Pocketful

Category: Mutual Funds

  • Smart Beta Funds: Characteristics, Factors, Benefits, and Limitations

    Smart Beta Funds: Characteristics, Factors, Benefits, and Limitations

    Do you ever feel stuck between the world of active and passive investing? While active funds claim to give a market–beating returns but often come with high fees and underwhelming results, passive funds, while being cost-effective, just mirror the market and provide average returns. 

    Not anymore! In today’s blog, we will explore smart beta funds, a strategic blend of active and passive funds that might be the perfect fit for your portfolio. 

    What are Smart Beta Funds?

    Smart Beta Funds, also referred to as factor-based strategic beta funds, actively select, weigh, or combine factors believed to contribute to higher returns and reduced risk, aiming to outperform traditional market-capitalization weighted index funds. They capture specific investment strategies historically associated with outperformance.

    Let’s understand this with an example.

    If you believe undervalued stocks have the potential for future growth, a smart beta fund focusing on value might include companies with low PE ratios or high dividend yields. These could be companies with a strong fundamental track record.

    Smart beta funds

    Smart Beta Funds Characteristics

    • Factor Investing

    These funds emphasize specific factors that are believed to drive returns. Common factors include value, size, low volatility, quality, etc.

    • Rules-based Method

    Unlike actively managed funds, smart-beta funds generally follow a rule-based methodology along with a systematic, transparent investment process that is based on predefined criteria for factor selection.

    • Low-Cost

    Similar to traditional index funds, smart-beta funds often have lower expense ratios when compared to actively managed funds.

    • Customization

    Smart beta strategies can be tailored to specific investment goals or risk preferences. Investors can select funds that align with their objectives.

    Note – While smart beta funds may outperform traditional market-cap-weighted indices, performance can differ based on market conditions.

    Factors of Smart Beta Funds

    Smart Beta Funds rely on a specific set of factors to choose and weigh holdings within the fund, deviating from the traditional market capitalization method. Here are some of the most common factors used in smart beta investing.

    • Value – this factor focuses on stocks that appear to be undervalued and have a low P/E ratio and relatively high dividend yields. Thus suggesting that they have the potential to grow.
    • Momentum – the factor targets stocks that have been experiencing strong price movement recently, based on the assumption that the trend is likely to continue in the future.
    • Quality – This factor focuses on companies with strong financial attributes like profitability, low debt levels, and a stable cash flow because these companies are considered less risky and more likely to perform consistently over time.
    • Low Volatility – this factor focuses on seeking stocks with lower betas, which means that their price movements tend to be less volatile than the overall market. This can help in navigating the portfolio risk.
    • Size – Size refers to a company’s market capitalisation. Some smart-beta funds might focus on small-cap or mid-cap stocks, believing that they carry a high-growth potential compared to large-cap companies.

    These factors are not necessarily used alone. Many Smart beta funds combine multiple factors in their selection criteria to achieve specific risk-return objectives.

    Benefits of Smart Beta Funds

    1. Smart Beta Funds provide exposure to specific investment factors which allow investors to earn higher returns. For example – by including stocks with less dramatic price swings, the overall portfolio’s risk is reduced. 
    2. Smart Beta strategies incorporate a diversified portfolio and spread risk across different sectors.
    3. Compared to actively managed funds that need human stock pickers, smart-beta funds come with a lower expense ratio.
    4. Since these funds function based on predefined objectives, it provides transparency to investors and helps them understand the fund’s strategy.

    Note – It is important to keep in mind that smart beta is not a guaranteed path to riches.

    Limitations of Smart Beta Funds

    1. Past performance is not necessarily indicative of future results, and there is no assurance that a smart beta fund will outperform the market.
    2. These funds are still exposed to several risks. For example, value-focused funds might not outperform if value stocks move in an unfavourable position.
    3. Some smart beta strategies may have a limited track record, especially if they are based on relatively new or niche factors. 
    4. There is no consensus on which factors are the most effective for generating alpha or excessive returns. Therefore, choosing the wrong factor fund may cause losses.

    Performance Analysis of Smart Beta Funds

    The chart below showcases the performances of several factor indices over the past few years.

    Indices1-Year Returns (%)5-Years Returns (%)
    NIFTY Alpha Low Volatility 3054.5217.88
    NIFTY Alpha Quality Value Low Volatility 3062.8820.81
    NIFTY Alpha 50 Index83.9331.88
    NIFTY Alpha Low Volatility 3054.5217.88
    (As of 11th March 2024)

    A brief explanation of the above-mentioned indices:

    NIFTY Alpha Low-Volatility 30 Index 

    This index is curated to reflect the performance of a portfolio of stocks selected based on a combination of Alpha and Low Volatility. This Index consists of 30 stocks selected from the Nifty 100 and Nifty Midcap 50.

    NIFTY Alpha Quality Value Low-Volatility 30 Index 

    This index is curated to reflect the performance of a portfolio of stocks selected based on a top combination of Alpha, Quality, Value, and low volatility. The Index consists of 30 stocks selected from the Nifty 100 and Nifty Midcap 50.

    NIFTY Alpha 50 Index 

    This index aims to measure the performance of securities listed on the NSE with high alphas. It is a well-diversified 50-stock index. Criteria such as liquidity and market capitalization are applied while selection of securities.

    NIFTY Alpha Low Volatility 30

    This index is curated to depict the performance of a portfolio of stocks selected based on the top combination of alpha, quality, and low-volatility.

    Furthermore, several other indices such as the Nifty 100 Equal Weight, Nifty 50 Arbitrage Index, Nifty200 Momentum 30 Index, Nifty High Beta 50 Index, and Nifty 50 Equal Weight are also used to track the smart beta funds. 

    Did You Know?

    Nifty Multi-factor indices are created to showcase the performance of a portfolio of stocks that are selected based on a combination of 2 or more factors. 

    Factors in Smart Beta funds

    Conclusion

    To wrap it up, smart-beta funds offer a compelling proposition for investors seeking a cost-effective and performance-enhancing alternative to traditional index funds, and understanding their benefits and drawbacks can help investors make better investment decisions. 

    However, before investing, keep yourself updated on the latest trends and do not rely solely on smart beta strategies. 

    Frequently Asked Questions (FAQs)

    1. How are smart beta funds different from traditional index funds?

      While traditional index funds follow market-cap-weighted strategies, smart-beta funds use alternative weighting methods based on selected factors, providing a systematic and rules-driven investment approach.

    2. Are smart beta funds actively managed?

      No, smart-beta funds are a blend of active and passive investing; they follow a rules-based approach.

    3. Are smart beta funds suitable for long-term investors?

      Investors with a focus on long-term goals and a willingness to tolerate short-term fluctuations may find smart beta funds to be a suitable addition to their portfolios.

    4. Are Smart Beta funds transparent?

      Smart-beta funds are known for their transparency.

    5. How do I choose a smart beta fund?

      Selecting a smart beta fund involves taking into consideration your risk tolerance and investment goals while understanding the factors that the fund targets.

  • The Rise of ESG Funds: Overview, Growth, Pros, Cons, and Suitability

    The Rise of ESG Funds: Overview, Growth, Pros, Cons, and Suitability

    ESG investing has gained a lot of momentum in the past years. So, AMCs followed suit and created mutual funds targeting sustainable investing. The idea has come a long way and shows no signs of slowing down. Let’s dive into the blog to see the rise of the ESG era. 

    Overview of Sustainable Investing

    Sustainable Investing involves making capital allocation decisions based on socially responsible and ethical strategies to ensure portfolio companies maintain a high standard of sustainability principles. ESG is the benchmark that measures a company’s sustainability and societal impact.

    • “E” – Environmental factors include a company’s carbon emissions, water usage, waste management practices, and the impact of its operations on the environment.
    • “S” – Social factors include a company’s impact on local communities, employee relations, human rights, and diversity and inclusion policies.
    • “G” – Governance factors include a company’s board structure, executive compensation, transparency, and accountability.

    These important factors attract investors who practice sustainable investing and target financial returns while contributing to a positive social and environmental impact. Investors believe sustainable and socially responsible companies are more likely to generate long-term returns and mitigate risks.

    ESG investing in INDIA

    Growth of ESG in India

    The growth of sustainable investing in the country has led to a significant increase in the demand for ESG funds. As per a report by Refinitiv, ESG investing is set to become mainstream in India in the next few years. The report predicts that ESG investing will account for 20-30% of India’s total assets under management by 2025. 

