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Wednesday, September 28, 2016

When is the time to sell your mutual funds

While investing in Mutual Funds, you go through fund reviews, watch funds performance, track historical performance, find out what experts have to say and based on that decide if you wish to buy the fund. In short, buying a fund is no child’s play. It requires a lot of effort but you are willing to put the effort because you have expectations of performance attached to it. So when do you decide is the right time to sell a fund? Most investors sell a fund under these three circumstances:
  • Exceptional performance of funds, leading the investor to decide that now it is time to book profits.

  • Underperformance of funds pushes an investor to look for a better investment option and selling the current fund.

  • Neither profit nor loss is such a scenario where an investor feels the fund is stagnant. Hence, they sell the fund and invest in a better investment option.
The question still stands, is performance the only measuring tool for a fund? In the three circumstances stated above, the decision to sell a fund was solely made on the performance. Experts and advisors are of the opinion that most of the funds are redeemed and/or sold because of the performance. While this could be one of factors that affect the decision for selling. It may not be very wise to make this the only factor for selling.

When You Could Not Sell

  • Mutual Funds Vs Stocks
    Despite investing in Mutual Funds we are always keeping a hawk eye on the markets. Just when the markets dwindle, the investors tend to rush towards redemption of their mutual funds fearing catastrophic losses. If your decision to sell mutual funds is based on the stock market performances then it could be erroneous. Most mutual fund schemes are not exactly linked to stock markets, unlike stocks. They consist of investment components such as debt, sectoral investments, stocks which are not part of the stock market indices and bonds or fixed income instruments reducing the direct impact of market fluctuations on Mutual funds. Hence, if you are hearing or reading about market fluctuations or certain volatility, it may not affect your investments as badly as you are imagining it to be. Do not hastily sell off your funds because in the long run that very fund could be a stellar performer. Take a decision based on the actual impact of the market fluctuations on the mutual funds.

  • Short Term Performances
    Mutual Funds are known to give results over a long period of time. When we invest in mutual funds it is natural to have some expectations regarding performances. It is also important to maintain realistic expectations. If you have invested for a period of 20-25 years and you are already starting to get jittery after a year because the performances are not sky high then you are again making an error. Judging mutual funds on the basis of short term performances could steer you away from the larger picture. Before you decide to sell the fund check the historical performance of the fund, the consistency and the reaction to market changes. If it is positive, then ideally you should stick to the fund and not consider selling it. However, if the performance continues to remain uncertain then you might want to stop the investments and watch the fund for a while.

When You Could Sell

  • Change in Financial Goals
    This could be a very important reason for selling funds. The investments should ideally be aligned to your financial goals. Hence, if there has been a change in the goal or some new short term goal has been created which requires funding then it may be ideal to redeem the funds. For example, if you are planning to go an impromptu family holiday then you could sell a fund to finance the trip. You could sell the latest investment because it still has not started picking up pace or has been underperforming for a while.

    You also have to make sure you do not lose out on the investments by having to pay for exit loads and taxes. If a fund has a fixed lock in period like Equity Linked Savings Scheme or Fixed Maturity Plans (FMP), then you can not redeem y even by paying a penalty. Change in goals also allows an opportunity to review the entire portfolio. You could sell the underperformers, make some new investments and boost the existing ones.

  • Shift to Other Forms of Investment
    Not every investor wants to accumulate all wealth in mutual funds. Hence, if you are planning to invest in other forms, instead of making fresh investments you could also redeem existing mutual funds. A lot of times the portfolio gets crowded because it is not diversified enough. For example you have invested in four balanced funds. So if you are planning to invest in real estate, you could redeem a few similar funds and make the real estate investment.

    Other instance could be, you are close to retirement. You are looking for more stable forms of investments which provide steady growth and regular returns. By using the Systematic Withdrawal Plan you can start redeeming your funds while the balance amount not redeemed continues to generate returns. Based on your age and risk taking ability, you could also consider selling the funds and move to options such as fixed deposits or tax free bonds which provides fixed rate of return.

