Pocketful

Category: Mutual Funds

  • Debt Mutual Funds: Meaning, Types and Features

    Debt Mutual Funds: Meaning, Types and Features

    Want to park your money for the short term, or are you looking for relatively safe investment options other than equities? In most cases, investors look for bank FDs or savings accounts, but there are different investment options known as Debt Mutual Funds that can provide relatively higher returns than bank savings accounts and fixed deposits.

    In this blog, we will learn about debt funds and their different types.

    Overview – Debt Mutual Funds

    Debt Mutual funds primarily invest in fixed-income assets such as treasury bills, bonds, government securities, and other debt instruments. All of these investments have a predetermined maturity date and coupon that an investor will receive upon maturity. These funds are professionally managed by asset management firms and are ideal for investors seeking a consistent return.

    Debt funds provide diversification across a variety of debt instruments, assisting investors in risk management. If you want to learn more about debt mutual funds, check out our blog on the same: What are Debt Mutual Funds?

    Features of a Debt Mutual Fund

    1. Debt funds generally offer lower returns than equity-oriented funds because their portfolios are invested in fixed-income securities.
    2. It diversifies your investment into numerous debt instruments, allowing you to obtain a consistent return, which is why they are popular among low-risk investors.
    3. Most debt mutual funds have high liquidity and no exit load, allowing investors to withdraw their cash at any moment, depending on the current net asset value.

    Read Also: Debt Mutual Funds: Meaning, Types and Features

    Types of Debt Funds

    Types of Debt Funds

    As per the Association of Mutual Funds in India (AMFI), there are 16 types of debt funds that cater to the needs of investors; let’s explore each one of them:

    • Liquid Funds—These funds invest in money market securities with a maximum maturity of 91 days. They could be a good alternative to a savings bank account.
    • Overnight Funds – The securities of overnight funds have a maturity of one day. These are regarded as the safest type of debt fund because credit and interest rate risk are minimal in such funds.
    • Ultrashort Duration Fund—This fund invests in money market instruments, with a Macaulay duration ranging from 3 to 6 months.
    • Short Duration Fund—This fund invests in debt instruments with maturities of 1 to 3 years. It generally earns higher returns than money market funds.
    • Money Market Funds – The portfolio of money market funds is invested into debt securities having maturity of up to 1 year.
    • Low Duration Funds- These funds invest in Debt & Money Market instruments with Macaulay duration ranging from 6 months to 12 months.
    • Medium Duration Fund – The medium duration fund invests in the maturity of debt securities, which ranges from 3 to 4 years.
    • Medium to Long Duration Fund—The portfolio of a medium to long duration fund holds securities maturing from 4 to 7 years.
    • Long Duration Fund – It invests in debt securities having a maturity of more than seven years.
    • Corporate Bonds Fund – This fund invests at least 80% of its total assets in AA+ or higher-rated corporate bonds. These bonds offer higher returns than government securities but also carry higher risk.
    • Banking & PSU Debt Fund – This fund’s portfolio consists of debt securities issued by public sector undertakings (PSUs) and banks, which constitute about 80% of its total portfolio.
    • Gilt Fund—It invests a minimum of 80% of its investible corpus in government securities across varying maturities. These funds have a very low credit risk; however, they carry interest rate risk.
    • Gilt Fund (10 Year) – These funds are similar to Gilt funds; the only difference is that they invest a minimum of 80% of corpus in government securities with a Macaulay duration of 10 years.
    • Dynamic Bond Fund – These funds don’t have any restrictions on the security type or maturity profile for the investment. They change their portfolio according to the market dynamics.
    • Floater Funds – This fund invests at least 65% of its total assets into floating-rate instruments (including fixed-rate instruments converted to floating-rate exposures using swaps/ derivatives). These funds carry less mark-to-market risk because the coupon of these floating-rate bonds is reset periodically based on the market rates.
    • Credit Risk Fund—This fund invests a minimum of 65% of its total assets into corporate bonds with a rating below AA. It tries to generate high yields compared to corporate bond funds. However, this fund carries high default risk, so investors in credit risk funds need to be cautious.

    Read Also: Types of Mutual Funds in India

    Risks in Debt Mutual Fund

    Risk in Debt Mutual Fund

    Primarily, the credit risk and interest rate risk are two different types of risk associated with investing in debt mutual funds.