    Some ESG factors are given below:

    EnvironmentalSocialGovernance
    Energy ConsumptionHuman RightsQuality of Management
    PollutionChild and forced laborBoard Independence
    Climate ChangeCommunity EngagementConflicts of Interest
    Waste productionHealth and SafetyExecutive compensation
    Natural Resource PreservationStakeholder relationsTransparency & disclosure
    Animal welfareEmployee RelationsShareholder rights

    Pros and Cons

    Pros

    • Investing in ESG funds can positively impact social change in the economy, as it invests in companies with good ratings in ESG factors.
    • As ESG funds gain more popularity, companies realize the importance of sustainable development, and thus, they take proactive measures to improve their ESG ratings.  
    • Some studies suggest that companies with strong ESG practices may be more likely to beat traditional funds in the long run.

    Cons

    • As we know, ESG is new in the market, so the data regarding its return and volatility are insufficient. 
    • ESG funds lead to sustainable growth, which means they are better in the long run, but returns may not be good in the short term.

    ESG Score

    ESG scores are essential for investors to assess a firm’s sustainability and ethical performance. These scores range from 0 to 100; a score of less than 50 is considered relatively poor, and more than 70 is considered good. ESG scores are allotted to companies by research organizations like MSCI, Sustainalytics, and Morningstar.

    For example, MSCI has a scale as shown below:

    MSCI ESG scale

    This snapshot reflects how well the firm manages its ESG risks versus its peers. So, a company with AA and AAA scores will be an industry leader in managing its ESG risks.

    Top Holdings of ESG Funds

    Let us have a look at the various ESG Mutual Funds in India with their top 5 holdings:

    Fund nameTop 5 holdings
    SBI Magnum Equity ESG FundInfosys Ltd., HDFC Bank Ltd., TCS Ltd., ICICI Bank Ltd., L&T Ltd.
    Mirae Asset ESG Sector Leaders ETFInfosys Ltd., HDFC Bank Ltd., HDFC Ltd., Reliance Industries Ltd., TCS Ltd.
    Axis ESG Integration Strategy FundHDFC Bank Ltd, Avenue Supermarts Ltd., TCS Ltd, Bajaj Finance Ltd., Kotak Mahindra Bank Ltd.
    Aditya Birla Sun Life ESG FundAxis Bank Ltd., Infosys Ltd.,  HDFC Bank Ltd., Bajaj Finance Ltd., State Bank of India
    ICICI Prudential ESG FundInfosys Ltd., TCS Ltd., HDFC Bank Ltd., Divi’s Laboratories Ltd., Marico Ltd.
    (As of 19th March 2024)

    Return Comparison with Index

    Particulars2020202120222023
    S and P BSE TRI (%)16.8426.536.0323.23
    ESG Category Average (%)20.1233.38-2.1025.43
    Return Comparison of ESG funds

    This graph showcases that the returns delivered by the ESG category can beat the index by a significant margin in most of the past years. However, the graph also indicates increased volatility as it delivered negative returns in 2022. 

    Hence, the higher risk-to-reward ratio offered by ESG funds is exposed in the graph, which might incentivize long-term investors to park their funds.

    Read Also: Explainer on ESG Investing: Overview, Pros, Cons, Background, and Mutual Funds

    Conclusion

    The rise of ESG funds reflects a growing trend towards sustainable investing, with investors seeking to generate financial returns while contributing to positive social and environmental impacts. The growth of ESG investing in India is driven by increased awareness, government initiatives, and the renewable energy sector, indicating a shift towards a more sustainable future with superior financial returns.

    However, before investing in these funds, you must consider all your risk factors.

    Frequently Asked Questions (FAQs)

    1. Are ESG funds a good investment?

      The research showed that sustainable funds have consistently demonstrated a higher downside risk than the index. Hence, a careful analysis of the risk-to-reward ratio needs to be performed before investing in an ESG fund.

    2. Which is the oldest ESG fund in India?

      SBI Magnum Equity is the oldest ESG fund, and it was launched in 2013.

    3. Why is it necessary for ESG funds to exist?

      ESG is an ethical investing strategy that helps people align investment choices with personal values. Therefore, ESG funds must exist in order to compel companies to improve their ESG scores. 

    4. What is ESG?

      Environmental, social, and governance factors (ESG) are used to evaluate a company or investment’s sustainability.

    5. What are the four pillars of ESG?

      The four pillars are principles of governance, planet, people, and prosperity.

  • Mutual Funds vs Direct Investing: Differences, Pros, Cons, and Suitability

    Mutual Funds vs Direct Investing: Differences, Pros, Cons, and Suitability

    Investing in stocks is gaining more and more popularity as people wish to take advantage of the rising indices. There are two stock investing methods: investing directly in equities and investing through an asset management business.

    We will now explain the differences between the two methods and help you make an informed choice.

    Mutual Funds – Overview

    Mutual funds are a type of investment product that pools the capital of several investors who share a common investment objective or goal. The fund managers, who are experts in this area, use the pooled capital to invest it in various asset classes, such as stocks, bonds, and commodities. The investor receives the return on their investment after their costs and fees are subtracted; the company responsible for this process is called an asset management company, or AMC.

    Did you know?

    As of January 2024, the mutual fund sector in India managed 52.74 lakh crores worth of assets. 

    Types of Mutual Funds Based on Asset Class

    There are different types of Mutual Funds based on the asset class.

    1. Equity Mutual Fund – This mutual fund category invests predominantly in equity or shares; this category has more risk than other categories as they are sensitive to market fluctuations.

    2. Debt Mutual Fund – The investors who invest in this category of mutual funds are relatively risk averse. Thus, their money is invested in fixed-income securities such as treasury bills, bonds, commercial papers, etc.

    3. Hybrid Fund – This fund category is the combination of both equity and debt mutual funds. The portfolio of hybrid funds will have a specific allocation of equity to provide growth in your portfolio return and debt to provide stability and consistency.

    Note – Mutual funds can be segregated into regular and direct funds, click here to check out our blog.

    Pros of Investing in Mutual Funds

    Diversification – The principal advantage of investing in mutual funds is their ability to diversify your investment portfolio, thus lowering the chance of loss over time. 

    Liquidity – Because you can take your money out at any time, investing in mutual funds gives you the benefit of liquidity

    Affordability – With just INR 100 at minimum, you can begin investing in mutual funds. Any investor can afford it. 

    Professional Management – Your investment amount will be managed by professional fund managers who have a team of research analysts to identify investment opportunities.

    Transparency – You can easily track your investment where your money will be invested and monitor the performance of it.

    Fund manager in Mutual funds

    Cons of Investing in Mutual Funds

    Expense Ratio – Mutual funds charge various costs for managing your investments, including administration and management fees, which will lower your return over time. 

    Selection of funds – Numerous funds are available for market investment. Selecting the right fund is a task for the investor; sometimes, an investor gets confused among the funds and chooses the wrong fund.

    Note – If you wish to know more about analysing mutual funds, check out our blog by clicking here.

    Exit Load – This fee is charged by asset management companies from an investor when they redeem their fund before a stipulated period. If an investor wants to redeem their fund before the stated time, they will have to pay this fee to the fund management company.

    Fund Manager – Performance may be impacted if investors place their savings in a mutual fund based on the fund management’s performance reports. Still, the fund manager is not skilled in picking stocks, which leads to reduced returns.

    Read Also: Mutual Fund vs PMS: Which is Better?

    Direct Investing – Overview

    When you invest directly into stocks through your demat account, it is known as direct investing. In this, you don’t have to go through any intermediary, such as an asset management company, and investors buy the company’s stocks independently after performing their due diligence.

    A share or equity represents the ownership in a company, and by investing in this, the investor can participate in the company’s growth.

    Did you know?

    As per the data released from Central Depository Services and National Security Depository, the total demat accounts in India stands at 14.39 crore as of Jan 2024.

    Pros of Direct Investing

    Decision making – The investor has the full authority to decide in which stock they want to invest their money, and they can buy or sell the securities any time they want.

    Cost-effective – Direct investment into stocks can save various costs that an investor will have to pay while investing through different intermediaries.

    Higher returns – Investing directly in equities might yield a potentially large return for an investor in exchange for increased risk. 

    Liquidity – A direct stock investment gives investors complete control over when and how much they can take from their investment without worrying about exit costs. 

    Diversification – When making direct investments, an investor can effortlessly diversify their portfolio across several asset classes or sectors based on their requirements and risk tolerance. 

    Cons of Direct Investing

    Market Risk – Your portfolio valuations will suffer greatly from any market decline. Several factors, including adjustments to interest rates or corrections in the global market, can bring this about.

    Concentrated Risk – Your risk will rise if you directly invest in individual securities because your portfolio will be concentrated into a limited number of stocks. 

    Investor Bias – Multiple biases could cloud your thinking since you pick stocks independently. Multiple irrational biases come into play when we select stocks; all of them can dramatically affect your portfolio.  

    Risks of direct investing

    Difference between Direct and Mutual Fund Investing

    Risk – Since equities is among the riskiest asset classes, direct investing carries a higher risk than investing in mutual funds. 