  • Subjectively Measuring Performance
    It is often said to not sell solely based on performance. As an investors you could measure performance by analyzing how long you want to stay invested and what is the performance you expect in upcoming years. Hence, if you are planning to stay invested only for ten years and even after two or three years the performance is not up to your expectation. Then you might consider the option of selling. However, in the same fund, if you are planning to stay invested for twenty or twenty five years, then the performance in the first two or three years should not push you to sell the fund. Hence, time acts an important factor in making the decision of selling.

    Funds that have a history of good performances will suddenly not start performing badly. So unless you are about to make major losses it is best to buy and hold for a while and see if the tides turn in your favour.
Conclusion
‘When to Sell a Fund’ is a subjective question, best known to investors who are dealing with it. Our needs and financial goals keep changing, it is natural to sell funds and keep some to ensure that the ultimate aim, that is, the fulfillment of financial goals is met. It is always best to exercise caution and not rush while making a decision to buy and sell. The decision to sell always has to be in favour of profit making. If you redeem a fund due to short term market volatility or have to pay a heavy exit load on the entire amount being redeemed and not just the initial investments then you have to make a call regarding how favourable it is. It is always best to seek professional help of your financial advisors and let their expert opinion guide you in your investment journey. (Source - AdvisorKhoj)

Top Liquid Mutual Funds: Better options than savings bank for parking your surplus cash

Most of us keep our surplus cash lying in our savings bank account. It is safe and convenient, if we need to use the money on a frequent basis. However, we should, from time to time, take a look at our savings bank statement and ask ourselves, how much balance we should have in our savings bank account? We should always keep our funds for emergency purposes in our savings bank account. But very often we have much more lying in our savings bank, either because we are waiting for an upcoming expense or we do not know what to do with the money. Liquid fund is a much better option than savings bank for parking your surplus funds for short durations ranging from a month to a year.
Liquid funds are money market mutual funds and invest in instruments like treasury bills, certificate of deposits and commercial papers and term deposits. The objective of liquid funds is to provide the investors with an opportunity to earn returns, without compromising on the safety and liquidity of the investment. Typically liquid funds invest in money market securities that have a residual maturity of less than or equal to 91 days. Liquid funds have no exit load and therefore you can withdraw money either partially or fully at any point. Redemptions from liquid funds are processed within 24 hours on business days. Over the last one year top performing liquid funds have delivered more than 8% returns, which is much higher than your savings bank interest rate.

Savings Bank Interest

Most of us do not pay much attention to savings bank interest because the interest rate is too low and it does not show on our monthly bank statement. However, if your savings account average balance is high, then you may be losing a lot by keeping your money in savings bank account and not investing it in liquid funds, as we will see in this blog. But first let us understand how much interest your savings bank pays you.
The vast majority of banks pay an annual interest rate of 4% in savings accounts. Some private sector banks, e.g. Kotak Mahindra Bank, Yes Bank etc pay a higher interest rate subject to certain conditions. The table below shows the current savings bank interest rate some of the largest private and public sector banks.


Mutual Funds - Savings Bank Interest


As per RBI guidelines, the savings bank interest has to be calculated on daily basis on the day’s closing balance. Let us understand this with the help of an interest. Let us assume you have 100,000 balance in your savings bank account today and your savings bank interest rate is 4% per annum. The interest for the day will be calculated as below:
Today’s Interest = (100,000 X 4%) / 365 = 10.96
If you withdraw 10,000 tomorrow, then your account balance will be 90,000. The interest for tomorrow will be:-
Tomorrow’s Interest = (90,000 X 4%) / 365 = 9.86
If you deposit 20,000 day after tomorrow then your account balance will be 110,000. The interest for day after tomorrow will be:-
Day after tomorrow’s Interest = (110,000 X 4%) / 365 = 12.05
Therefore, the total earned by you over these three days will be 10.96 + 9.86 + 12.05 = 32.86/-.
You should also understand the interest is not credited to your savings bank account every day. Actually, it is not even credited to your bank account at the end of the month. As per RBI guidelines, banks need to credit the savings bank interest on a quarterly basis. Some of us have the misconception that savings bank interest is compounded daily or monthly. It is important to understand that compounding cannot take place unless the interest is credited to your account. Since the interest is credited to your account on a quarterly basis, the compounding takes place quarterly.