    Credit Risk

    Credit risk arises when the borrower fails to repay the principal and interest. An investor can analyze the bond ratings issued by credit rating organizations before investing. Generally, debt securities issued by the Government carry lower credit risk as compared to securities issued by Corporations.

    Interest Rate Risk

    There is an inverse relationship between Bond prices and interest rates. When interest rates fall, bond prices rise, and when interest rates rise, bond prices fall. It is because when interest rate rises, new bonds are issued at a higher interest rate, causing the value of existing bonds to fall, which negatively impacts the performance.

    Taxation of Debt Fund

    We have discussed multiple categories of Debt Mutual funds above. Taxation of debt mutual funds depends on the equity component of a fund, investment horizon, and individual tax slab.

    The income tax regulations governing capital gains generated by debt mutual funds have recently changed (removal of indexation benefit).

    If any debt mutual fund has less than 35% of the investments in equity, then gains from that will be taxed as per the income tax slab without any indexation benefit. Further, there will be no STCG and LTCG in this case..

    However, if a debt mutual fund has 35 – 65% in equity or equity-oriented securities, then STCG or LTCG will apply:

    Short-Term Capital Gain Tax (STCG): If you remain invested in a debt mutual fund for less than three years and have a capital gain, you will be taxed based on your income tax bracket, without any indexation benefit.
    Long-Term Capital Gain Tax (LTCG): If you sell your investment after three years, it will be categorized as long-term capital gain and taxed at a rate of 20% with an indexation benefit.

    If you’re curious to learn more about the taxation of mutual funds in India, check out our detailed blog on the same: Mutual Funds Taxation in India

    Who should invest in Debt Mutual Funds?

    Why should invest in Debt Mutual Funds?

    Debt funds are a suitable for investors who want to meet short-term financial goals and are looking for Bank FD alternatives, because they are less volatile than equity mutual funds and provide stable returns. They are also an alternative for investors seeking a higher return than traditional fixed-income products and ready to accept a moderate amount of risk.

    Did you know?

    Bank FDs are insured to the extent of INR 5 lakhs by the Deposit Insurance and Credit Guarantee Corporation (DICGC). There is no such protection in debt mutual funds.

    Read Also: Mutual Funds: Meaning, Types, Features, Benefits and How They Work.

    Conclusion

    There is a wide selection of debt mutual funds available in the market, and choosing one can be challenging for an investor because each category has its own set of features, risks, and returns. As a result, investors should assess their risk profile and align their investment objectives properly before making any investment in debt mutual funds. Furthermore, it is always recommended that investors seek advice from financial advisors before making investing decisions.

    Frequently Asked Questions (FAQs)

    1. How do debt mutual funds differ from Bank FDs?

      In bank FDs, the rate of interest offered by banks at the time of investment depends on the tenure of the FD and prevailing interest rates. Meanwhile, in debt funds, the fund managers use their expertise to invest in different papers or bonds according to the scheme objective, which can lead to variation in returns generated per year.However, both the debt mutual funds and FDs carry risks, such as credit risk and interest rate risk.

    2. Can I do SIP in the debt mutual funds?

      Yes, just like equity mutual funds, one can do SIP in debt mutual funds.

    3. How does a debt mutual fund work?

      A debt fund invests in fixed-income securities such as corporate bonds, government bonds, treasury bills, etc. It earns coupon income from these investments and also benefits from the price appreciation of the debt securities.

    4. How are debt funds taxed?

      The taxation of debt funds depends on multiple parameters such as equity component, duration of holding, income tax slab, etc.

  • Equity Mutual Funds: Meaning, Types & Features

    Equity Mutual Funds: Meaning, Types & Features

    Have you ever been concerned about how to prepare for your long-term financial goals, such as purchasing a home, planning a child’s marriage, schooling, and so on, but yet to discover the appropriate investment product that will provide inflation-beating returns?

    Then someone told you to invest in an equity mutual fund, but you don’t understand what exactly an equity mutual fund is.

    In this blog, we’ll discuss the equity categories of mutual funds in detail.

    Equity Mutual Fund

    Firstly, if you’re new to the mutual fund’s world, then check out our blog on the same: What are Mutual Funds?

    Coming to the equity category of mutual funds, the fund manager primarily invests in the equity market. Equity mutual funds generally offer better long-term returns than other categories of mutual funds, but they can be volatile in the short run and carry higher risk.

    The fund management and their research team invest the funds in a variety of companies from different sectors or market capitalizations depending on the type of equity mutual fund.

