Fixed income investors need to look at liquid funds now

 The interest rate has the power to make or break an economy. In the last two years, RBI has not just intervened across the maturity curve, it has guided the market expectations through open commentaries about the level of bond yields, the shape of the yield curve and also through tactical interventions in primary debt auctions. In the face of large government bond supply, these actions have reduced volatility and induced an uneasy calm in the bond market.

Market Turbulence

            The RBI induced calm in the bond market has been broken in the past few weeks. Bond yields have moved up by 20-30 basis points. The market witnesses a broad based selling, seen across the maturity curve. Even the 10-year benchmark government bond, which was tightly held around 6% by the RBI, broke out of its shell. In the short run, RBI’s action will remain the key driver for the Indian bond market. The central bank has already committed to purchase Rs. 1.2 trillion of government bonds under GSAP 2.0 in Q2 FY 22. Given the extraordinarily large size of the government’s borrowing requirement, RBI will have to continue its market interventions well into the future to maintain calm in financial markets. It is expected the RBI will buy Rs. 4.0-4.5 trillion of central and state government bonds in FY 22. This should extend some support to the market. However, we expect the RBI will continue to lower its other tactical market interventions like auction cancellations, devolvement, special OMOs, etc. and will allow market forces to adjust to economic reality.  

            Over the medium term, inflation and potential monetary policy normalization will play a more important role in shaping the interest rate trajectory. With gradual progress in vaccination and inflation picking up, talks of policy normalization will intensify. We believe bond yields have already bottomed out and expect it to move higher over the next 1-2 years.

What should fixed income investors do?

            Investors should acknowledge that the best of the bond market rally is now behind us. At this time, it would be prudent to lower the return expectations from fixed income products – fixed deposits rate will remain low and potential capital gains from long bond funds will be muted. 

            Conservative investors should remain invested in categories like liquid funds where the impact of interest rate rise would be favorable. However, while selecting a liquid fund be cautious of the credit quality and liquidity of the underlying portfolio. At this point where fixed deposit rates have come down to historical lows, liquid funds could be an option (with market risk) in comparison to locking in long term fixed deposits. Liquid funds invest in up to 91- day maturity debt securities, which get re-priced higher when interest rates rise. Fixed deposits interest rates remain fixed for the entire tenor thus losing out during a rising interest rate cycle.

            Investors with a higher risk appetite and longer holding period can consider dynamic bond funds where the fund manager has the flexibility to change the portfolio when the market view changes. These funds are best suited for long term fixed income allocation goals. However, do remember that bond funds are not fixed deposits, and their returns could be highly volatile and even negative in a short period.

Women also need to plan for their retirement

 By 2050, around 25% of the population in OECD countries and 17% of the global population would be over 65 years of age, but only 24.8% of individual globally save for their old age. India is not an exception to this trend. By 2050, the number of people aged 60 and above is expected to be about 315 million.

Across the globe, mostly men undertake the task of financial management and deal with financial planning, including planning for retirement. Women’s financial planning receives very little attention.

Retirement planning refers to preparation for the time when a person would leave the workforce and work-related income would cease to exist. It is a strategy to establish a balance between current expenditure and savings to ensure a financially secured retirement. Retirement financial planning is vital for smooth transition, adjustment, and success during retirement.

Why focus on women?

Today, more women are participating in the workforce. Further, old age has specific implications for women as they often outlive men, devote less time in the workforce due to their caregiving roles, usually participate in part-time jobs/ less paid jobs or service positions which are not covered under pension plans, avail less pension benefits and lower wages due to gender differences etc. which cannot support them financially in their old age.

Financial planning for women

One should start investing from the very beginning of one’s earning career. As financial planning is a long journey, before embarking on it, everyone should purchase adequate health insurance and a suitable life insurance policy. One may be young, but ill-health and risk could happen at any point of time. Apart from adequate insurance, it is also essential to build an emergency fund which should be equal to six months of your take home salary. Once you are done with these basics, then start investing.

Suitable Financial Products

At a younger age generally, financial commitments are less and risk appetite is more. In such a scenario, one could be better off by investing in preferably equity based mutual funds through SIP. This will help in achieving long term goals such as financial security post retirement, buying a house etc. Upon reaching the second phase of the life cycle such as marriage and becoming a mother, women look for certain other products such as highly rated non-convertible bonds, debt oriented mutual funds, PPF, NPS etc.

Improving Financial Planning by women

Many empirical studies carried out in India reveal that young women are less active in retirement planning. The studies cite reasons such as lack of experience in investing, choosing among the range of financial products, depending on the spouse etc. Thus, young women should be considered a separate niche market and financial advisors should provide step by step guidance and encourage them to start financial planning early.

To conclude, the earlier culture of keeping financial discussions and responsibility for investment decision restricted to male members of the family is slowly fading away and working women should seriously do their own financial planning.

Life Insurance: Data Analytics for customized solutions

There is no denying the pandemic has been a true catalyst of transformation in every sense – economic, societal, and personal. For all the uncertainty it posed, it is clear already the future is digital. The scale and speed of digital transformation witnessed globally has proved that digital journey is not a destination, but an evolution. There are two questions that businesses should always be asking: Are customers demanding more from the business? How can you unlock higher value with a more digitally agile operating model?