Liquid Fund Returns

In selecting liquid funds, one must be careful and select top quality funds only. While AUM is not such an important consideration for equity funds, it is assumes importance when selecting liquid funds. Other considerations as per CRISIL are returns, volatility, downside risk probability, asset quality, concentration risk and liquidity risk. In today’s blog we selected 10 top performing liquid funds based on CRISIL’s ranking. Investors should note that unlike your savings bank interest rate, liquid fund returns are not assured. However, liquid funds offer high degree of capital safety and liquidity. Also, since liquid fund investments are done over short durations, one can get a good sense of the expected returns from recent trends, after allowing for a few basis points of downside or upside in yields. The table below shows the top liquid funds (returns are on a trailing basis, as on Sep 23, 2015). You should note that yields have been on a declining trend in India over the past year and therefore you should give more importance to the 1 month and 3 months returns rather than the 1 year returns.


Mutual Funds - Liquid Fund Returns


Difference in returns between liquid funds and savings bank

Let us see with the help of an example. Let us assume, you always have 500,000 in your savings bank account. Let us see how much interest you will earn in the period April 1, 2015 to September 30, 2015.


Mutual Funds - Difference in returns between liquid funds and savings bank


Let us now see, how much return you would have got if you invested 500,000 in one of the top performing liquid funds, 6 months back. Assuming you got a return of 4.15% (you can see from the table of top performing liquid funds that you could have got up to 4.2% returns) your total returns would be 20,750. This is more than double of what you would get from most savings bank accounts. Even if you got 7% interest rate in your savings bank account, the liquid fund returns are still much higher. In fact, all the liquid funds in our selection would have higher returns than the highest interest rate paid by savings bank.
Conclusion

Liquid funds are very good investment options for parking your short term funds. Though liquid funds do not provide the convenience of making deposits or withdrawals on weekends and after business hours (through ATMs), something which banks provide, if retail can plan their cash flow needs a few days in advance, they can earn higher returns by investing their surplus cash in liquid funds than having it lie idle in their savings bank account. Investors should consult with their financial advisors if these funds are suitable options for parking their surplus cash (Source - AdvisorKhoj)

Is Mutual Fund Retirement Plans suitable for you

What is Mutual Fund Retirement Plans

Retirement or Pension plans offered by Mutual Funds do not get as much of mention compared to the other retirement planning solutions, e.g. PPF, life insurance pension plans etc. These schemes are essentially hybrid mutual fund schemes, i.e. they have both fixed income and equity allocations in their portfolios. Investors can invest either in lump sum amounts or through systematic investment plans. Investments in Mutual Fund pension plans, in most cases, qualify for Section 80C benefits under Income Tax Act. Post retirement the investors can withdraw their corpus on a lump sum basis or through systematic withdrawal plan at a chosen frequency (e.g. monthly, quarterly etc.) for their regular income needs during retirement. The balance units post withdrawals in either case remain invested and continue to grow in value.

Benefits of Mutual Fund Retirement Plans

  • With higher allocation to equities, some mutual funds retirement plans can generate superior returns in the long run compared to other products like PPF, life insurance plans etc. However, various plans under the National Pension Scheme can also generate returns comparable to, if not better than, mutual fund retirement plans.