    Volatility – Compared to mutual funds, which include a diverse portfolio of equities to offset market volatility, investments in individual stocks possess more volatility.

    Minimum Investment – Any group of investors can afford to invest in mutual funds, with a minimum amount of 100 INR. Conversely, investing directly in stocks requires a larger capital contribution because many stocks have higher pricing, making them unaffordable for most investors. 

    Cost of investment – Investing in stocks directly incurs several fees, including brokerage from the broking company and various taxes (such as GST and security transaction taxes). Mutual funds also charge fees for services rendered, but are more than the fees charged while investing in stocks. 

    Convenience – Mutual funds offer hassle-free investment. Once you are done with your investment, an asset management company will do the rest of the work, such as identifying the asset class, investing in securities, and monitoring the same. On the other hand, direct investment requires continuous monitoring by the investor.

    Professional Management – To invest directly, one needs to have a strong skill set to identify the correct stock. However, while investing in a mutual fund, there is no such need to do it as these all will be done by the asset management company’s fund managers.

    Suitability

    The investor’s risk tolerance and desire will choose whether to choose mutual funds or make one of the direct investments. Mutual funds are the ideal investment product if you are just starting in the world of finance. However, if you are comfortable taking risks and are knowledgeable about financial concepts, direct investing is the better choice. 

    Read Also: Active or Passive Mutual Funds: Which Is Better?

    Conclusion

    In a nutshell, direct investments are best suited for individuals who possess knowledge about stock investing and want complete control over their investments, while mutual funds are best suited for those who lack the time to regularly monitor their portfolios. In conclusion, there is no right or wrong way to invest; the ultimate goal is to generate wealth and earn returns.

    Choosing the best alternative among them is entirely dependent on your risk tolerance and investment objectives.

    Frequently Asked Questions (FAQs)

    1. How can I invest in stocks directly?

      To invest in stocks directly you are required to open a demat account with a stockbroker who will facilitate you to transact on the National Stock Exchange and Bombay Stock Exchange.

    2. How to analyze mutual funds?

      Mutual funds can be analyzed through both qualitative and quantitative factors. To learn about mutual fund analysis, check out our blog.

    3. Which provides better return direct investment into stocks or mutual funds?

      While investing in stocks directly yields better returns but carries a larger risk. In contrast, mutual funds diversify your portfolio to lower risk.

    4. Why should I periodically check my stock portfolio?

      The stock market is very volatile since a number of factors affect its daily movement. If you miss out on these fluctuations, your portfolio’s return will be impacted thus you must regularly monitor your stock portfolio. 

    5. What is the minimum amount required to invest in the stock market?

      Direct stock investments have no minimum amount requirement; you may begin with any amount you feel comfortable with and buy as little as one share of a firm. However, several stocks are trading at extremely high prices, making them unaffordable for investors with less capital.

  • A Comprehensive Guide on Mutual Fund Analysis: Quantitative and Qualitative Factors Explained

    A Comprehensive Guide on Mutual Fund Analysis: Quantitative and Qualitative Factors Explained

    Feeling lost in the maze of mutual funds, unsure how to choose the right fund for your financial goals, and worried about making the wrong investment decision.

    We understand that selecting the right fund can feel daunting, but not anymore!

    Today’s blog will equip you with the knowledge to analyse mutual funds confidently. Let us delve into the quantitative and qualitative factors to explore mutual funds.

    Mutual Funds Overview 

    Mutual funds collect money from numerous investors to invest in a diversified portfolio of stocks, bonds, or other assets. These funds are managed and curated by professional fund managers and hence become suitable for investors with less time and expertise to manage their portfolios. When you invest in mutual funds, units of the mutual fund are allocated to you based on NAV (Net Asset Value), which reflects the net value of the securities the fund manager chooses.

    Mutual funds in India are established as a Trust under the Indian Trust Act, 1882, under SEBI (Mutual Funds) Regulations, 1996.

    Mutual funds are considered ideal for investors who do not have sufficient knowledge of investing in stock markets and wish to start their financial journey with a small amount. These funds offer investors various investment options like shares, bonds, debentures, real estate and money market instruments.

    Now that we know the impact of mutual funds on your portfolio, we will dive deeper into analysing a mutual fund. The analysis involves looking beyond its current price and a multi-faceted approach, combining quantitative and qualitative factors.

    Let us analyse both of these factors in detail.

    Mutual funds

    Mutual Funds Quantitative Factors 

    Standard Deviation

    This measures the volatility of the fund’s returns. It shows how much the fund’s return deviates from its average return over a specific period. A higher standard deviation indicates a more volatile fund, indicating that the returns fluctuate more widely.

    Sharpe Ratio

    It is a statistical measure that quantifies the volatility of a fund’s returns. It depicts how much extra return you are getting for the additional risk you are taking compared to risk-free investment security like government bonds.

    A higher Sharpe ratio is considered better and indicates that the investment is generating more robust returns relative to its level of risk.

    Formula

    SR = (Average Return of Investment – Risk-free Rate of Return)/Standard Deviation of Returns.

    Sortino Ratio

    This is similar to the Sharpe Ratio. However, the Sortino ratio only considers downside risk in the volatility calculation. This can be a more relevant measure for investors more concerned about losing money than missing out on gains.

    Formula

    Sortino Ratio = (Average realised return – Risk-free Rate of Return)/Target downside deviation.

    A higher Sortino ratio indicates a better risk-adjusted return. This means that the investment is generating more return per unit of downside risk.

    Beta

    This measures the volatility of the fund relative to its benchmark. A beta of 1 indicates that the fund’s returns are expected to align with the benchmark.

    To calculate beta, you need the historical returns of the mutual fund and its corresponding benchmark index over the same period. For the mutual funds and benchmark index, subtract the risk-free rate from each return to get the excess return. The risk-free rate represents the return you expect from an investment with no risk. Now, calculate the covariance between the mutual fund’s excess returns and the benchmark index’s excess returns and the standard deviation. 

    Note that, covariance measures the tendency of two variables to move together.

    Formula

    Beta = Covariance/Standard Deviation

    Internal Rate of Return (IRR)

    IRR is a discount rate that makes the net present value (NPV) of the fund’s cash flows equal to zero. To simplify, IRR shows the expected annualized growth rate of an investment.

    A higher IRR indicates a more profitable investment.

    Jensen’s Alpha

    Jensen’s Alpha is used to assess the abnormal return of an investment or portfolio compared to its expected return based on the Capital Asset Pricing Model (CAPM). In simpler terms, it is a score that tells you how well an investment did compared to what was expected based on its risk level.

    Formula

    Jensen’s Alpha = Portfolio Return – [Risk-free Rate + Portfolio Beta*(Market Return – Risk-Free Rate)].

    A positive alpha indicates outperformance, while a negative alpha suggests underperformance.

    Portfolio Turnover Ratio

    This measures how often the respective fund manager buys and sells securities. A higher turnover ratio depicts higher transaction costs and lower net returns.

    Portfolio turnover can be calculated by dividing the total sales proceeds from securities sold with the average monthly assets of the fund.

    A high portfolio turnover indicates that the fund manager is frequently buying and selling securities. 

    Treynor Ratio

    Treynor’s ratio is a performance metric used to assess the risk-adjusted return of a portfolio. It measures the excess return generated per unit of systematic risk providing insights into how efficiently a portfolio compensates investors for assuming market-related risks.

    A higher Treynor Ratio signifies a portfolio’s ability to generate superior returns relative to its inherent market risk.

    Formula

    Treynor Ratio = (Portfolio Return – Risk-free Rate)/Portfolio Beta

    A higher Treynor ratio indicates better performance of the fund.

    Downside Coverage Ratio

    The downside coverage ratio is used to measure an investment’s potential to protect against losses during market downturns. It is a trade-off between downside protection and upside participation.

    The two components of Downside Coverage Ratio are,

    • Downside Capture Ratio – measures how much an investment falls relative to the market during downturns.
    • Upside Capture Ratio – measures how much an investment gains relative to the market during uptrends.
    Quantitative factors in Mutual funds

    Mutual Funds Qualitative Factors

    Qualitative factors are subjective aspects that can impact the future performance and overall stability of the mutual fund.

    Below mentioned are some of the key qualitative factors that you can consider when analysing mutual funds.

    Experience of the Fund Manager 

    A fund manager’s experience and past performance can offer insights into their investment philosophy, risk management skills, and the ability to generate consistent returns. Looking for fund managers with a long and successful track record is suggested, especially during volatile market conditions.

    Reputation of Asset Management Company

    The AMC’s reputation, financial stability, and track record in maintaining different types of mutual funds can be indicative of its commitment to investor interests and its ability to provide quality investment products.