The insurance industry is growing at a steady pace accelerated by a rise in awareness and subsequent demand. But this growth is also fueled by significant investments in delivering end-to-end digital customer experience, flexible products, and most importantly, radical customer obsession seeped into every single process.

Data leads to Innovation

            The evolution of experience stems from the intelligent use of data insights and analytics to inform decision-making. Access to data can help firms reach customers more efficiently. Using improved analytics skills & Artificial Intelligence (AI) based customer modeling can be developed and deployed across various customer life stages. This can help gain a thorough understanding of the customer pulse. An example of this is using data analytics with an existing customer database to create predefined personas with less documentation. Queries on life insurance policies types, personal details, work experience, and past life insurance experience can help develop potent ground to innovate and rethink the policy approaches.

Digitally harness the power of flexibility

            Insurance often faces the argument that there is relatively less scope of personalization as compared with other goods. Customers acquire their insurance, often through an agent or broker, with the products being very similar to each other. Instead of a one-size-fit-all strategy, insurers must use the digital insurance process to offer customized in insurance solutions. I believe we have change the conversation with today’s customer moving away from ‘why insurance’ to a ‘which insurance’ mindset, and one needs to address the question with on-demand, all-in-one lifestyle solutions, personalized basis usage-based telematics that offer relevant, flexible offerings.

            Specially attuned to the organic needs of the millennial customers for whom customized offerings are an absolute ask, insurers will have to become digitally adept and offer solutions that are relevant to their specific life stages and savings-cum-protection asks. Another great way to ensure that the right consumer need is addressed with the right solution is to bring creative startups into areas of play that can help with co-innovation.

Invest in more effect servicing

            Today’s consumers do not shy away from changing brand loyalties if a company doesn’t actively anticipate or address their wants. The value at stake is significant. The fundamental challenge many companies face is getting the organization moving, and moving at speed to ensure proactive improvements in redesigning customer journeys. Agility can be the key, and now every lever needs to be perfectly in place to roll out enhancements, plan for continuous rounds of improvements, always searching for better efficiency and speed.

                        In the end, remember that every interaction with the customer is a way to live up to your promise. Think of your customer experience as a continuous journey, technology as accelerators, and transformation as a fundamental opportunity.

Eight steps to walk the financial Independence path

 The greater the gap between earnings & Spending, the faster the net worth grows.

Financial Independence refers to being in possession of sufficient money to sustain the current lifestyle for an indefinite longevity. The first step towards attaining financial independence starts with assessing one’s net worth or current financial position.

To be sure, list down all your assets like bank accounts, investments, house and property, valuable & your liabilities. The difference between what you owe from what you own is your net worth.

To achieve financial independence the net worth should always grow. A financial plan having lifetime goals or short term goals will help achieve this. There are two basic principles: spend less and earn more. The greater the gap between earning and spending the faster the net worth grows.

Financial independence is misrepresented with higher income. The more we save the easier is the path to financial independence. Takeaways on financial independence:

1.      1. It is always advisable to save at least 10% of your gross income. It will always keep a buffer available.

2.     2. Keep monitoring your savings percentage periodically to investigate the short fall.

3.     3. Be aware of the avenues where money saved by you can be invested.

4.     4. Differentiate between long term and short term money requirements and save accordingly using different financial instruments.

5.     5. Take debt but understand the difference between good and bad debt. A good debt is one where assets outlive the debt like a loan for a house. Spending an exorbitant amount on vacation or dinner or clothes by taking debt and repaying it later for an extended period is not a good debt. It can be avoided.

6.     6. Invest what you save but be a balanced investor. Diversify between asset classes like real estate, equity or fixed income instruments. Real estate provides protection again inflation while fixed income securities provide capital protection. Choosing the appropriate mix provides benefits of diversification.

7.     7. Planning for retirement is always the priority. You can always take a loan to buy a house or car, but you will not get a loan to fund your retirement. Priorities retirement.

8.     8. As life transitions from college to first job to marriage, children, kids’ education to retirement, financial needs change. Reworking finances and achieving financial independence at each of these critical stages is equally important.

The journey towards financial independence starts now because the best time to start saving & investing is always right now.

Core & Satellite Portfolios

 The core – satellite strategy is a method of portfolio construction that allows investors to focus on long term financial goals while minimizing volatility, costs & taxes. In this approach, investors differentiate between two segments in their portfolio. The core portfolio is geared to meet the long term goals and strategies needs of an investor. It should form at least 60%-70% of the portfolio. Investments that are part of the core are long term holdings; changes in the core portfolio are made only when there is a change in investor’s needs, objectives or life stage.

The core should ideally consist of passive investment that tracks major market indices, such as index funds. Alternately, investments that are geared to generate market returns are also suitable for the core portfolio needs. For example, diversified equity funds and large cap funds are funds that generate debt investment returns in line with market rates.