  • Some Mutual fund retirement solutions offers higher flexibility in terms of asset allocation options

  • Charges of mutual fund pension plans are much lower compared to insurance products. However, they are higher compared to NPS

Disadvantages of Mutual Fund Retirement Plans

  • The returns on investments are not tax free, unlike some other products like PPF

  • There is not a wide array of choices available in the market

Mutual Fund Pension Plans in India

Looking at the assets under management of the different mutual fund retirement plans, it seems that they are not as popular compared to the other retirement planning solutions like PPF, life insurance plans etc. On the other hand, over the last 3 years or so, these funds have given 11 – 15% returns, which are much higher than what the more popular retirement planning solutions generated over the same time period.
UTI Retirement Benefit Plan was the first fund to be launched in this space in 1994, followed by Franklin India Pension Plan in 1997. After a gap of 15 years, Tata Mutual Fund came out with a retirement savings fund in November 2011. Earlier this year Reliance Mutual Fund launched the Reliance Retirement Fund.
The funds from UTI and Franklin Templeton have around 40% of their assets allocated to equity, while the balance is invested in fixed income securities. The equity portions of both these schemes investment portfolios are concentrated in large-cap stocks in the equity portion, whereas the fixed income has more of corporate bonds and long term government securities. The Tata scheme offers three options:
  • Progressive plan in which the minimum equity investment is 85%

  • Moderate plan in which the equity investment is around 75%

  • Conservative plans offer equity exposure ranging from 0-65%
The scheme automatically switches from one plan to another depending on the investor's age. At age of 45, investments under the progressive plan automatically switch to the moderate option while at the age of 60 investments in the moderate plan are switched to the conservative plan.
The Reliance Retirement Fund offers two options
  • Wealth Creation

  • Income Generation
In the wealth creation plan 93% of the investment portfolio is invested in equities, whereas in the income generation plan 80% of the investment portfolio is invested in debt and the balance in equities. One can opt for wealth creation or income generation plan, based on their age, risk profile and investment horizon.
The chart below shows the 3, 5 and 10 year trailing annualized returns of the three comparable plans, UTI, Franklin Templeton and Tata (Conservative plan). NAVs as on November 9, 2015.

3, 5 and 10 year trailing annualized returns of the three comparable plans, UTI, Franklin Templeton and Tata

Annualized returns of UTI, Franklin Templeton and Tata (Conservative plan) are shown. The returns of Reliance Retirement Fund are not shown because it has not completed a year yet.
  • UTI Retirement Benefit Pension Fund: UTI Retirement Benefit Pension Fund is one of the earliest schemes, launched in 1994 and has nearly 1,580 crores assets under management. The expense ratio is only 2.23%. There is no entry load. An exit load of 5% is levied if the investor exits within one year, 3% if the exit is between one to three years and 1% thereafter, until retirement. Manish Joshi and V. Srivatsa are fund managers. The portfolio mix comprises 38% equity and 62% fixed income / money market investments. This is a 3 star rated fund as per Morningstar.

  • Franklin India Pension Plan: Launched in 1999 Franklin India Pension Plan has 340 crores of assets under management. It has an expense ratio of 2.45%. There is no entry load. An exit load of 3% is levied if the investor exits before retirement. Anand Radhakrishnan, Anil Prabhudas, Sachin Desai and Umesh Sharma are the fund managers. The portfolio mix is 40% equity and 60% fixed income / money market investments. This is a 5 star rated fund as per Morningstar.

  • Tata Retirement Savings Plan: Tata Retirement Savings Plan has 110 crores, 39 crores and 86 crores of assets under management for the progressive, moderate and conservative plan respectively. The expense ratio of the Tata Retirement Savings Plan is a little over 3%. While the portfolio mix is heavily weighted towards equity at 95% in the aggressive plan, equity allocation is 75% in the moderate plan and only 27% in the conservative plan. This is a 4 star rated fund as per Morningstar.

  • Reliance Retirement Fund: The Reliance Retirement Fund has 230 crores and 63 crores of assets under management for the wealth creation and income generation plans respectively. The expense ratio of the Reliance Retirement Fund is a little over 3%. While the portfolio mix is heavily weighted towards equity at nearly 95% in the wealth creation plan, for the income generation plan the equity allocation is around 20%. Sanjay Parekh, Anju Chajjer and Jahnvee Shah are the fund managers.