    Portfolio Composition and Diversification

    Analyse the holdings of the fund’s portfolio to understand the asset allocation, sector weightage, and diversification across different asset classes. This will help you assess the level of risk linked with the fund. Additionally, evaluate the risk management practices of the AMC to understand how they mitigate risks and protect investor’s capital.

    Peer Comparison

    Peer comparison is an important step in analysing mutual funds and identifying suitable investment options. Once you have identified the peer group, compare the funds using appropriate metrics like historical returns of the funds, management fees, and expense ratio. Also evaluate the risk alongside returns.

    Exit Load

    An exit load is a charge mutual fund companies impose when investors redeem or sell their units within a specific period after buying them. It encourages investors to adopt a long-term investment horizon.

    Exit load is a percentage of the redemption amount calculated on the NAV of the units being redeemed. Also, different funds may have other exit load structures and some funds may not charge any exit load.

    Qualitative factors in Mutual funds

    Read Also: Types of Mutual Funds in India

    Conclusion

    A comprehensive mutual fund analysis involves evaluating various key factors to determine if the fund aligns with your investment goals and risk tolerance. Remember to not solely rely on past performance. 

    Market conditions can change and past returns do not guarantee future success. Also, avoid investing in funds that exceed your level of risk and in case of any concerns or uncertainties, consult a financial advisor for personalised guidance.

    Read Also: Equity Mutual Funds: Meaning, Types & Features

    Frequently Asked Questions (FAQs)

    1. Why should I consider investing in mutual funds?

      Mutual funds offer diversification, professional management and access to several asset classes with less initial investment amount.

    2. How do I choose the right mutual fund?

      Analyse your investment goals, risk tolerance, and time horizon. Deep research and analysis is needed to understand the fund’s performance.

    3. What are expense ratios?

      The expense ratio is the annual fee expressed as a percentage of a fund’s average net assets.

    4. Can I lose money in Mutual Funds?

      Yes, mutual funds are subject to market risk and fluctuations and investors may experience losses.

    5. How often should I review my mutual fund investments?

      Regularly review your portfolio and ensure that it aligns with your goals. However, avoid making impulsive decisions depending on short-term market movements.  

  • NFO Alert: PGIM India Large & Mid Cap Fund

    NFO Alert: PGIM India Large & Mid Cap Fund

    The universe is vast and so is the world of investment. If you are planning to start your investment journey, several options await you in the market. The popularity of the stock market is increasing every day and everyone wants to invest but due to a lack of proper guidance and financial awareness, a retail investor always carries a fear of loss of funds.

    Here comes into the picture, Mutual Funds. A Mutual Fund is an investment product through which a retail investor can invest indirectly into shares and different asset classes and their investment will be managed by a team of professional fund managers.

    If you’re new to the Mutual Funds world, then checkout our blog: Mutual Funds: Meaning, Types, Features, Benefits and How They Work.

    Today we will introduce you to the most commonly used jargon in the Mutual Fund Industry ‘NFO’ or New Fund Offer.

    What is an NFO?

    NFO

    A New Fund Offer (NFO) signifies the introduction of a new mutual fund scheme by an Asset Management Company (AMC) to the market, available for subscription by both retail and institutional investors. The primary objective behind launching an NFO is for the AMC to gather capital for purchasing securities to establish the fund’s portfolio.

    NFOs can be subscribed for a fixed period. Once the duration of subscribing to NFO closes, the fund can be easily sold and bought by the general public (in case of open ended funds) and the NAV allotted for the same fluctuates as per the market movement.

    The Risks associated with an Investment in NFO

    1. The NFO doesn’t have any track record therefore you cannot track its previous performance.
    2. The fund manager’s capabilities are also a parameter that should be kept into consideration before investing in an NFO because the performance of the fund manager can be checked in the fund returns after a particular period, which is not available in an NFO.
    3. The performance of NFOs is generally unpredictable as they need time to establish themselves and show good returns.

    PGIM Asset Management Company

    Before we delve deeper into the details of PGIM Large & Mid Cap Fund NFO, let us give you an overview of PGIM AMC.

    PGIM stands for Prudential Investment Management India. It is a global investment firm of US-based Prudential Financial Inc.

    The AMC offers a wide range of 20 open-ended funds that are managed by thirteen professional fund managers. PGIM also offers Portfolio Management Services (PMS) and Alternative Invest Funds (AIF). PGIM India Mutual Fund has a presence across 27 cities in the country.

    Details of the NFO

    NFO Details

    PGIM has launched NFO in the Large & Mid Cap category. The large & mid-cap category of mutual funds refers to a category in which a minimum investment of 70% of assets is required into Equity with a minimum of 35% in large-cap stocks and 35% in mid-cap stocks because large & mid cap funds are considered a blend of stability and growth. Larg-cap is considered as safer and gives you consistent returns whereas mid-cap provides higher returns.

    Note: Risk in mid-cap is comparatively higher than large-cap securities.

    In April 2019, the AUM of large & mid-cap funds across the industry was around 47,833 crores and as per the data of October 2023, the AUM of large and mid-cap funds stood at 1,87,575 crores. So, a growth of 4x was seen in just 4.5 years!

    There are a total of 29 actively managed large & mid-cap funds available in the industry.

    Read Also: Bandhan Long Duration Fund NFO: Objective, Benefits, Risks, and Suitability Explained

    Why invest in large & mid-cap funds?

    1. Growth Potential – The large and mid-cap mutual funds category offers higher growth potential to investors as compared to the large-cap mutual funds category.
    2. Flexibility – The Fund manager has the flexibility to choose between mid-cap and large-cap stocks depending on market conditions.
    3. Broader Representation – The large and mid-cap fund category has a broader representation of the market segment.
    4. Diversification – Diversification of your portfolio among large and mid-cap stocks helps the investor mitigate the risk associated with mutual funds.

    Why you should not invest in large & mid-cap funds?

    1. Absence of small-cap stocks – Large & mid-cap funds do not have much exposure to small-cap stocks. This may cause the fund to earn lower returns during bull runs as historically, small cap index has earned higher returns than large and mid-cap indices.
    2. Lower flexibility as compared to Flexi Cap funds – Since large and mid-cap funds have been mandated to have at least 35% exposure to large and mid-cap stocks, flexibility to exit a downward trending market is limited. This may lead to higher losses as compared to flexi cap funds, which do not have any such conditions.

    Who can invest in Large & Mid Cap Funds?

    1. Investors who are looking to diversify their portfolio can opt for large & mid-cap funds.
    2. Large and mid-cap funds are also suitable for investors who wish to reap the benefit from the growth of both large and mid-cap stocks.
    3. Investors who have an investment horizon of more than 5 years can also opt for these funds, should their risk profiles allow it.

    Fund Managers and their Stock Selection Approach

    The fund will be managed by 5 different fund managers named

    • Mr. Vinay Paharia (Equity)
    • Mr. Anandha Padmanabhan Anjeneya (Equity)
    • Mr. Utsav Mehta (Equity)
    • Mr. Puneet Pal (Debt)
    • Mr. Ojasvi Khicha (Overseas Investment)

    Fund managers of PGIM large and mid-cap stocks choose companies with a market cap greater than 1000 Crore to build their stock portfolio. Also, their stock selection strategy includes investing in IPOs. Additionally, the company must have a good track record of capital allocation.

    Fund Facts

    1. Date of Issue of NFO – 24th Jan 2024
    2. Closing Date of NFO – 7th Feb 2024
    3. Type of Scheme – It’s an open-ended large and mid-cap equity scheme.
    4. Investment Objective – The objective of this fund is to provide long-term capital growth through investment in equity-related instruments.
    5. Plan/Option – Payout of Income Distribution cum capital withdrawal option Reinvestment of Income Distribution cum Capital Withdrawal Option and Growth Option.
    6. Minimum Investment – Minimum 5000/- for lumpsum and 1000/- for SIP.
    7. Purchase and Switch in – Minimum 5000/- and multiples of Rs 1 thereafter.
    8. Additional Purchase – Minimum 1000/- and in multiples of Rs 1 thereafter.
    1. SIPs – Minimum of 5 instalments with an amount of Rs 1000/- each and in multiple of Rs 1 thereafter.
    2. Exit Load – If you exit before 90 days of unit allotment. You are liable to pay an exit load of 0.5% and NIL after that.
    3. Benchmark Index* – Nifty Large Mid Cap 250TRI

    *Benchmark refers to a base with which the performance of the fund is compared.

    Read Also: What is NFO? Features, Types, & How to Invest in It

    Conclusion

    There is no doubt that large and mid-cap funds have greater potential in terms of return as compared to solely large-cap funds but they generate an extra return on the cost of higher risk.
    Therefore, before making any investment choice it is always suggested to consult your financial advisor. Also, assess your investment horizon and risk profile.