The satellite portfolio should include actively managed investments. These investments are tactical in nature and form a smaller part of the total asset allocation of the investor. Satellite investments are managed in order to benefit from economic and market conditions. The higher risk-adjusted returns that these investments provide push up the overall returns of the portfolio. For example, long term gilt funds seek to gain from an increase in the price of securities when interest rates are declining. Sector specific funds benefit when the economic conditions are suitable for the particular sector. However, management of satellite assets requires that investors must be able to identify the right time to invest and exit from the investment.

Core portfolios can be focused on earning a return close to what the benchmark for an asset class offers. The booster to the portfolio’s return can be earned from the satellite portfolio, which tries to add value over and above the benchmark returns.

The core portfolio provides stability and long term appreciation. The core portfolio offers an extra risk-adjusted return that pushes up overall portfolio returns. Since investment that form part of the core portfolio is not churned frequently, there is a reduction in transaction costs and volatility for the investor. Liquidation for meeting cash needs is usually done from the satellite portfolio. As a result the impact of transaction costs and tax incidence on trading gains is limited to the satellite portfolio. The core part of the portfolio controls manager risk, while limiting management fees. The active satellite assets provide diversification benefits and possible outperformance of the benchmark.

Bonds: Two types of risks, three kinds of return

 Bondholder gets return from three sources if he buys and holds a bond till maturity. First there will be periodic interest payments, which are termed as coupon payments. If the holder wants to earn a compounded rate of return, he will have to reinvest these coupons have been reinvested till maturity, the investor would have earned simple interest. Interest obtained by reinvesting coupons is interest on interest.

            This reinvestment income is the second source of return for the bondholder. Finally, at maturity, the holder will get the face value back. If he had bought the bond at a price below par, then there would be a capital gain. Else if the bond had been trading at a premium at the time of purchase, there will be a capital loss. This capital gain is the third source of income for the bond holder.

Reinvestment Risks

One risk that every investor faces is reinvestment risk. This is the risk that the prevailing interest rate at the time of receipt of a coupon , is lower than what the holder had anticipated at the outset. This affects all bonds. The larger the coupon the greater the reinvestment risk, because the greater is the contribution of reinvestment income to the total return.

Consequently, premium bonds are more vulnerable to reinvestment risk than par bonds, while discount bonds are less vulnerable. This is because the former is characterized by high coupon compared to the prevailing yields, while for the later; the coupons are lower than the yields. Also, long term bonds are more vulnerable to reinvestment risk than shorter term bonds since longer the term to maturity; the greater is the contribution of reinvestment income to the total return.

Finally, the return also depends on tax factors. In many markets the coupons are taxed. The issue with paying tax on coupons is that the investor not only gets a lower post-tax amount, he consequently, has less to invest, and gets a lower interest. And the interest earned by reinvesting the coupons, will itself be subject to income tax.

Second, if there is a capital gain at maturity that too may attract a tax. In many countries, the rate of tax applied to income differs from that applied to capital gains. Also, some countries make a distinction between short term and long term capital gains.  An investor may be able to get an indexation benefit while computing his or her capital gain. That is, the quantum of the original investment can be scaled up for inflation, and the capital gain is then computed with respect to this adjusted investment.

Price Risk

A trader who sells the bond prior to maturity not only faces reinvestment risk, but also faces price risk. That is if the yields are high at the time of sale, the selling price may be lower than anticipated. Remember, the face value will be received only if the bond is held to maturity. Prior to that the holder will receive the market price, which may be lower or higher. The two risks work in opposite directions. Reinvestment risk impacts an investor if rates fall, while price risk hurts him if rates rise.

What makes Investors chase certain stocks?

Advisory and investors are not judged by the quality of their decisions but by their investment outcomes.

With hundreds and thousands of mutual funds out there, high returns become the default filter. Buying a mutual fund is equivalent to trying to decide between 1000 different hair dryers. The best decision is to buy a decent one and stick to it for a very long time. But investors keep on buying the best hair dryer and sell the worst hair dryer. They don't understand that juggling hair dryers is more damaging over the long run. Every hair dryer goes through good and bad performance  over a longer time span.

If returns are the first filter for investors, the next filter tends to be star ratings. Very rarely will investors see a good performing fund with a bad rating. Unfortunately, ratings also tend to follow good performance, so investors are back to square one. In fact, in many cases, rating upgrades tend to happen after a period of good performance. This again is a type of return chasing behaviors.

Reversion to mean

A lot of studies show mean reversion in the investment industry as well. By definition, mean reversion is a theory that suggests that asset prices tend to revert to an average level overall long enough point in time. This theory also suggests that investors following the opposite of return chasing should ideally make more money, i.e. sell good performing investments and buy poor performing investments. In technical terms, this means 'portfolio rebalancing' and yes, it works wonders and forms the basis of intelligent investment management. Unfortunately, many investors do the opposite of rebalancing - buy more of good performing funds by selling poor-performing funds.