    Features of Equity Mutual Funds

    Features of Equity Mutual Funds
    1. Equity mutual funds generally offer higher returns than other types of mutual funds, such as hybrid and debt funds.
    2. Investors can enjoy tax benefits while investing in ELSS funds, which are a part of equity mutual funds.
    3. Equity funds carry higher risk as their portfolios majorly consist of stocks.
    4. Investment in equity mutual funds is suggested for the investors with a longer horizon, preferably >5 years.
    5. Equity funds tend to have higher expense ratios than other categories of mutual funds.

    Types of Equity Mutual Funds

    Before jumping into the types of equity funds, let’s first understand the Large, Mid and Small Cap Companies.

    There is a concept called Market capitalization, which refers to the total valuation of a company’s outstanding shares. It is calculated by multiplying the total number of outstanding shares by the current share price.

    As per our market regulator, i.e., the SEBI, based on the market capitalization, stocks are classified into Large, Mid and Small-Cap:

    1. Large-Cap – It refers to the top 100 listed companies on the basis of market capitalization. They are also known as Blue Chip companies and considered less riskier than Mid and Small-Cap companies.
    2. Mid-Cap—Companies ranked between 101st and 250th are considered Mid-Cap Companies. They are considered riskier than Large-Cap Stocks.
    3. Small-Cap—It refers to the 251st company onwards in terms of market cap. They carry the highest risk.

    Read Also: What is Solution Oriented Mutual Funds?

    Categories of Equity Mutual Funds

    There are various types of mutual equity funds, and investors can choose among them based on their investment objectives and risk profile.

    1. Large-Cap Funds— A large cap mutual fund manager invests a minimum of 80% of their total assets into large-cap stocks (the top 100 stocks based on market capitalization). These funds are less volatile because large-cap companies are considered more stable than large and small-cap.
    2. Mid-Cap Funds—A minimum of 65% of total assets are invested in Mid-cap stocks. These stocks have the potential to grow at a higher rate than large-cap stocks, but are also more volatile. Hence, they are suitable for investors who can take a moderate amount of risk on their capital.
    3. Small-Cap Funds—These funds invest a minimum of 65% of their total assets in the stocks of small-cap companies. They have the potential to generate higher returns, but they also carry the highest amount of risk. This fund is suitable for risk-taking investors with a longer investment horizon.
    4. Large & Mid Cap Funds—The fund invests a minimum of 35% of its total assets in large-cap and 35% in mid-cap stocks.
    5. Flexi-Cap Funds—Flexi-cap funds can invest a minimum of 65% of their total assets into equity and equity-related instruments across market capitalization. It gives more flexibility to the fund managers as there are no restrictions regarding the investment based on market capitalization.
    6. Multi–Cap Funds—The Multi-cap funds invest at least 75% of their portfolio in equity and related instruments and a minimum of 25% of their total assets in large, mid, and small-cap stocks. It offers less flexibility to the fund manager as compared to the Flexi-cap funds.
    7. Focused Funds—This category of equity mutual fund invests a minimum of 65% of its total assets in equity-related instruments. Further, investing in more than 30 stocks at a particular time is not allowed.
    8. Sectoral/Thematic Funds—These funds are required to invest a minimum of 80% of their total assets in a particular theme or sector, such as Banking, FMCG, Infra, Healthcare, etc.
    9. Dividend Yield Funds—A minimum of 65% of this fund’s assets are invested in dividend-yield stocks.
    10. ELSS Funds—In an ELSS fund, the fund manager invests 80% of the total funds into equity and equity-related instruments without any restriction of market capitalization. This is the only equity mutual fund category that comes with a lock-in period of three years, as it offers a deduction of up to INR 1,50,000 under section 80C of the Income Tax Act.

    Taxes on Equity Mutual Funds

    Taxes on Equity Mutual Funds

    We have discussed multiple categories of Equity Mutual funds above. However, taxation on almost all equity mutual funds remains the same, whether it is large, flexi, small cap, etc. Ignoring taxation can significantly impact your net returns post taxation.

    The capital gains tax on the profit earned by investing in equity mutual funds is divided into two different categories:

    1. Short Term Capital Gains Tax (STCG)— If the investment is held for less than 12 months or 365 days, the capital gain generated will be taxed at a rate of 15% without any indexation benefit.
    2. Long Term Capital Gains Tax (LTCG) — If the investment is sold after 12 months or 365 days, the capital gain generated will be taxed at a rate of 10% over and above INR 1 lakh.