Tax treatment of Mutual Fund Retirement Plans

Investment in Mutual Fund Retirement Plans is subject to tax deduction under Section 80C of Income Tax Act for most mutual funds retirement plans. However, the maturity proceeds of retirement plans are not entirely tax free. Non equity oriented mutual funds, i.e. the mutual funds where equity allocations are less than 65% are subject to debt fund taxation. Long term capital gains for non equity mutual funds are taxed at 20% after allowing for indexation benefits. Indexation benefits allow you to adjust the acquisition price of units by the ratio of cost of inflation index in the year of redemption and the year of purchase. As a consequence, while the long term capital gain for income tax purposes is not tax free, it is lower and hence the tax obligation is also lower compared to many other fixed income investments, e.g. fixed deposits etc. You should note that, for debt funds the minimum holding period for long term capital gains to apply for debt funds is 36 months.

Can we construct a mutual fund portfolio that gives better returns than retirement plans

Yes, it is possible. However, it calls for a certain level of investment expertise, which you can build, if you educate yourself about personal finance and investments. While, the retirement planning solutions currently available in the mutual funds space offers limited options, you can build your own portfolio comprising of diversified equity funds and income funds that meets your target asset allocation requirement. Such a portfolio will also be more tax efficient from the point of view of capital gains taxation at the time of your retirement. Let us understand this with the help of an example. Let us assume that you invest 500,000 in a debt oriented hybrid retirement fund over a 20 year investment horizon. For the purpose of our example, the pre-tax compounded annual return of the retirement fund is 12%. Over 20 years, with a CAGR of 12%, your investment value will be a little over 48 lacs. The long term capital gains will be 43 lacs, which will be taxable as per the debt fund taxation norms explained in the previous section. Can you construct your own portfolio with diversified equity and income funds to generate the same returns as the retirement fund over a 20 year investment horizon? Yes, you can. If you invest 1.5 lacs in a diversified equity fund giving 15% annualized returns and 3.5 lacs in a long term income fund giving 10% annualized returns, you could have got the same returns as the retirement fund.
However, the post tax returns will be very different. In this case, the long term capital gains from the diversified equity fund will be 23 lacs, which will be entirely tax free. Only the 20 lacs capital gains from the debt fund will be taxable, as per the debt fund taxation norms. Therefore, if you construct your own retirement planning portfolio, with diversified equity and income funds, there is the potential to generate higher post tax returns. However, you should monitor the performance of your portfolio on a regular and make suitable adjustments based on your portfolio performance. Also, you should rebalance your portfolio from time to time to make sure that you have the most optimal asset allocation based on your retirement planning goal.
Summary
In summary, while on an absolute basis the returns of these pension plans is not as attractive as equity funds or even balanced funds, their performance is much better than a lot of other retirement solutions available in the market. Higher equity market returns over the long term make these products an effective inflation hedge for retirement. The UTI Retirement Benefit Pension Fund and Templeton India Pension Plan are suitable for investors with conservative risk profiles, while Tata and Reliance Mutual Fund offers variety of options for investors with different risk profiles. You can also create your own retirement planning portfolio by investing in diversified equity and income funds through Systematic Investment Plans. You should consult with your financial advisor with regards to the retirement planning solution that is best suited for your needs. ( Source - Advisorkhoj )

Should you invest in Gilt Mutual Funds: Gilt Funds Demystified

Of the several mutual funds product categories available in the market, gilt funds are probably the least understood product category. Many retail investors stay away from gilt funds and many others have wrong strategies when investing in gilt mutual funds. Gilt funds invest in Government securities or bonds with varying maturities. Why are they called Gilt Funds? Historically, UK Government securities were issued on golden edged papers and hence are also known as gilt edged securities or simply gilts. In the Indian context, the usage of the term gilts is both a legacy of our colonial past and also a reference to the guarantee provided by the Sovereign or Union Government with regards to investments in these securities. There are several misconceptions with respect to Gilt Funds.
  • Some retail investors mistakenly believe that Gilt Funds are risk free investments as they invest in Government securities. While the Government securities themselves are risk free with respect to interest and principal payments, the price of the securities fluctuates with changes in the yields or interest rates. Gilt funds are in fact the riskiest product class among all debt funds in the short term.