If an advisors sells a good performing fund and it does not perform, then it's technically the fund's fault. If he sells a poorly performing fund which then delivers poor returns, then that is the advisor's fault. If someone advises Infosys as a stock recommendations and if the company underperforms, something is probably wrong with Infosys. But if an analyst recommends a small cap stock, then it is the analyst's fault. Investing in underperforming managers and selling strong performers may end up being a good strategy but comes with significant carrier risk.

Outcome Bias

Advisors and investors are not judged by the quality of their decisions but by their investment outcomes. A good decision going sour is a sign of poor decision making. A wrong decision with a little bit of luck is a sign of superior decision making. Good performers talk about their investing process, and low performers speak about bad luck. Not many talk about their investing process and frameworks.

FOMO (Fear Of Missing Out)

This one is relating self-explanatory. It is the reason why equity flows tend to be highest at market peaks. Fear of short term loss (FOSTL) is the reason why no body invests during market bottoms. Overall, FOMO & FOSTL lead to poor long term investment outcomes.

Realign your investment

 It's time to realign your investment portfolio

In last few years have seen India's GDP growth slowing down from 8.3% in FY 17 to 4.2% in FY 20. Inflation targeting has largely happen due monetary policy intervention and creating excess liquidity. This scenario has changed the returns of the investors. We entered FY 21 with a pandemic and a lockdown that has slowed down the economy.

Review and relook

Post pandemic investment requires individuals to undertake a holistic review of their financial portfolio. Investment decisions are getting complex as generating lower double digit returns is the first big challenge and hence the suggested option is to identify a trustworthy and knowledgeable wealth advisor whose interests are aligned to yours.  The most fundamental and primary task is to review protection risk through insurance plans, both life and health. An adequate cover basis some logical assumptions of future needs are to be considered while finalizing the sum assured.

Risk adjusted returns are definitely hard to come by and hence preference of the investment is critical int he fixed income investments. The general preference is AAA or sovereign bonds  or 1-3 years good quality corporate bonds due to safety and liquidity consideration, but given the improved situation in the economy, good quality AA corporate bonds also seem to be finding place in investment portfolio.

Market linked debenture (MLD) is another attractive option due to tax efficiency of the investment. With the introduction of REITs and INVITs as part of fixed income investment, there is an additional option in the fixed income plus product as an emerging opportunity. Some allocation to gold is also recommended as global risk elevates and it gives diversification to the investment portfolio, although gold has run its course in last 12 months. For existing mutual fund investors, they may have to study the underlying portfolio and realign the changed objective as we are moving into economic recovery. Remaining invested into a good quality large cap and mid cap mutual fund scheme could be a better option than small caps. The direct option on investment into funds gives additional delta to the returns.

Reallocate

Home loan rates at the lowest (well below 7%), and falling home prices have ensured better affordability to home buyers. This is the most opportune time to look for a house which is complete or nearing completion, or where the occupancy certificate has been received. One can expect a meaty price-value gap deal in the market place where development or execution's risk is minimal. Many investors invest in commercial or high street properties connected to mix development use. Due to the pandemic and developers liquidity requirements, distress value opportunities exist in growth corridors. Where after a couple of ears, these properties could be valuable income yielding properties. The other best financial option is to invest in a real estate fund managed by a manager with a great track record who is investing in residential/ mix use project with preferred or protected returns.

As equity markets are resilient an demos of the losses of March 2020 are regained, it is worthwhile to look at allocation and selection of those industries and companies where the impact is the least or at those which benefitted the most. It is not an easy answer; hence with the help of an expert advisor or investment manager one should realign the investment portfolio towards good quality management with consistently predictable growth companies at enough margin of safety.

Basic rules of investing in the stock market

 Any beginner in the stock market should start with blue chip stocks as the risk is lower for such stocks, compared to mid cap or small cap companies.

After Life insurance, by and large the most preferred instruments wherein Indians park their surplus cash are fixed deposits or government savings schemes. While this allows their money to be largely secure from the stock market, it also keeps them away from the prospect of earning high returns. In this context, let us discuss the essentials of investing that would help investors to be ready for investing in the stock market.

Analysis

Any investment strategy is based on the analysis of the financial instruments on offer. The investor needs to understand the business of the firm whose stock he plans to buy in the market. One should understand how the company carries out its business, its strengths and weaknesses, its growth prospectus etc. The investor should also go through the financial statements of the company and how well the management is managing the affairs of the company. One needs to understand from where the company is generating cash and where it is being utilised. Investors must understand the prospects and the value of the firm and compare it with the current market price of the stock. If the stock is undervalued, the the investo can invest in that stock.

Look at blue-chips stocks

Any beginner in the stock market should start with blue-chip stocks. The term "Blue-Chips" comes from the game of poker where the blue chips command the highest value on the table. Similarly, a blue-chip company is renowned, well-established, and financially stable company. Investors who are new to the stock market can start their journey by investing in such companies as the risk factor is lower for such stocks, compared to mid cap or small cap companies. Although the mid cap and small cap companies have higher returns, they are also more volatile than these blue chip stocks.