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

    Read Also: Mutual Fund Factsheet: Definition And Importance

    Conclusion

    Investment in equity mutual funds can be a good option for long-term wealth creation. It can help you achieve your long-term financial goals and beat fixed-return investment plans.

    Further, one can start investing in equity mutual funds with as little as INR 100, and ELSS funds provides a tax benefit of INR 1,50,000 under Section 80C while providing equity returns.

    Still, the investor must be well-versed in the various categories of equity mutual funds, as each fund has unique characteristics, risks, and rewards.

    It is advisable to consult with your investment advisor, who can help you choose an equity mutual fund that aligns with your investment horizon and financial goals.

    Frequently Asked Questions (FAQs)

    1. I have a low-risk appetite and a short-term horizon. Can I invest in an equity mutual fund?

      It is suggested not to invest in equity mutual funds as these funds carry higher risk and are more volatile in the short run. Further, consulting with your financial advisor before investing in any fund is advisable.

    2. Is there any mutual fund which provides tax benefits?

      Yes, the ELSS (Equity Linked Savings Scheme) is a category of equity mutual fund that provides tax benefits of up to INR 1,50,000 under section 80C, but it comes with a three-year lock-in period.

    3. What is the meaning of direct investing in stocks?

      When an investor directly purchases the stocks of any company, it is known as direct investing in stocks.

    4. What are sectoral mutual funds?

      Sectoral funds invest 80% of their total assets into the stocks of a particular sector, such as IT, FMCG, or Pharma. These funds carry higher risk because their portfolios are exposed to a specific sector; hence, if any downfall in the sector occurs, the portfolio can show a negative return.

    5. What are Contra Mutual Funds?

      Contra mutual funds follow a contrarian investment approach and invest at least 65% in equity & equity-related instruments.

  • What are Small Cap Mutual Funds? Definition, Advantages, and Risks Explained

    What are Small Cap Mutual Funds? Definition, Advantages, and Risks Explained

    Small Cap Funds

    Small-cap companies are on a bull run, and so are small cap mutual funds. Recently, they have been in the limelight just because of their higher returns. The Nifty Small Cap 250 index, which measures the performance of small market-cap companies, gave investors a 64% return last year.

    But what about the risks involved in small-cap funds & will they offer similar returns in the coming future?

    In this blog, we will give you an overview of small-cap mutual funds, the advantages, the risks involved, and answers to the above-mentioned questions.

    Overview of Small Cap Mutual Funds

    Before jumping into the explanation of small-cap funds, check out our blog on mutual funds, where we have simplified the topic: Mutual Funds: Meaning, Types, Features, Benefits and How They Work.

    Based on their market capitalization, companies in India are categorized as Large, Mid and Small-Cap companies. As per SEBI, the definition of Large, Mid and Small-Cap is as follows:

    1. Large Cap: 1st -100th companies in terms of Market Cap.
    2. Mid Cap: 101st – 250th companies in terms of Market Cap.
    3. Small Cap: 251st company onwards in terms of Market Cap.

    So, small-cap mutual funds invest in small companies. As per rules prescribed by SEBI, at least 65% of their investments are in small cap companies. Most of the small cap companies are generally new and expanding aggressively, but they are technically fragile and might lose money in a volatile market.

    Small-cap mutual funds carry high-risk and are volatile in nature. The small-cap companies generally have low market float and have less trading volumes; this makes them vulnerable to adverse events and susceptible to bearish market movements. They have the potential to give higher returns in a bull market. However, they fall at a rapid pace in bearish markets.

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

    Pros of Investing in Small-Cap Mutual Funds

    Pros of Small Cap Funds
    • Small-cap companies have the potential to grow rapidly because of their relatively small operating scale. There’s a great saying, “Almost all multi-baggers are small cap companies once.” It allows fund managers of small cap mutual funds to reap the benefit of investing in hidden gems.
    • Small-cap companies have the potential to capitalize on emerging trends, fostering a sense of agility and innovation and helping to enhance the business.
    • Small-cap companies are open to pivoting their strategy and business model. It is advantageous when changing economic and technological scenarios compared to large-cap companies.

