett's Investment Style
The world's richest person applies the following criteria before he invests in a company.Check out what are they
1. The company should have a good ROE for the past 5-10 years.
2. The debt/equity ratio should be very minimal.
3. The profit margins should be high and increasing over the past 5 years.
4. The company should be a listed entity for last 5+ years.
5. The company should not rely on any singly commodity as its main stream of revenue.
6. Stock price should be 25+% lower than its real value.
The most trickiest part is that how to find the real intrinsic value of a stock and Buffett is the undisputed King in finding out the real value of the company.
1. The company should have a good ROE for the past 5-10 years.
2. The debt/equity ratio should be very minimal.
3. The profit margins should be high and increasing over the past 5 years.
4. The company should be a listed entity for last 5+ years.
5. The company should not rely on any singly commodity as its main stream of revenue.
6. Stock price should be 25+% lower than its real value.
The most trickiest part is that how to find the real intrinsic value of a stock and Buffett is the undisputed King in finding out the real value of the company.
Diversfied funds Vs Sectoral Funds
In mutual funds, there are two common types of equity funds - diversified and sectoral funds. Let us go through the comparison of two funds.
Choice of Stocks
1. Diversified funds invests in stocks of different sectors and industries.
2. Sectoral funds invests only in stocks of the sector where the fund has the mandate to invest. (eg tech sector funds invest only in tech companies)
Risk
1. Diversified funds has a low risk compared to sectoral funds due to investment in various sectors.If a sector performs badly,it can exit from the sector and invest the funds in a better performing sector.
2. Sectoral funds carry a high risk since their investment is concentrated on a set of stocks of a single industry.If the industry performs bad, then the fund will be beaten down heavily. (eg dot com burst in 2000 and recent IT crash)
Who should invest where?
1. A person with thorough knowledge in a sector only should invest in that sector fund.
2. A person with not much of knowledge should opt for a diversified fund and let the fund manager choose the investment sectors.
Time Duration
For all equity investments, regular SIP over a long period of time will bear its own fruit.
Happy Investing!!
Choice of Stocks
1. Diversified funds invests in stocks of different sectors and industries.
2. Sectoral funds invests only in stocks of the sector where the fund has the mandate to invest. (eg tech sector funds invest only in tech companies)
Risk
1. Diversified funds has a low risk compared to sectoral funds due to investment in various sectors.If a sector performs badly,it can exit from the sector and invest the funds in a better performing sector.
2. Sectoral funds carry a high risk since their investment is concentrated on a set of stocks of a single industry.If the industry performs bad, then the fund will be beaten down heavily. (eg dot com burst in 2000 and recent IT crash)
Who should invest where?
1. A person with thorough knowledge in a sector only should invest in that sector fund.
2. A person with not much of knowledge should opt for a diversified fund and let the fund manager choose the investment sectors.
Time Duration
For all equity investments, regular SIP over a long period of time will bear its own fruit.
Happy Investing!!
What is balanced fund?
Balanced fund are a type of funds which does not take full exposure either in equity or in debt. It invests in both equity and debt in a well defined ratio as per the fund's mandate.These funds are also called as hybrid funds.
Equity Oriented Hybrid Funds
These funds usually invest in the ratio 60:40(equity : debt) or 75:25 (equity : debt). This is suitable for investors who wants to get benefited from the equity market but at the same time would not like to risk his entire money with equites. These funds perform better than equity funds during the downturn in markets and have a better shield in terms of debt component.
In case of downturn, these funds increase their debt component to reduce the impact of falling market in the fund's NAV.Similarly during a bull run, these fund will increase their equity exposure to get benefited from the bull run. So a moderate risk investor can choose this fund to have a balanced return.
Debt Oriented balanced Mutual Funds
The pension funds are typical example of debt oriented balanced mutual funds. These have a big chunk(>70%) of their portfolio in debt instruments. These funds are designed to get returns from debt instruments but have a small portion invested in equities to get that additional kicker return to outpace typical fixed income instruments like bank FDs.In order to get an edge over typical debt instruments and also provide investor an extra bit of return, they have a limited exposure to equities.
So an investor in the age range of >30 who has dependents and who can't take high level of risk, can opt for balanced fund to bring in stability to his portfolio.
Equity Oriented Hybrid Funds
These funds usually invest in the ratio 60:40(equity : debt) or 75:25 (equity : debt). This is suitable for investors who wants to get benefited from the equity market but at the same time would not like to risk his entire money with equites. These funds perform better than equity funds during the downturn in markets and have a better shield in terms of debt component.
In case of downturn, these funds increase their debt component to reduce the impact of falling market in the fund's NAV.Similarly during a bull run, these fund will increase their equity exposure to get benefited from the bull run. So a moderate risk investor can choose this fund to have a balanced return.
Debt Oriented balanced Mutual Funds
The pension funds are typical example of debt oriented balanced mutual funds. These have a big chunk(>70%) of their portfolio in debt instruments. These funds are designed to get returns from debt instruments but have a small portion invested in equities to get that additional kicker return to outpace typical fixed income instruments like bank FDs.In order to get an edge over typical debt instruments and also provide investor an extra bit of return, they have a limited exposure to equities.
So an investor in the age range of >30 who has dependents and who can't take high level of risk, can opt for balanced fund to bring in stability to his portfolio.
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