  • On the other extreme, some retail investors believe that, Gilt Funds are as risky as equity funds. Gilt Funds are more volatile than other debt fund categories because the Net Asset Values (NAV) of Gilt Funds fluctuates with changes in yields or interest rates. If interest rates go up, the NAVs of gilt funds will decline and it is even possible to get negative returns in the short term. But comparing volatilities of gilt funds with that of equities is uninformed and obviously incorrect.

  • Some investors and financial advisors believe that if the central bank, in our case the Reserve Bank of India (RBI), keeps interest rates unchanged, Gilt Funds will give steady returns. This is also incorrect, especially in the short term. While RBI interest rate actions have a big impact on the price of Government Securities or gilts, the price or yields of gilts will depend on the demand and supply of gilts, just like any other commodity. For example, if Government has to borrow more money to meet a higher fiscal deficit, it has to issue more Government Securities. If supply of a commodity is more than demand, then common sense logic tells us that, the price of the commodity will. In this case, if the fiscal deficit is higher, then the price of Government securities will fall. On the other hand, if say, the fiscal deficit or inflation is lower, the price of Gilts will increase. Therefore, even if the RBI does not take any rate action, the NAVs of Gilt funds will fluctuate depending on the demand and supply of Gilts. We will understand this in more details later.

How do Gilt Funds work

Before we go into gilt funds in more details, it is important to understand how debt funds in general generate returns. Debt funds employ two different kinds of investment strategy:-
  • Hold till Maturity:

    This is also known as accrual strategy, by which the fund invests in certain types of fixed income securities (or bonds) and hold them till maturity of the bond, earning the interest offered by the bond over the maturity period.

  • Duration Calls:

    Using this strategy the fund manager, takes a view on the trajectory of interest rates. Bond prices are inversely related to interest rates. Why? Suppose you bought a 20 year bond with a coupon (interest) of 9% at face value of 100 a year back. If interest rate goes down by 1% during the year then bond yields will decline and new bonds will be issued at a lower interest. Investors, who wish to earn a higher interest rate, will be ready to pay more than 100 for your 20 year 9% coupon bond. Bond prices go up when interest rate falls and declines when interest rate goes up. Typically, the fund manager taking duration calls will invest in long term bonds because the longer the maturity, higher is the change in bond prices with change in interest rates.
Average maturities of government bonds in the portfolio of long term gilt funds are in the range of 15 to 30 years. The fund manager in long term gilt funds actively manage their portfolio and take duration calls with outlook on the interest rate. The returns of these funds are highly sensitive to interest rates movements. For example, if interest rate falls by 1% in a year, these funds can give 15 – 16% returns. If interest rates fall more, then the returns are higher. On the other hand, if interest rate rises then returns are lower.
To get a mathematical understanding of returns of a gilt fund, we should review two important concepts. It will get a little technical from here onwards, but please bear with us, because hopefully, armed with the conceptual knowledge you can become a much more informed debt fund investor. We will try to avoid mathematical equations, as much as possible, and try to understand the concept because as an investor the concept is important, the mathematics is less important.
  • Yield to Maturity:

    Yield to maturity (YTM) is the return which a bond investor will get by holding the bond to maturity. For a debt fund, it is the return which the fund will get by holding the securities in its portfolio to maturity. For example if a debt fund’s portfolio has a YTM of 10% and a duration of 2 years, it means that, assuming no change to the portfolio, the fund will give 10% returns, as long as it holds the securities in its portfolio till they mature. i.e. for 2 years.