    Frequently Asked Questions (FAQs)

    1. What is going to happen once I invest in NFO during its subscription period?

      The fund house will receive your invest and then use it to actively manage stocks in the large and mid cap category with the objective to seek long term capital growth.

    2. Units of NFO will be allotted in how many days?

      The units of NFO will be allotted within 5 days after the closure of the subscription period.

    3. Is there any lock-in period in PGIM India Large & Mid Cap Fund if not, then how long should I stay invested?

      No, there is no lock-in in PGIM India Large & Mid Cap Fund but the fund house recommends a tenure of at least 5 years as the ideal time to stay invested in the mutual fund.

    4. What is the base NAV of any NFO?

      The base NAV of NFO is Rs 10 but the NAV of a mutual fund unit is derived from the value of the underlying securities and the accumulated profits since scheme launch.

    5. Is SIP allowed in NFO and how much do I need to pay monthly?

      Yes, you can do an SIP in NFO and you can start an SIP in this mutual fund with just Rs. 1000.

  • ELSS Funds: 3 Years Lock-In Worth It?

    ELSS Funds: 3 Years Lock-In Worth It?

    Have you ever planted a seed and nurtured it for three years? ELSS funds are similar to those seeds. In today’s blog, we will uncover how investing in ELSS funds can help you reap the seeds of tax-optimised returns.

    ELSS stands for Equity Linked Saving Scheme. ELSS is an equity mutual fund investment that invests at least 80% of its assets in equity and equity-related instruments. Investors choosing ELSS funds as an investment option can claim deductions under Section 80C of the Income Tax Act of up to INR 1.5 lakh. The amount that you invest in ELSS is deducted from your taxable income and helps you pay a lesser amount of income tax. Investments in ELSS attract a 3-year lock-in period.

    ELSS

    Some of the important features of ELSS funds are as follows.

    1. ELSS funds primarily invest in equity-related instruments of companies with significant growth potential. This means they can generate higher returns as compared to other tax-saving options like the Public Provident Fund (PPF) or National Savings Certificate (NSC).
    2. ELSS options can be a go-to option for investors who want to save tax and seek high returns.
    3. Gains from ELSS investments after the lock-in period are taxed as long-term capital gains at a rate of 10%.
    4. You cannot redeem your investment amount before three years from the date of investment. 
    5. Investments in ELSS funds can be done through both lump-sum and SIP.

    Read Also: What is an Open-Ended Mutual Fund & How to Invest in it?

    ELSS vs Other Tax-Saving Options

    PPF

    Apart from ELSS mutual funds, there are a variety of tax-saving options available to the investors like PPF, NPS, ULIPs, etc. 

    Public Provident Fund 

    PPF is a debt-oriented, government-backed saving scheme offering guaranteed returns. It is exempted from taxation, i.e., interest earned and the amount received on maturity are tax-free.

    However, it comes with a lock-in period of 15 years. Only partial withdrawals are allowed after specific years and offer returns of around 7-8%.

    PPF is suitable for risk-averse investors seeking stable returns and is ideal for long-term savings goals.

    National Pension Scheme

    NPS was introduced by the central government to help individuals have recurring income in the form of a pension after the retirement. These funds are market-linked and invest in equities, bonds and other assets, leading to higher and volatile returns.

    NPS invests in asset classes such as equity and related instruments, corporate and debt-related instruments, government bonds, and alternative investment funds. NPS is open to all Indian citizens aged between 18 to 65 years. Investors can claim tax deductions of up to INR 2 lakh. Maturity corpus is partially taxable, while annuity income is fully taxable.

    It attracts a lock-in period up till the age of retirement. Only 25% of the invested amount can be withdrawn after three years from the date of investment in case of an emergency.

    NPS is suitable for investors who are looking for retirement savings and are comfortable in taking risks.

    ULIP

    ULIP, or Unit-Linked Insurance Plan, is a financial product that offers both investment and insurance benefits. It provides life cover and an investment component wherein premiums are invested in numerous funds like equity, debt, or hybrid. The policyholder can choose the fund based on their risk appetite. 

    Moreover, ULIPs provide flexibility to switch between funds and allocate premiums accordingly. Returns depend on the market performance, which influences the policy’s value. Consequently, it provides the benefit of both, life insurance as well as the wealth creation. In ULIP, you can get a tax deduction of up to INR 1.5 lakh under Section 80C of the Income Tax Act.

    The table below shows the difference between ELSS and other tax-saving options:

    ParticularsELSSPPFNPSULIP
    StructureEquity-orientedDebt-orientedMarket-linkedUnit-linked insurance Plan
    Tax Deduction Up to INR 1.5 lakhsUp to INR 1.5 lakhs Up to INR 2 lakhs Up to INR 1.5 lakhs
    Lock-in period3 years15 yearsUp to retirement.5 years
    Risk profileRisk is high because of equity market fluctuationsLow risk and returns are guaranteedDepends on fund structureModerate Risk

    Further, there are multiple other tax savings instruments available such as the National Savings Certificate (NSC), Tax saving Fixed Deposit, etc. 

    Should I invest in ELSS for 3 years?

    Investing in ELSS is entirely depends on the individual preference and financial situation. However, there are some of the benefits of investing in the ELSS funds that you must know:

    1. You can claim tax deductions of up to 1.5 lakh.
    2. ELSS funds carry the potential for higher returns when compared to other tax-saving investment options.
    3. If the investments in ELSS are done through SIP, more units can be purchased when the market falls, lowering the average cost per unit.
    4. Unlike PPF and NPS, ELSS has a short lock-in period of only 3 years.

    Read Also: Long-Term Capital Gain (LTCG) Tax on Mutual Funds

    Conclusion

    Whether the three-year lock-in period of ELSS funds is worth it or not, depends on your financial goals. There is no simple yes/no answer to this question. If you can handle market fluctuations, know how to stay calm during market volatility, and are looking for some good tax saving options, then ELSS funds will be a great option for you to choose. 

    However, ELSS funds might not be suitable if you have an investment horizon of less than three years. Make sure that you fully understand all the implications before investing in ELSS funds, and remember to do thorough research on ELSS funds. With the right approach, even those 3 years might fly by as your investment grows towards a brighter financial future!

    Frequently Answered Questions (FAQs)

    1. What’s the catch with a three-year lock-in period in ELSS?

      You can consider ELSS funds as a short to mid-term commitment since you cannot withdraw them for 3 years, but the potential for higher returns makes ELSS funds attractive.

    2. ELSS funds invest in equity; will there be a volatility in returns? 

      Buckle up! You might see some bumps along the way. Stock markets can be volatile, but don’t worry, ELSS funds come with a lock-in period of three years, and staying invested for the longer term can make your journey smooth.

    3. What will happen to my investment amount once the 3-year lock-in period is over?

      After 3 years of lock-in, you have the freedom to redeem the investment, or you can stay invested. The choice is all yours! However, if you stay invested the fund will continue to generate returns.

    4. Three years of lock-in seems like a long time; why should I choose ELSS funds?

      ELSS has the shortest lock-in as compared to other tax-saving investment options. NPS lock-in is till retirement, PPF has a lock-in of 15 years, Tax saving FD and NSC have 5-year lock-in period. 

    5. Is premature withdrawal possible in ELSS funds?

      No, while other tax savings investments have the option of premature withdrawal with a certain penalty, however, in ELSS, there is no option available for the investors to withdraw before 3 years. 

  • Regular vs Direct Mutual Funds: Make The Right Investment Decision

    Regular vs Direct Mutual Funds: Make The Right Investment Decision

    As of December 2023, the Indian Mutual Fund Industry has over 50 lakh crores under management, and if your majority of the investments are in Mutual Funds, then it is high time that you should know the difference between Regular and Direct mutual funds.

    What are Mutual Funds

    Mutual funds collect money from several investors to invest in a diversified portfolio of stocks, bonds, or other assets. These funds are managed and curated by professional fund managers and hence become suitable for investors who have less time and expertise to manage their portfolios.

    When you invest in mutual funds, NAV (Net asset Value) is allotted to you, which reflects the net value of the assets that are chosen by the fund manager to invest your money in. Furthermore, SIPs and lump-sum are different ways through which we can invest in mutual funds.

    Benefits of Investing in Mutual Funds

    Benefits of Direct Mutual Funds
    1. Mutual funds help you diversify your capital across asset classes. This spreads your risk and mitigates the impact of losses, if any, in a single holding.
    2. Mutual funds are managed by professional fund managers who understand market dynamics. These managers help you reduce the pressure of managing your portfolio.
    3. Investing in mutual funds is a hassle-free way to access a diversified portfolio. You do not need to keep an eye on every asset class, such as stocks, bonds, debentures, etc.
    4. Investment amounts for mutual funds are low as compared to directly buying stocks or bonds. You can start your investment journey today with an amount as low as INR 500.
    5. There’s a vast array of mutual funds available catering to diverse investment goals, risk appetites, and time horizons. You can choose the fund that best aligns with your objective.

