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.