    Points to Consider

    So far, we have understood that small-cap mutual funds are considered high-risk in the world of mutual funds. There are a few points that you should consider before investing in small-cap mutual funds:

    • Small-cap mutual funds indeed have a potential to give higher returns, but you should also consider the expense ratio of the fund before investing. As small-cap funds are actively managed, their TER, i.e., Total Expense Ratio, is generally higher than that of other mutual fund categories. Further, choose a direct route rather than regular small-cap funds.
    • When the market starts falling, even the top small-cap mutual funds can see erosion in their returns. Therefore, if you are considering investing in small cap funds, invest for the long-term, preferably >5 years.
    • Investors who are heavily invested in large cap companies and want to diversify their investments can look for small-cap mutual funds.
    • Investment in small-Cap mutual funds is much riskier and more volatile than large-cap funds. Therefore, it is suggested for investors with a high risk appetite.

    Taxation Rules

    As mutual funds can be of different types, so is their taxation. However, taxation on all equity mutual funds remains the same, whether it is large, flexi, or small cap. Ignoring taxation can significantly impact your net returns post taxation.

    Capital Gain Tax

    For small cap funds, STCG (short term capital gain) will apply if the holding period is less than one year and LTCG (long term capital gain) if the holding period exceeds one year.

    In the case of LTCG, 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 small-cap funds, there is a flat 15% tax on gains without indexation benefit.

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

    Top Performing Small Cap Funds

    Top Small Cap Funds

    Here are some top-performing small-cap funds based on the performance:

    Fund Name (Direct Plan)3-Year Return (%)5-Year Return (%)Fund Size (INR Cr.)
    Quant Small Cap Fund41.31%  39.28%17,348
    Tata Small Cap Fund34.03%29.02%6,236
    Canara Robecco Small Cap Fund32.11%29.1%9,402
    Edelweiss Small Cap Fund31.63%29.94%  3,134
    Bank of India Small Cap Fund30.95%  32.97%939

    Key Highlights of AMFI Notice

    On 27 February 2023, the Association of Mutual Funds in India (AMFI) sent a notice to All Asset Management Companies (AMCs) in India when the regulator, i.e., SEBI has raised concerns regarding the continuous flow of funds in Mid and small-cap mutual funds. The AMFI has asked fund houses to develop a policy and take appropriate measures to protect investors.

    • AMFI focuses on the ability of the fund house to face redemption pressure and detect whether any funds has liquidity issue or not.
    • All AMCs must disclose the outcomes of the Stress test, volatility, liquidity analysis, valuation, and portfolio turnover concerning mid-cap and small-cap equity schemes.
    • Asset Management Companies will display the stress result within 15 days after the end of each month.
    • AMFI emphasizes investor protection and enhanced transparency within the mutual fund industry.

    Read Also: 10 Best Small Cap Electric Vehicle Stocks

    Conclusion

    In summation, small-cap mutual funds offer the potential for high returns and a great diversification opportunity. However, these funds come with significant risks due to the volatile nature of small-cap companies.

    Investors should carefully consider the risks and other relevant factors such as expense ratio, historical returns, fund manager, etc. before investing in small-cap mutual funds. It is suggested to consult with a financial advisor before investing.

    Frequently Asked Questions

    1. Are small-cap funds risk-free?

      No, small caps are not risk-free, in fact small cap mutual funds carry a higher risk than other category of mutual funds. It is advisable to research before investing in small-cap funds and seek help from your financial advisor.

    2. What is the suitability of small-cap mutual funds?

      Small-cap mutual funds are generally suitable for Investors having a high-risk appetite with a time horizon of at least 5 years.

    3. What is the difference between Small-Cap and Flexi-Cap Mutual funds?

      A small-cap mutual fund invest at least 65% in small cap companies. In contrast, a flexi-cap mutual fund invest at least 65% in equity & equity related instruments, which means flexi cap funds are more flexible as they can invest in large, mid or small cap companies.

    4. What is a Small Cap mutual fund?

      A small-cap mutual fund invest at least 65% in small-cap companies.

    5. Do small-cap funds carry higher taxation?

      No, small-cap funds are taxed in a similar manner to any other equity mutual funds.

  • What is PSU Index? Performance, Comparison, Benefits, and Risks Explained

    What is PSU Index? Performance, Comparison, Benefits, and Risks Explained

    The Indian stock market boasts a diverse range of indices, each catering to specific investor preferences. PSU index is one such index.

    This index tracks the performance of some of India’s most reliable and established PSU companies. The index consists of giants like Coal India, NTPC, and SBI.