    Regular Mutual Funds

    Every mutual fund scheme offers two ways to invest: Direct Route and Regular route. A regular mutual fund is a type of mutual fund that is sold through intermediaries such as brokers and distributors. Investment in mutual funds through regular mode attracts a higher TER* because of commission involved.

    If you’re not familiar with the word TER, it stands for Total Expense Ratio, or say, Expense Ratio. Fund Managers charge an annual fee that is charged to investors basis their total investment and the same can be analysed through TER.

    Did you know?

    Every mutual fund in India comes under Regulation 52 of the SEBI MF Regulations, in which the maximum TER allowed is 2.5% for the first INR 100 crores of total net assets.

    Here are some interesting features to know about regular mutual funds:

    • Regular mutual funds carry a high expense ratio, i.e., a larger portion of your investment will be eaten up by fees, thereby reducing your returns.
    • The expense ratio is the cost linked with managing and operating a mutual fund. It is expressed as a percentage of the fund’s average net assets and represents the total annual expenses charged to the fund.
    • Regular mutual funds are a good investment option for investors who do not have enough time and knowledge to do their research on mutual funds, and are willing to pay a higher expense ratio and seek professional investment advice.
    • Regular mutual funds are distributed through multiple channels such as, banks, SEBI-registered financial advisory firms, and brokerage firms.

    Direct Mutual Funds

    Investing in Direct mutual funds means buying directly from the Asset Management Company (AMC) without the involvement of any intermediaries like brokers or distributors. The investor invests through the website of the AMC, mobile app or offline. Further, there are certain new-age brokers as well which provide the facility of investing in direct plans.

    Here are some interesting features to know about direct mutual funds:

    • Since there are no distributors involved, direct plans have a low expense ratio.
    • The lower expense ratio leads to a higher net asset value (NAV).
    • The investor in direct mutual funds has more flexibility as compared to regular ones.
    • Direct mutual funds are the best fit for individuals who understand the fundamental concept of mutual funds, prefer a do-it-yourself (DIY) approach, and are willing to do thorough research and analysis.

    Regular Mutual Fund vs. Direct Mutual Fund

    1. Regular mutual funds are sold through intermediaries such as distributors and brokers, whereas direct mutual funds are bought directly from the asset management companies who manages the fund.
    2. Unlike direct mutual funds, regular mutual fund has a high expense ratio because of intermediaries. The regular mutual fund has a lower NAV because the distributor’s commission is deducted from the invested capital whereas direct mutual funds offer a high NAV for the same investment amount because of the low expense ratio.
    3. A higher expense ratio leads to lower returns in regular plans as compared to direct plans.
    4. Regular mutual fund often comes with professional advice (investment advisor), while direct funds are self-directed and DIYs.

    Breakdown of Expenses

    The fee structure of direct and regular mutual funds is more or less the same. Let us dive deeper to know the difference.

    • Expense Ratio – As discussed above, this covers the fund’s operating costs such as management fees, custodian fees, and administrative expenses and is generally expressed as a percentage of the asset under management. The expense ratio for direct mutual funds is lower, and in the case of regular mutual funds expense ratio is generally higher due to the inclusion of distribution charges.
    • Transaction charges – Some of the direct or regular mutual funds may charge a small amount for buying or selling mutual fund units.

    How to identify a Mutual fund as Direct or regular?

    How to identify if plan is regular or direct

    Suppose you want to invest in a mutual fund scheme but want to avoid seeking professional advice. Then how will you recognize whether the fund you have chosen is direct or regular? We got you covered!

    1. The word ‘direct’ will be there in the name of the scheme.
    2. The expense ratio of a direct scheme will always be lower than that of a regular scheme.
    3. You can also refer to your consolidated account statement. If the plan is direct, no ARN* number will be mentioned in the account statement.

    *ARN Number is the AMFI registration number issued to the mutual fund distributors and brokers.

    Impact of Expense Ratio on Returns

    Impact on returns

    Let’s understand this with an easy example:

    • Initial Investment – INR 1 lakh
    • Time Period – 20 years
    • Rate of Return – 15%
    • Expense Ratio – 2.5% in regular plan and 1.5% in direct plan

    After 20 years, your investment:

    In Direct Plan– INR 12.58 lakhs

    In Regular Plan – INR 10.54 lakhs

    That’s a difference of almost INR 2 lakhs, so now you can get an idea of how the difference of just 1% can significantly impact your returns over a long period.  

    Conclusion   

    If you are muddled between the two and cannot decide what to choose then Regular mutual funds are the best fit for investors who value professional guidance, are new to the world of investing, and lack financial literacy.

    Direct mutual funds can be a match for investors whose primary focus is to maximise the returns and who are cost-conscious. They are experienced investors who are comfortable with independent research and decision-making and are well-versed in managing investments directly.

    Eventually, the choice depends on the individual preferences and their financial goals. However, we would suggest seeking professional advice if you are not sure which fund aligns perfectly with your investment objective.

    Frequently Asked Questions (FAQs)

    1. What is the difference between direct and regular mutual funds?

      Direct mutual funds are bought directly from the AMC, whereas regular funds are bought through intermediaries like brokers and distributors.

    2. Which is better: Direct or Regular Mutual funds?

      The answer to this question depends on the individual’s needs and preferences. However, direct funds come with a lower expense ratio and provide better returns than regular mutual funds.

    3. Can I change my investment plan from a regular to a direct mutual fund?

      Yes, you can change your investment plan from a regular to a direct plan by contacting the asset management company. However, there are certain things which investors should keep in mind before switching from a regular to a direct plan:The change in investment plan will be treated as a withdrawal, which means if there is any exit load, then you have to incur exit load charges if you redeem your investment before the exit load period. Further, there are tax consequences depending on the type of fund and time horizon.

    4. Which one gives higher returns?

      Generally, direct funds have a lower expense ratio as compared to regular funds because there is no intermediary involved in direct mutual funds. Therefore, effectively, direct funds provide better returns than regular funds.

    5. How to know the expense ratio of regular and direct plans of the same scheme?

      You can know the expense ratio from the factsheet of mutual funds, which is available on the website of the Asset management company.

  • Decoding Credit Risk Funds In India

    Decoding Credit Risk Funds In India

    Do you know there is a category of mutual funds which specifically invests in junk bonds? If you’re not familiar with the word, Junk bonds, as the name suggests, are low quality bonds which have a high risk of default. But wait, high risk means high returns? Yes! To compensate for the high default risk, these bonds provide greater returns than other highly rated bonds.

    If you’re new to the mutual fund world, check out our blog: Mutual Funds: Meaning, Types, Features, Benefits and How They Work.

    What are credit risk funds?

    Credit Risk Funds are a category of debt mutual funds that primarily invest a minimum of 65% only in AA and below-rated corporate bonds.

    Did you know?

    Credit Risk Funds are earlier known as “Credit Advantage Fund” or “Credit Opportunity Fund”.

    Credit Risk Funds

    How do Credit Risk Funds work?

    Fund managers seek out debt funds with credit ratings that generally range from BBB to C since these bonds offer higher interest rates to compensate for the risk of default.

    To diversify the risk, the fund manager will invest across multiple bonds of different companies to avoid overexposure in a single issue or company.

    Checkout our blog on debt mutual funds: What is Debt Mutual Funds: Invest in the Best Debt Funds in India

    Readc Also: Types of Mutual Funds in India

    Advantages of Credit Risk Funds

    Advantages of Credit Risk Funds
    1. High Yield

    Credit risk funds offer investors high yields as compared to other debt funds. This can fascinate investors who wish to seek relatively higher returns.

    1. Diversification

    Investors can get exposure to high-yield bonds, although with higher risk. Further, credit risk funds have investments across multiple companies and issues such that exposure to any sector or company is significantly reduced. For risk-seeker investors, this enhances the overall portfolio performance.

    1. Professionally Managed

    Credit risk funds are managed by professional fund managers having specialisation in credit risk assessment. Their expertise helps the fund in generating good returns considering the risk profile.

    Disadvantages of Credit Risk Funds

    1. Risk of Default

    Junk bonds carry a high possibility of default. The lower credit quality of the bonds increases the chance that the issuer may fail to repay the principal amount.

    1. Volatility

    Credit risk funds are highly volatile compared to other debt options, i.e., the fund’s net asset value (NAV) changes significantly which may not give positive returns to investors for a short period.

    1. Not Suitable for all Investors

    These funds are a fit for investors with a high-risk tolerance and long-term investment horizon.

    1. Management Costs

    Credit risk funds need active oversight and analysis. This leads to higher expense ratios and reduces the overall returns. Generally, the expense ratio of credit risk funds is more than other categories of debt mutual funds.