Cashing in or Cashing out

One of the most important, but an often forgotten, aspects of investing in the stock market is the exit strategy. Beginner investors tend to keep their stocks on their portfolios as their babies and do not let go even when the stock price hits the roof. This reluctance to sell a stock happens because they do not have an exit plan ready. Exit plans are necessary for both situations- stock prices moving upwards or downwards. If the stock prices move upwards, the investors should cash in after it has breached his expected returns margin. If need be, the same stock may be again purchased and kept in the portfolio, if the stock is undervalued and if it can go upwards in future.

Diversification

Though we all know the adage "Never keep all your eggs in the same basket", yet it is not executed in the stock market context. Diversification is the method by which we can maintain out returns while reducing the risks of our portfolio. Diversification means investing in different companies from different industries whose prices do not move in the same direction. It also means investing in different industries which are not connected to each other. Diversification reduces the impact of market volatility in the investor's portfolio.

 

Spend or Save? Finding the Perfect Balance

 Adopt the 50:30:20 rule by allocating 50% of your income to essential expenses, 30% to buying things you want and 20% to savings for the future.

To save or to spend, this is a question that goes through our minds during the annual festive and wedding season. Wisdom states saving money is important to protect ourselves against future worries about money. At the same time, you need not necessarily turn down short-term indulgences because spending on thing/activities we want and need can bring us happiness. So what is the balance? You just have to spend responsibly. Consider the below mentioned pointers for making good spend versus save decisions.

Major pointers to check

Ensure that you have an adequate emergency fund. You should have an emergency fund which will cover three to six months of expenses. Saving for retirement is a continuous process when you are on the job and so check that the process is a continuous one. Make sure that you donot have debts, especially credit card outstanding etc.

How can we balance?

There are multiple ways through which one can balance between spending and saving. Let us see a few of them:

Shop smart: Instead of making impulse purchases at high end stores, shop smart and look for savings; this actually adds another layer of thrill to the shopping process, nothing feels better than getting that feeling of a shoping reward and knowing you saved money in the process.

Make use of the offers: There is nothing wrong with making a big-ticket purchase such as buying an item you have always wanted, but consider the same while brands are offering some special offers or discounts.

Sell the things you do not need: If you are just coming out of an uncontrollable spending habit then you probably have a lot of things you actually do not use and they are simply lying around occupying space. Sell those items/ things that you do not need or use, put half this money into savings an then have half to spend on things you actually need. Repeat this process whenever you have too much stuff, but remember to leave the savings in the emergency fund untouched.

Buy memories than things: Instead of buying 'things' one could always think of buying 'memories'. Invest in spending time with your family and deepening relationships with close friends. Money cannot buy happiness, but it can help you spend more time with the people who make you happy.

Use a standard budgeting rule: Rather than thinking of spending and saving as an all or nothing, mentally allocate a portion of your income to both. You could use the popular 50:30:20 rule by allocating 50% of your income to things you need as your essentials such as rent, bills, food etc., 30% to things you want such as those new shoes and dinner in a nice place and 20% to your savings for the future.

To conclude, definitely you should save your future  but immediate spending has a feel good factor and you can justify it to yourself with excesses about living in the here and now. Clearly, there is no straight answer for the question whether to save or to spend. Assess your own personal financial situation, examine your current and future spending needs and income, and then spend responsibly in an effort to maximize your long term financial security.

Six Kinds of Hybrid funds: Know what’s best for you

A hybrid fund is a type of mutual fund that invests in a mix of asset classes within the same fund. Depending on the type of fund, it can be combination of two or more asset classes that includes equity, debt, gold and also international equities in varying proportions. There is little to no correlation between these asset classes, which can enable an investor to artfully balance risk and return at all times through flexible rebalancing.

            Understanding the broad contours of a hybrid fund makes it easy to easy to see their relevance in an investor’s portfolio. At the same time, it is not a one-size fits all approach. Bucketed based on the asset class allocation and risk factor, each has a different investment style and purpose. In order to pick the right fund for your portfolio, remember to first understand and assess each type.

Conservative Hybrid Fund:       

            A conservative hybrid fund invests only about 10-25% of its total assets in the stock markets i.e. equities. The remaining portion in invested in debt instruments that includes corporate and government bonds and non-convertible debentures. While the debt investment aims to provide regular and stable income from coupon payments, the equity portfolio has the potential to generate better returns through capital appreciation and dividends over time. If you are a risk-averse investor with moderate returns expectation, then this category of hybrid funds is likely to suit your investment style.

Aggressive Hybrid Fund:

            This category of hybrid funds is at the other end of the spectrum compared to a conservative hybrid fund and is good for investors who have a higher risk appetite. The mandate is to allocate 65-80% to equity across market capitalization (large-cap, mid-cap & small cap) and the remaining to debt and other asset classes. The category is ideal for investors who are looking for equity like return (as 65%-80% is invested in equity) but with lower volatility (balance 20-35% is invested in fixed income). But as the underlying is heavily tilted towards equities, investors should consider this product for a period of more than 5 years.