    The PSU index is known to hold the capability to generate decent returns as PSU firms come with a sense of security because of government backing.

    In today’s blog, we will be exploring the benefits, risks and performance of the PSU funds.

    PSU Index Background

    Before we dig deeper into the PSU Index, let us have a quick overview of what PSUs are.

    PSUs stand for Public Sector Undertakings that are owned and operated by the government of India, either at the central or state level. PSUs play a major role in the Indian economy, contributing to multiple sectors and can be established through various means such as nationalisation, special enactments, mergers, and acquisitions.

    Types of PSUs

    • CPSEs (Central Public Sector Enterprises) – Companies where the direct holding of the Central Government or other CPSEs is 51% or more
    • PSBs (Public Sector Banks) – Banks where the direct holding of the Central/State Government or other PSBs is 51% or more
    • SLPEs (State Level Public Enterprises) – Companies where the direct holding of the State Government or other SLPEs is 51% or more

    Public sector enterprise offers a wide range of products which include steel, heavy machinery, fertilisers, drugs and pharmaceuticals, petrochemicals, textiles, cement etc.

    PSU companies types

    Overview

    The PSU Index was launched on February 1, 1999, and tracks the performance of the Public Sector Undertakings (PSUs) listed on the Bombay Stock Exchange (BSE) in India. It measures the combined performance of some of the companies classified as PSUs by the BSE and serves as a benchmark for funds and portfolios focusing on PSUs.

    The S&P BSE PSU is calculated using the float-adjusted, market-cap-weighted methodology. PSUs are recognised for their dividend payouts and offer a source of regular income for investors. Additionally, the PSU Index can be a relevant investment option for investors seeking exposure to the Indian public sector.

    Did You Know?

    The first disinvestment by way of public offer took place in 1995-96. Since then, Rs. 2,90,489.62 crore has been raised through PSU disinvestments from capital markets.

    Top 10 Constituents

    State Bank of India, NTPC, Power Grid Corp, Coal India, Bharat Electronics, Indian Oil Corp, Power Finance Corp, Bharat Petroleum Corp, and Hindustan Aeronautics Ltd.

    S&P BSE PSU vs. S&P BSE 500

    The table below shows a comparison between the annualised returns of S&P BSE PSU and S&P BSE 500.

    202320222021
    S&P BSE PSU61.48%28.3%47.95%
    S&P BSE 50026.55%4.77%31.63%

    While S&P BSE PSU has demonstrated an unexpected return of 61% and 47% during the shorter periods of one year and three years, respectively, S&P BSE 500 has stayed somewhat consistent over the longer term. This indicates that thematic investing brings a lot of risk due to lack of diversification. 

    Read Also: List Of Best PSU Stocks in India

    Categories

    PSU Funds can be categorized into two main types, Equity PSU Funds and Debt PSU Funds,

    Equity PSU Funds primarily invest in the equity shares of PSUs and debt PSU Funds invest in the bonds issued by the PSU.

    Equity PSU Funds

    Fund Name2023202220212020
    SBI PSU Fund Reg Gr54.0329.0132.41-9.98
    Invesco India PSU Equity Gr54.4820.5431.056.07
    ABSL PSU Equity Reg Gr59.2828.5537.1–
    NIFTY 100 TRI21.244.9426.4516.08

    The table above showcases some of the top-performing Equity PSU Funds and their returns relative to the benchmark, Nifty 100.

    Inferences that can be drawn from the above data are as follows,

    PSU funds have been on a roll for a past few years due to several factors and PSU stocks witnessed a significant surge in the year 2023 which lead to exceptional returns for these funds. Funds like Aditya Birla Sunlife PSU and SBI PSU Equity funds delivered blockbuster returns of more than 50% 

    While 2023 stands out, PSU funds have not offered consistently higher returns every year. The performance of these funds can vary depending on the market conditions and the specific PSU stocks they hold. 

    Debt PSU Funds

    Fund Name2023202220212020
    Axis Banking & PSU Debt Reg Gr6.533.753.399.59
    Tata Banking & PSU Debt Reg Gr6.62.93.4210.75
    ABSL Banking & PSU Debt Reg Gr6.863.653.5910.91
    Franklin India Banking & PSU Debt Gr6.843.273.699.13
    SBI Banking & PSU Fund Reg Gr6.562.872.5810.47
    Kotak Banking and PSU Debt Gr6.773.63.9110.51
    Nippon India Banking & PSU Debt Gr 6.83.173.8610.93

    The table above shows the returns of multiple debt PSU Funds over the past few years.