    Read Also: Decoding Hedge Funds In India – Types, Advantages And Distinctions

    Impact of Interest Rate Changes on Credit Risk Funds

    • When interest rate rises, the value of existing bonds declines, since bond prices and interest rates share an inverse relationship. However, credit risk funds invest in low-quality bonds that have high coupon rates to compensate for the increased risk of default, i.e., a decline in the value of bonds may be less visible, and the higher coupon rates can still provide good returns even if the interest rates are rising.
    • Credit risk funds are sensitive to changes in credit spreads. Credit spread is the additional yield that investors demand for holding riskier bonds over safe and secure government bonds.
    • There is a thing called “Duration” in the bond universe, which is the measure of the sensitivity of price change of a bond for a change in the interest rate. The higher the duration, the more sensitive the bond is to the changes in interest rates. Investors should keep in mind the duration of the credit risk funds before investing as it can significantly impact the performance of funds in a short period.

    Risks associated with Credit Risk Funds

    Risk of credit risk funds

    Credit Risk

    The primary risk that is involved in credit risk funds is “Credit Risk” or the “Risk of Default” by the bond issuers. Bonds with high coupon rates are more exposed to default risk and can lead to a decline in the fund’s value. 

    Liquidity Risk

    Credit risk funds are generally less liquid when compared to other debt funds because these funds hold bonds that are of low credit quality, making it difficult to buy or sell them in the market.

    Concentration Risk

    Several credit risk funds have concentrated exposure to specific sectors, which can increase the risks if those sectors face any kind of economic downturn or challenge.

    Interest Rate Risk

    As we discussed above, just like other fixed-income securities, credit risk funds are sensitive to changes in interest rates. When interest rates rise, the prices of existing bonds in the portfolio may fall, leading to potential capital losses.

    Credit Risk Funds vs. Other Mutual Funds

    • Credit risk funds carry high risk and potential of high returns since they invest in lower-rated corporate bonds, whereas the risk and returns of other mutual funds vary depending on the category of investment (equity, debt, balanced, etc.)
    • Compared to other mutual funds, credit risk funds are more volatile because of sensitivity to changes in credit ratings.
    • Credit risk funds are less liquid due to low demand than other debt mutual funds like liquid funds, low-duration funds, etc.
    • Credit risk funds are suitable for investors with high-risk tolerance and long-term investment horizons, and other mutual funds say liquid funds are suitable for a wide range of investors.

    Historical Performance of Credit Risk Funds

    Credit risk funds generally offer high returns as compared to other categories of debt funds, and annualised returns can range somewhere between 7% to 14% depending on the fund and the market conditions.

    As of January 2024, there are more than 15 credit risk funds available in India from different Asset Management Companies. The table below shows the annualized performance of a few credit risk funds that we selected on a random basis:

    Funds1 Year Return (%)3 Year Return (%)5 Year Return (%)7 Year Return (%)
    Aditya Birla Sun Life Credit Risk Fund – Direct Plan7.737.647.247.51
    Axis Credit Risk Fund – Direct Plan7.866.566.947.05
    HDFC Credit Risk Debt Fund – Direct Plan7.356.397.957.56
    ICICI Prudential Credit Risk Fund – Direct Plan8.036.868.258.06

    Are Credit risk funds suitable for you?

    Suitability of credit risk funds

    Investments in credit risk funds expose your portfolio to high risk, and if your main purpose is to preserve your capital (assuming you are a risk-averse investor), then chances are likely that credit risk funds may not align with your financial goals.

    However, if you are looking for diversification in your debt portfolio, can stay invested for a longer horizon, and are familiar with the risks involved, you can choose credit risk funds to diversify your portfolio and generate good returns.

    But remember to seek advice from a financial advisor. A professional advisor will analyse your investment goals and curate your portfolio accordingly.

    Read Also: What is Debt Mutual Funds: Invest in the Best Debt Funds in India

    Conclusion

    Credit risk funds are considered a double-edged sword. They offer high returns but at a cost of high risk. Although, the investor needs to analyse the credit quality of the bonds before investing in any credit risk fund and if in any case, the investors want to exit these funds, they need to assess and monitor the fund’s portfolio regularly.

    If you are curious to learn more about the taxation of mutual funds in India, check our blog: Decoding Mutual Funds Taxation In India

    Frequently Asked Questions (FAQs)

    1. What are credit risk funds?

      Credit Risk Funds are a category of debt mutual funds that primarily invest a minimum of 65% only in AA and below-rated corporate bonds.

    2. Do credit risk funds offer higher returns as compared to other debt mutual funds?

      Yes, they generally offer higher returns as compared to other categories of debt mutual funds such as liquid funds, money market funds, etc.

    3. Credit risk funds are suitable for what kind of investors?

      Credit risk funds are suitable for investors with a high-risk tolerance and long-term investment horizon.

    4. Should you seek professional help while investing in credit risk funds?

      It is recommended to seek professional advice before investing in Credit risk funds.

    5. Credit Risk Funds are previously known as?

      “Credit Opportunity Fund”  & “Credit Advantage Fund”.

  • Asset Management Companies (AMC) in India

    Asset Management Companies (AMC) in India

    If you are looking forward to beginning your journey in mutual funds and are not familiar with the term AMC or Asset Management Company, you have come across the right place!

    What is AMC?

    AMC stands for Asset Management Company. AMCs are financial institutions that manage and invest funds on their client’s behalf through pooled investments such as mutual funds, ETFs or other financial instruments.

    AMC Summary

    AMC employs professionals fund managers, and analysts to make investment decisions. These professionals research and analyse the market conditions to fulfil the fund’s choices and investment needs.

    And for all these services, they charge fees for managing the funds. The fees include a management fee, a performance fee and other miscellaneous expenses. The fees are the percentage of the assets under management (AUM) – It is the total value of the investments managed by the AMC.

    In India, AMCs are regulated by the Securities & Exchange Board of India (SEBI). Further, AMCs are also passively regulated by the Association of Mutual Funds in India (AMFI).

    Now, you must be thinking about how these AMCs operate. AMCs invest the pooled money in professionally managed funds based on the investor’s financial goal, investment horizon and risk appetite. They rebalance these funds on different frequencies, such as quarterly or annually to maintain the desired asset allocation.

    AMCs distribute these funds through various channels including banks, online platforms, NBFCs, distribution houses, agents, etc. The revenue of an AMC primarily comes from the fees it charges from the investors.

    Indian Mutual Fund Industry Analysis 

    Assets Under Management (AUM) of the Indian Mutual Fund Industry stood at INR 49.05 lakh crores as of 30 November 2023.  

    The AUM of the Indian Mutual Fund Industry has grown from ₹8.90 trillion as of 30 November 2013 to ₹49.05 trillion as of November 30, 2023, more than a 5-fold increase in 10 years.

    The proportionate share of equity-oriented schemes is 54.9% and for debt-oriented schemes it is 18.5% of the industry’s assets. Individual investors hold a relatively higher share of industry’s assets, i.e., 59.2% in November 2023.

    Institutional investors account for 40.8% of the assets, of which corporates are 95%. The rest are Indian and foreign institutions.

    From the above data, we can interpret that AMCs have experienced steady growth over the years, reflecting investors’ participation in the mutual fund industry. Rise in disposable incomes and increasing financial awareness are key factors leading to the growth of the mutual fund industry in India.

    Read Also: Top 5 AMC Stocks in India 2025 – Overview and Insights

    Emerging trends in Mutual Funds industry in India

    We all understand the financial landscape of India, which is continuously evolving and AMCs are launching new schemes every year. In the calendar year 2023, AMCs in India launched 198 New Fund Offers (NFOs).

    Some of the key emerging trends in the mutual Fund industry are:

    1. Fintech and Robo-advisors are playing an important role in managing investments. Robo-advisors use algorithms to provide automated suggestions on your investments are continuously gaining attention.
    2. Investors these days generally look for investment opportunities that align with their values. Thematic and Overseas funds play a major role by providing sector-focused and global investments opportunities respectively.
    3. ESG investing or environmental, social and governance factors are crucial for new-generation investors. AMCs that curate ESG-friendly funds are attracting ample inflows.
    4. Direct investment platforms are gaining traction because of their low expense ratio and easy registration process.

    Broadly, there are two types of mutual funds – direct funds and regular funds. Their expense ratio is the primary distinction between them. Regular mutual funds are chosen by investors who prefer investing with financial advisors, whereas Direct mutual funds are meant for those investors who make their own investment decisions.

    Top Asset Management Companies of India

    Top 5 AMCs in India

    As of December 2023, there are 44 registered Asset Management Companies in India. The top 5 AMCs in India are:

    1. SBI Asset Management Company

    SBI mutual fund is a leading AMC in India. It was established in the year 1987 and has 36 years of experience in the fund management. It is a joint venture between the State Bank of India and Amundi Asset Management company. State Bank of India currently holds a 63% stake in the SBI mutual fund, and Amundi Asset Management company holds a 37% stake through a wholly owned subsidiary.