Dynamic Asset Allocation Fund:

            A balanced advantage fund or a dynamic asset allocation fund is hybrid mutual funds which increase/ decrease allocation between equity and fixed income based on certain pre-defined valuation parameters. An investor can invest in balanced advantage funds if they want to avoid timing the market levels. The fund balances between equity and fixed income instruments depending on market conditions to earn reasonable return with low volatility as compared to pure equity funds.

Arbitrage Fund:

            Arbitrage funds take advantage of the price differential of a stock either on two different exchanges or between two different markets (the cash & derivative market). By creating an arbitrage position, the fund manager ensures that the spread between the two markets is captured and this translates into returns for the investor. With the advantage of equity taxation, an arbitrage fund can be an investor’s choice for parking short term surplus liquidity and earning decent returns.

Multi Asset Allocation Fund:

            Going one step beyond your traditional hybrid funds, the multi asset fund invests in at least three different classes with a minimum of 10% allocated to each. A mix of three asset classes can help the investor attain the goal of asset allocation via a single product. Since every asset class behaves differently, diversification safeguards the portfolio against downside emerging in a single asset class. A mix of asset classes which have low correlation amongst them is a good way to generate decent returns with low levels of volatility.

Equity Saving Fund:

            The equity savings fund is another way of diversifying the portfolio as the fund is a prudent mix of equity, debt and arbitrage. An equity savings fund does just that, by allocating a minimum of 65% in equity and arbitrage positions and the balance in fixed income instruments. The arbitrage positions create a hedge in the portfolio and the focus is to generate regular income, whereas the allocation to equity focuses on capital appreciation. Because of this, the funds equity exposure is partially hedged and the volatility is reduced as compared to the completely unhedged equity exposure in aggressive hybrid fund. The fund also offers equity taxation.

                        Each type of hybrid fund has a unique investment style. Investors must compare these plans via their investment needs and pick the one that best address them.

Equity fund-of-funds is a Prudent Investment

 Retail investors often try to time the market which is not the optimal strategy most of times. Investor should map their equity allocation to their long term financial goals and stagger their investments to achieve the best results from equity.

            The sharp rise in markets and overall improvement in the economic environment has led to investors putting more money in equity mutual funds. The mutual fund industry has also gone into overdrive and has been launching a slew of NFO. However, it is best to advise caution to the retail investors. With valuations at a premium, especially in the midcap and the small cap side, there is a significant possibility of new investors facing disappointment (in terms of returns) in the near term and pull out money at the wrong time, out of fear; if the markets correct sharply. Over the long term, as the understanding of equity as a long term asset class (and not a short term speculative avenue) increases, flows to the equity mutual funds should improve structurally.

            Many conservative investors are opting for hybrid funds now to compensate for lower returns in fixed deposits, as well as to get a flavor of equities. We may see this trend continue going forward. Even balanced hybrid fund and dynamic asset allocation funds tend to be equity biased as and when they try to generate better returns and alpha. While achieving these objectives, these hybrid funds invariably end up taking more risk, which may not always match the risk profile of conservative investors. If these preferred hybrid fund categories are not able to provide downside protection through the stock market volatility as expected, conservative investors may not be comfortable staying on.

                Floating rate bonds are a good investment choice in a rising interest rate environment. As market interest rates move up, coupon rates on these bonds reset to higher levels. However, there is limited stock of quality floater securities available in the Indian debt market and secondary market liquidity is much desired in this segment. So, it would be extremely difficult with an increase in the AUM size in this narrowly focused category to not compromise on the portfolio quality.

                Investors often buy different equity mutual funds to diversify but inadvertently buy funds with similar strategies and portfolios. Diversification in the mutual fund portfolio needs to be backed by proper research. Ideally, 15% allocation should be towards a well-managed value fund, 15% to an ESG focused equity fund and then a layer of 5-6 equity mutual funds diversified across caps and styles.

                Value funds aim to ignore short term market movements and wait patiently for value to emerge as it allows them to generate steady returns over other equity mutual funds is that the companies that are strong on ESG have relatively better long term financial prospects. Whereas, an equity fund-of-funds is a prudent investments option to build the major portion of your equity portfolio is just by investing in one fund. This fund gives investors exposure to funds that are actively managed and lets them rely on the fund manager’s capability to take advantage of the correction and build a robust portfolio.

Flexi-Cap Funds see rush of investor money

 

Risk-return component in flexi-cap fund is well-balanced as fund managers take advantage of investment possibilities and market capitalization.

After the market regulator introduced flexi-cap schemes and fund houses aligned their multi-cap scheme, investors are increasingly pouring money into this category. The AUM of flexi cap funds soared to Rs. 1.93 lakh crore as an improving investor sentiment, driven by a surge in the markets and falling interest rates, have attracted new investors in search of high returns.

Mitigating Risks:

                Flexi cap funds are open-ended dynamic equity schemes investing across large-cap, mid-cap & small-cap stocks to diversity their investment portfolio. The minimum investment in equity and equity-related instruments will be 65% if total assets. These funds help in mitigating the risk and lower the volatility in the portfolio. The introduction of flexi-cap funds by SEBI last year came as a big relief to fund managers of multi cap funds as the regulator's September 2020 directive prescribed a minimum 25% allocation to large, midcap and small cap stocks each.