    Year-wise returns of debt PSU funds are likely to be less volatile when compared to equity PSU funds. They show a gradual increase over time, with some fluctuations. 

    Over the past three years, the average return for the Banking and PSU Debt Funds hover around 5.5%. However, specific fund performance can vary. 

    Therefore, debt PSU funds are suitable for investors seeking relatively stable returns with lower risk and want regular income through coupon payments.

    Should I Invest in PSU Funds?

    Investing in PSU funds is a personal decision that should be taken after considering all of the risks. Hence, the benefits and risks stated below might help you in making an informed decision.

    Benefits of Investing in PSU Funds

    1. PSU Funds primarily offer capital preservation and regular income with moderate growth potential.
    2. These funds are considered low-risk compared to other investment options since they invest in PSUs. This provides a degree of safety and security to your investment.
    3. Many consider investing in PSUs because of government backing to the companies. 

    Risks of Investing in PSU Funds

    1. PSUs are backed by the government, which makes them susceptible to government policies and decisions. These policies can impact their performance, profitability and growth prospects and expose investors to uncertain risks.
    2. The government uses OFS to divest its stake in PSUs. This increased supply of shares can put downward pressure on the prices, leading to losses for investors.
    3. While some PSUs perform well, others might struggle with bureaucratic inefficiencies and slower growth compared to private companies. This can hinder the overall performance of the PSU index.
    4. The PSU index is concentrated in specific sectors like energy, banking etc. This lack of diversification across different sectors can expose investors to greater risk.
    PSU Index Benefits

    Read Also: Why Are PSU Stocks Falling? Key Insights and Considerations

    Conclusion

    Investors need to keep in mind that though short-term returns of PSU funds have outperformed the Sensex, the risk of investing in PSU funds still exists. Therefore, it is important to perform your own analysis before investing in PSU Funds.

    Frequently Asked Questions (FAQs)

    1. What is the PSU Index?

      Think of the PSU Index as a shopping cart filled with public sector undertakings of the country.

    2. Are there any downsides in investing in PSU Index Funds?

      Investment is not risk-free and the PSU index might not be as high-flying as some other options. Also, these companies are sensitive to interest rate changes by the government and thus affect their stock returns.

    3. How can I invest in the PSU Index?

      You cannot invest directly in the PSU Index. However, you can invest through PSU mutual funds and individual PSU stocks.

    4. What are the benefits of investing in PSU funds?

      PSU funds offer a lot of benefits to the investors such as regular income and low-risk.

    5. Do all PSU funds give dividends?

      While several PSU funds offer consistent dividends, many don’t. 

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

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

    The Bandhan Asset Management Company is launching a new mutual fund offering in the debt category, the “Bandhan Long Duration Fund.” Let us begin by analyzing the New Fund Offer (NFO). 

    Debt Fund

    A debt fund is a mutual fund that predominantly invests in fixed-income securities such as government bonds, corporate bonds, debentures, treasury bills, etc. These are suitable for investors who are risk averse and want stable and consistent returns in their portfolio.

    Long Duration Fund

    This category of debt fund primarily invests in fixed-term securities with longer maturity, i.e., from 7 years to 20 years or more.

    Benefits of Bond Investing

    1.  The country’s current account deficit is decreasing, creating a stable interest rate environment and lowering the need to issue bonds to cover the deficit. 

    2.  The government aims for a 4.5% fiscal deficit by FY 26, which suggests that there will be a decrease in the bond supply, which will be beneficial for the market.

    3.  The country’s Core inflation remains below 4% as the government is effectively managing the food supply chain.

    4.  An extra 23–25 billion in foreign investment is anticipated to enter the Indian bond market due to India’s inclusion in global indices.

    5.  As global inflation eases, reduction in the rate of interest is expected.

    Bandhan AMC

    It was first founded as IDFC AMC in 2000, and by 2020, it was one of India’s top 10 AMCs in terms of AUM. In 2023, IDFC AMC was acquired by a group of institutions led by Bandhan Financial Holdings Limited. Bandhan ended up controlling 60% of the AMC, and thus rebranded it as Bandhan AMC. 

    The stakeholders include Chrys Capital (20%) and Singapore’s sovereign wealth fund, GIC (20%). 