    SBI currently manages 306 open-ended and 215 close-ended funds with an AUM of INR 828,152 crores as of September 2023.

    2. ICICI Prudential Asset Management Company

    ICICI is another major player in the Indian Mutual Fund Industry. It was established in 1998 and is a joint venture between ICICI Bank and Prudential Plc, a leading Pan-Asia & Africa-focused group that provides health protection and saving solutions.

    ICICI AMC manages 436 open-ended and 17 close-ended funds with an AUM of INR 594,204 crores.

    3. HDFC Asset Management Company

    Established in the year 2000, HDFC is also a major player in the mutual fund industry with a strong track record and robust product portfolio.

    HDFC AMC is a joint venture between HDFC Limited & ABRDN Investment Management Limited (formerly known as Standard Life Investments Limited).

    HDFC AMC manages 277 open-ended and 57 close-ended funds with an AUM of INR 518,132 crores.

    4. Kotak Asset Management Company

    Kotak AMC is the wholly owned subsidiary of Kotak Mahindra Bank Ltd., which started operations in the year 1998 and holds a large investor base of over 8.1 million.

    It currently manages 237 open-ended and 34 close-ended funds with an AUM of INR 330,703 crores.

    5. Nippon Asset Management Company

    Nippon India Mutual Fund (NIMF) is one of the fastest-growing mutual funds in India and was established in the year 1995. NIMF was previously known as Reliance Mutual Fund.

    Nippon currently manages 441 open-ended and 24 close-ended funds with an AUM of INR 329,831 crores.

    Read Also: Top AMCs in India

    Conclusion

    To wrap it up, there are 44 registered AMCs in India offering a diverse world of mutual funds. Remember, even though the Indian asset management industry is poised for consistent growth in the coming years, always conduct thorough research and analysis before starting your investment journey and consult with financial advisors.

    Also, if you are a keen investor and want to update yourself on the taxation of different mutual funds in India, checkout our blog: Decoding Mutual Funds Taxation In India

    Frequently Asked Questions (FAQs)

    1. What is the full form of AMC?

      Asset Management Company.

    2. Does AMC charge fees from investors?

      Yes.

    3. Who regulates AMCs?

      Securities & Exchange Board of India.

    4. How many registered AMCs are there in India?

      As of December 2023, there are 44 registered AMCs.

    5. What is Assets Under Management (AUM)?

      It is the total value of the investments managed by the AMC.

  • Mutual Fund Taxation – How Mutual Funds Are Taxed?

    Mutual Fund Taxation – How Mutual Funds Are Taxed?

    Taxation summary

    Mutual funds are pooled investments that aim to provide capital growth to investors in the long term. They are classified according to asset class, financial goals, and structure. There’s an entire universe of mutual funds.

    As mutual funds can be of different types, so is their taxation. Now, you must be guessing, that is okay, but why should I care? Taxation on mutual funds varies due to various factors. Ignoring this can significantly impact your net returns post taxation. In this blog, we will learn how taxation impacts your returns on mutual funds investment.

    In India, after the budget of 2023 and finance bill, the benefit of indexation is no longer available on debt mutual funds. Hold on; things will be clarified by the end of the blog.

    Taxation rules are defined based on certain factors:

    1. Type of Fund: Equity-oriented or Debt-oriented.
    2. Type of Plan: Growth or IDCW (Income distribution cum capital withdrawal).
    3. Holding Period: Short term capital gain tax or Long term capital gain tax.

    Earnings from Mutual Funds Investment

    There are two ways you can earn from investing in mutual funds:

    1. Capital Gains: When you sell an asset at a price higher than initial buying price, you earn capital gains. In case of mutual funds, allotment is done based on NAV.

      For example – You bought ten units of mutual funds having NAV of 100. Your total buying was 10*100 = INR 1,000. Now, after some time, you sold these ten units at 120. So, you earned 20*10= INR 200, i.e., capital gains.
    2. Dividends: Mutual funds invest money in several companies, and when mutual funds receive dividends from those companies, the fund manager adjusts this dividend in two ways:
    3. Growth Option: In this, the fund manager will re-invest the dividend received in the portfolio, and you won’t get any pay check.
    4. IDCW: Income distribution cum capital withdrawal, the Fund manager will transfer the dividend received to you and will not re-invest the money.

    Taxation

    Now, for taxation purposes, both capital gains and dividends are taxed separately, we will uncover them one by one. Let’s start with dividends then we will move to capital gains tax.

    Dividends Taxation

    As discussed above, in the case of dividends, there are two options available to the investors:

    Growth: In case of growth, all your returns are classified as capital gains tax. So, no need to worry about separate taxation on dividends.

    IDCW: In this method, you will receive the dividends directly in your account. In India, dividends are taxed at your tax slab. For example, you fall in a 30% tax slab and receive dividends worth INR 50,000 in a year. So, out of total dividends, 30% of 50,000, i.e., INR 15,000 will go to the tax authorities.

    IDCW is only suggested to investors looking for a regular source of income. However, the growth option is more tax-efficient and ideal for long-term investors.

    Capital Gains Taxation

    For capital gains, mutual funds are broadly classified as Equity-oriented or debt-oriented. After the fiscal budget of 2023, there are three categories of taxation: Equity, Debt and Debt with indexation benefit. The exposure of a mutual fund’s equity component determines which category the fund is in. Have a look at the table below:

    capital gains taxation

    So, funds investing more than 65% in equity and equity-related instruments, are taxed as per Equity taxation. Fun Fact: Arbitrage funds come under equity taxation.

    Now, coming to the holding period. Your holding period also affects taxation. The holding period is different for all three categories. Check the table below:

    Holding period classification

    As you can observe, for equity-oriented funds, STCG will apply if the holding period is less than a year and LTCG if the holding period exceeds one year. In case of less than 35% exposure in equity, neither STCG nor LTCG will apply. Your gains are taxed at your income tax slab rate.

    There are hybrid funds in the market, these are the combination of equity and debt funds. They can be either equity-focused or debt-focused. If equity-focused (at least 65% in equity), then equity taxation will apply else debt taxation.

    Now again, tax rates are different for STCG and LTCG. At this point, you must be scratching your head; so many rules. Don’t worry, we have created a cheat sheet for you. Have a look at the chart below:

    Mutual funds cheat sheet

    Note that, in the case of LTCG in equity, there is no tax till the income of one lakh; post this limit a 10% tax is applicable without indexation benefit. In case of STCG in equity, there is flat 15% tax on gains without indexation benefit.

    Indexation benefit on debt funds – In this, your buying value will be inflation-adjusted so that your taxable income is reduced. Longer the holding period, higher the benefit of indexation.

    Now, which has the lowest taxation? Generally, there is no straight answer. It will depend on the type of mutual fund you are invested in and your holding period. However, between debt and debt with indexation, latter is the clear winner.

    Read Also: Long-Term Capital Gain (LTCG) Tax on Mutual Funds

    Conclusion

    We have covered all the aspects of mutual funds taxation in India. In summation, it broadly depends on the type of mutual fund you invest in and your holding period.

    Equity-oriented mutual funds are tax efficient but carry higher risk, and in case of debt-oriented funds, your slab rate will impact your tax majorly. If you fall in “no-tax” bracket, then small gains in a short holding period will carry no tax. Further, the longer your holding period, the more tax-efficient you will be.

    Based on this, one can analyses their portfolio and plan their entry and exit. For example, you have an unrealized profit of INR 80,000 in an equity mutual fund and want to take out this profit. Here, a better approach would be to analyses your holding period and act accordingly. If you have been invested for 11 months, then probably waiting for one more month is ideal, where LTCG will apply on your 80,000 gains. Do remember that in case of equity, no tax is there till one lakh.

    Read Also: Arbitrage Mutual Funds – What are Arbitrage Funds India | Basics, Taxation & Benefits

    Frequently Asked Questions (FAQs)

    1. What are slab rates in taxation?

      These are brackets based on the age and income of an individual; each bracket will carry different taxation.

    2. Do I need to pay any tax if my realized profit is INR 95,000 from selling an equity mutual fund after 14 months?

      No, in this case, LTCG will apply, and in equity LTCG, no tax is there till one lakh.

    3. What is IDCW?

      IDCW (Income Distribution Cum Capital Withdrawal) means dividends received from mutual funds will be transferred to you.

    4. What is Indexation benefit?

      Your buying value will be inflation-adjusted so that your taxable income is reduced.

    5. For long term investing, which is better, growth plan or IDCW?

      For the long-term, a growth plan is preferred.

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