                After the introduction of the flexi-cap scheme, most multi cap funds have now switched to this category to retain their original portfolio characteristics. It helps fund managers to invest freely across market capitalization, assess the fund allocation and switch between companies and sectors depending on the performance from time to time. Experts say investors should stay invested in a flexi-cap fund for 3-5 years and the risk-return component in flexi-cap funds is well balanced as fund managers take advantage of investment possibilities market capitalization.

Equity Mutual Fund Gains

                A lot of investors who have accumulated higher savings in the last year due to lower spending and were staying on the sidelines are getting back. "The decline of the second wave, strong recent returns from equities, and the stability of the markets despite the second wave added to investor comfort and confidence." There has been a steady increase in the SIP flows indicating retail investors are participating in the equity rally through mutual funds.

Arbitrage Funds remain favorable

                Arbitrage fund leverage the price differential between equity shares in the cash market and in the stock futures market and generate returns by harnessing the price differential between the two as they buy in the cash market and sell in the future market. Fund managers are able to handle stock market volatility efficiently over a medium term horizon in these funds. Arbitrage funds invest about 65% of the portfolio in equities and are treated as equity funds for tax purposes. The balance is invested in the money market or debt instruments.

ESG [Environmental, Social and Governance] Investing

 The Sustainable Development Goals (SDGs) replaced the Millennium Development Goals (MDGs), in 2015 by the United Nations which was endorsed by 193 UN member states. The Sustainable Development Goals (SDGs) aim at ending poverty, protecting the planet and ensuring that all people enjoy peace and prosperity by 2030. The 17 SDGs are integrated—that is, they recognize that action in one area will affect outcomes in others, and that development must balance social, economic and environmental sustainability.

 The SDGs came into force in January 2016 and are gradually emerging as a global framework to articulate sustainability by companies and investors. ESG — environmental, social and governance — are the three key factors in evaluating the sustainability and associated potential financial performance of a company. This is also known as impact investment i.e. those investments which are made with the intention to generate positive, measurable social and environmental impact alongside a financial return.

Investment Advisers in many countries are making their clients aware of the Environmental, Social and Governance impact that their investments can make - by subscribing to or avoiding investments in certain products / sectors. Thus, investment advisers should gradually make a conscious effort to align portfolios not just by goal, tenure etc. but also based on “values”.

In Indian securities markets, there are regulatory provisions pertaining to public issue and private placement of Green Debt Securities. Green Debt Securities are those where the funds raised from the issue are used for defined projects or assets such as renewable and sustainable energy, clean transportation, sustainable water management, waste management etc. These green debt securities have to comply with some additional requirements apart from the regulations prescribed for the issue and listing of debt securities under the SEBI (Issue and Listing of Debt Securities). The offer document will contain information on the process used to determine that the said project was eligible under the definition and the procedure to track the usage of funds so raised. The issuer will be required to disclose the details of the usage on a continuous basis along with the half-yearly and annual financial results.

Philanthropy

 

The world over, more and more people are getting philanthropic i.e. they want to devote time and/ or money for larger social good. Earlier, the approach was to set apart some money in their will for philanthropic purposes. Increasingly, people want to give away part of their wealth during their life time and see the positive change around them. Thus, philanthropy is becoming a part of everyone’s life.

Some people, who wish to give away a part of their wealth, set up dedicated trusts for specific social objectives such as promotion of education, healthcare or culture. This is a format where the philanthropist is taking greater ownership for the activity. As sponsor, the philanthropist will appoint one or more trustees who will manage the affairs of the trust. The overall charter of the trust viz. what it will do and will not do, how the trust will take decisions, how trustees will be appointed or changed etc. are incorporated in the trust deed.

An alternate format is to donate money or time to some other social institution which is already engaged in the activity. The philanthropists, in this case, choose to leverage on some other existing institution, rather than create another institution. Even in this format philanthropist can put conditions on how the donation will be used.

This alternate format is particularly suited for people with smaller amounts to donate. The cost, time and effort that would otherwise go in establishing and running another institution can be better channeled to the beneficiaries through an existing institution.

In the case of regular donations during one’s lifetime, the approach that is often taken is to donate a portion of one’s regular income or windfall gains. Some people sell some of their shares from time to time, and donate the proceeds to philanthropic activity.

Contribution to philanthropy through Will should be done in consultation with a lawyer. This will ensure that other beneficiaries do not make adverse claims and disrupt the philanthropy.

Know how Balanced Mutual Funds operate

 Balanced Mutual funds, or balanced funds, usually are the "go to" option for most small investors. Apart from the ease of investing, a common belief is that they are safe and provide decent returns. However, both these aspects may not be true of all balanced funds to the same extent. The safety and performance of these funds depends a lot on their composition, and how their components behave in the market.

Equity & Debt components

Whenever you invest in a balanced fund, your money is invested by the fund manager in a variety of market securities. These include equity instruments, debt instruments, and money market instruments.