    Bandhan Long Duration Fund NFO

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

    Bandhan Long Duration Fund

    Bandhan Asset Management Company is coming up with a new fund offering named “Bandhan Long Duration Fund” which will open for subscription on 5th March 2024 and close on 18th March 2024.

    Investment Objective

    The company intends to diversify its portfolio into debt and money market securities in such a manner that the Macaulay duration of the fund is greater than 7 years. Thus, it intends to generate an optimum return over the long run.

    Key Points

    Date of Issue5th March 2024
    Closing Date18th March 2024
    CategoryDebt
    Sub-categoryLong Duration
    PlanRegular and Direct
    OptionsGrowth and Income Distribution Cum Capital Withdrawal (IDCW)
    Minimum Purchase AmountINR 1000
    Exit Load0%
    BenchmarkNifty Long Duration Debt Index A-III.

    Fund Manager

    Mr. Gautam Kaul, the senior fund manager of this fund, would supervise the fixed-income fund. Having managed over 27000 crores of assets using both active and passive techniques, he has a solid grasp of the fixed income securities market. 

    He worked for Edelweiss Asset Management Company before joining Bandhan Mutual Fund and received his MBA and B.Com. degrees from the University of Pune, where he focused on accounting and finance. 

    Benefits and Risks 

    Similar to any other NFO, the Bandhan Long Duration Fund NFO also holds its definite set of advantages and risks. Below mentioned are some of the key advantages and risks involved. 

    Benefits 

    1.  High-quality debt instruments with the lowest credit risk will be the fund’s primary investment focus. Thus making it suitable for risk-averse investors. 

    2.  Fund management will investigate opportunities in bonds issued by governments and corporations with maturities longer than seven years. Hence, long-term investors would benefit from this fund. 

    3.  The fund manager of the Bandhan Long Duration Fund has managed fixed-income assets for over 20 years. Hence, the investors would benefit greatly from the manager’s extensive work experience.  

    Risks

    1.  The fund needs to maintain a minimum duration of 7 years which will limit its flexibility in case of any adverse situation.

    2.  Putting money into a long-term debt fund will yield smaller returns. You won’t have the chance to earn larger gains if the stock market experiences a bull run. 

    Risks of Bandhan Long Duration NFO

    Suitability

    1.  Investors who are looking for higher returns in debt funds.

    2.  Investors who are looking for consistent returns.

    3.  Investors who want to reduce the risk associated with reinvestment by maturing their portfolio. 

    4.  Retired investors who can’t take on the risk associated with equities need a systematic withdrawal strategy to provide them with a steady income.

    Did you know? 

    After April 1, 2023, debt funds will no longer enjoy indexation benefits and thus will be taxed at applicable slab rates. 

    Read Also: Bandhan Bank Case Study: Business Model, Financial Statement, SWOT Analysis

    Conclusion

    In summary, long-term debt funds are a solid option for investors who want a consistent return without taking on too much risk and are wary of market fluctuations. After carefully assessing the risk involved, one can invest in this fund based on their investing horizon and risk tolerance.  

    S.NO.Check Out These Interesting Posts You Might Enjoy!
    1NFO Alert: PGIM India Large & Mid Cap Fund
    2What Is An IPO Mutual Fund? Should You Invest?
    3What is PSU Index? Performance, Comparison, Benefits, and Risks Explained
    4Top AMCs in India
    5The Rise of ESG Funds: Overview, Growth, Pros, Cons, and Suitability

    Frequently Asked Questions (FAQs)

    1. What is the Long Duration Fund’s tenure?

      The tenure of a long-duration fund is more than 7 years (Macaulay Duration).

    2. Who is the fund manager of Bandhan Long Duration Fund?

      The fund manager of the Bandhan Long Duration Fund will be Mr. Gautam Kaul. He has managed debt funds for the past 20 years. 

    3. Was Bandhan AMC named IDFC AMC before?

      In 2023 Bandhan purchased IDFC AMC; as a result, it is now referred to as Bandhan Mutual Fund.

    4. When does Bandhan’s long-duration fund NFO close?

      The NFO’s subscription period will end on March 18, 2024.

    5. Is it possible to use SIP to invest in Bandhan’s long-duration fund?

      You may invest with a SIP of INR 1000 in the Bandhan long-term fund.

    Disclaimer: The securities, funds, and strategies mentioned in this blog are purely for informational purposes and are not recommendations.

  • 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.

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