Suppose you invest $100,000 in a balance fund which invest in equity an debt in the ratio of 60:40. Ignore the cash component for now. Then $60,000 will get invested in equity and another $ 40,000 in debt. In return, you get allocated a certain number of units of the balanced fund at a certain per unit price. This per unit price is called Net Asset Value (NAV).

How Net Asset Value is arrived

As per SEBI guidelines, equity-oriented balanced funds need to invest at least 65% of the money collected or Asset Under Management (AUM) in equity, while debt -oriented balanced funds need to invest at least 40%. Suppose an AMC has AUM of $5 crore in an equity-oriented fund and has issued 10 lakh units of the mutual fund to its investors. Then the NAV per unit is $50. You investment of $100,000 would fetch you 2000 units of the mutual fund. If you had invested in a debt-oriented fund which would allocate your money into equity and debt in a ratio of 60:40, the way to llo at NAV is that each unit of $50 gets allocated into equity and debt in the same ratio. So, $30 goes into the equity and $20 goes into debt.

Performance of Balanced Funds

The performance of your balanced funds, therefore, would depend on how the NAV of your fund reacts to market developments and sentiment. The NAV itself, as demonstrated earlier, is composed partly of equity and partly of debt. When your fund manager invests part of your investment into equity, it basically represents ownership of the companies whose shares he is buying on your behalf. On the other hand, when the other part of your investment goes into buying debt, essentially you are getting claim on the assets of the company whose bonds you are buying.

In case the company is liquidated or goes bankrupt, debtors of the company are given higher preference over shareholders of the company in a claiming the salvageable assets of the company. Hence, debt is seen as a safer instrument than equity. Thus, when the markets go down,  the debt components of your NAV or your balanced fund protects against your investment trailing a proportionate loss and reduces your downside. However, when the markets go up, the equity component of  your NAV or your balanced fund tries to keep up & appreciated more in value compared to the debt component, assuming a positive correlation between the stock markets and the shares of your invested companies. This ensures that you get higher than normal returns on part of your investment. When investing in a balanced fund, study its historical NAV performance, its fund composition, and the fund manager's track record. Invest only after understanding the type of investment you are getting into.

Know when you should invest in liquid funds

 Investors who typically park their funds in savings bank accounts for lack of low-risk options for the short term should instead go for liquid funds.

Liquidity in one's portfolio is an investment criterion grossly underestimated by the common investor. If your investment portfolio does not have adequate liquidity to manage emergencies, running expenses, and planned contingencies, your financial plans may get thrown off track and you may end up with unexpected losses. Liquid funds are investment schemes that can offer decent returns at low risk, and can help reach your financial goals smoothly by providing for unexpected eventualities.

What is Liquid funds?

Liquid funds reside at the lowest end of the risk-return spectrum of investments. That is, they yield one of the lowest return as compared to debt or equity funds, but at the same time the risk of losing your principal is also considerably lower. For investors, they are the equivalent of a saving bank account for savers. These funds invest in the short term securities with a maturity period of up to 91 days. The securities could be debt or money market instruments. As the maturity term is very short, there is negligible volatility or risk. The return data for these funds are available for periods for 7 days, 15 days, and one month also. The Net Asset Value will be available up to 4 decimal paces, for the investor to assess the real returns and volatility, or fluctuations in return.

How to invest in liquid funds?

Investors need to take note of the cut-off timings for investing in liquid funds. For purchases and switch-in transactions, the cut off time is 1:30 pm. For applications received before this cut off time on any day, the closing NAV of the immediately preceding day will be applicable. If received after the cut-off, the closing NAV of the day immediately preceding the next business day is applicable.

For redemptions and switch-out transactions, the cut off timing is 3:00 pm. If application is received before this cut-off time, the closing NAV of the day immediately preceding the next business day is applicable. If received after the cut-off, the closing NAV of the next business day applies. For investing in liquid funds, investors need to look at a few parameters. One of them is what is called modified duration. This measures the interest rate sensitivity of the fund. Modified duration of liquid funds should be low.

Another parameter is the fund's performance against its benchmark  index, which could be the CRISIL Liquid fund index or the MIBOR of NSE. Finally, investors should watch out for the credit risk taken up by the fund - if this is high, the fund may not be a good option for liquidity.

When to invest in liquid funds?

Investors who typically park their funds in savings bank accounts for lack of low-risk options for the short term should instead go for liquid funds. This move may land you1-3% more returns compared to saving bank returns. At times, liquid funds could offer returns higher than even term deposits or Post office small savings schemes depending on the prevailing interest rates. Liquid funds are an ideal investment vehicle when you need to temporarily hold the proceeds of sale of shares or property, before reinvesting in instruments yielding higher returns. They can also offer a safe when the market is in turmoil and you need to protect your investment from volatility and potential losses.

You can also make liquid funds a permanent part of your portfolio so as to provide for unforeseen emergencies. But in that case, know that there is an opportunity cost of doing that- you lose out on higher yield instruments once you stay invested in liquid funds for more than 91 days. Liquid funds are an under utilized but very handy option for investor to earn a few percentage points more than savings bank interest rates at no extra risk and to park their funds for shorter duration as part of the portfolio strategy.