  • Modified Duration:

    Let us first understand what duration is. Duration is the measurement of how long, in years, it takes for the price of a bond to be repaid by its internal cash flows of the bond. Remember there are two kinds of cash flows in a bond, interest payments and principal payment. Some bonds pay the interest along with the principal on the maturity of bond. These are known as zero coupon bonds. Zero coupon bonds in India are issued at a discount to face value and you will get the face value on maturity. The duration of a zero coupon bond is the same as the maturity of the bond. However, there are some bonds which make interest payments also known as coupon payments to the investors at fixed interval, e.g. yearly and the principal is repaid on maturity. These bonds are known as vanilla bonds. Since a vanilla bond makes coupon payments on a regular basis to the investor, the investor recovers his investment well before the maturity of the bond. Let us assume you invested 100 in 20 year 10% coupon bond. If your bond pays 10% coupon, in other words, interest of 10 every year, you will recover your investment in 10 years, much before the maturity of the bond. The duration of a vanilla bond is less than the maturity of the bond. However, you should understand that duration of the bond in the above example is not 10 years. The concept of duration factors in the time value of money. Simply put, the interest payment received next year is not equivalent to the interest received after 5 years, because the value of money goes down with time. This concept of duration in finance lingo is known as Macaulay duration. Let us now understand what modified duration is. Modified duration, is simply the price sensitivity of a bond to changes in yields or interest rates, in other words modified duration is the change in the price bond with a change of 1% in interest rate. So if the modified duration of a bond is 10 years and interest rates go down by 1%, then the bond price will increase by 10%. As simple as that. You must be wondering why we went into such a long explanation of duration, if modified duration is such a simple concept. The concept is simple, but the calculation of modified duration is not simple. The calculation of Modified Duration is very similar to Macaulay Duration. Even the numerical values are close. However, you should note that, while they are close, they are not the same. The calculations of Macaulay and Modified Durations are a little complicated, but as mutual fund you should worry about the calculations, because the fund fact sheets and various research websites have information on the Modified Duration of a fund. Simply remember, that if you expect interest rates to change a certain percentage, you can multiply the percentage change in interest rates with the modified duration to see how much the NAV will change.

How much return to expect from a Gilt Fund

If we combine the two concepts, Yield to Maturity (YTM) and Modified Duration, we can come up with a quantitative construct to calculative indicative returns based on certain assumptions. Suppose you invest 100,000 in a Gilt Fund portfolio has a Yield to Maturity of 8% and Modified Duration of 10 years (as discussed earlier, you can find this information in fact sheet or various research websites). Your investment horizon is 3 years. You assume that in the next 3 years, interest rates or yields will decline by 2%. The expected return will be:-

How much return to expect from a Gilt Fund

On an annualized basis, in percentage terms, the return will be around 13%. However, please note that this is only a rough approximation of returns. You obviously need to deduct the expense ratio of the fund from the gross returns, to get the actual net returns. Further, the YTM and modified duration of fund portfolio may change over time. Finally, the actual trajectory of yields may be different from what was expected. For example, if the change in yields was only 1% instead of the expected 2%, returns will be lower (you can do the calculations yourself, based on the suggested equation). Now, what if interest rates rose by 1%, instead of falling by 2%? You would still get a positive return after 3 years. What if interest rates rose by 2%, instead of falling 2%? Again your gross returns, before expense ratio, will still be positive. So coming back to the perception that, that Gilt Funds are as risky as equity funds, if the Sensex or Nifty falls by 1 to 2%, the vast majority of equity funds will give negative returns. While in the short term both equity funds and gilt funds can be quite volatile, the risks involved in equity funds and gilt funds are very different. If you understand the concepts and risks, then Gilt Funds can be excellent investment options for you.

What are the different factors affecting Gilt Yields

By now, you should have realized that, the most important factor affecting the returns of your gilt fund investment is yields or interest rates. Though these two are Government bond yields and interest rates are often used interchangeably, it is important to understand the difference. What is interest rate? There can be many interest rates depending on the debt issuer. However, as far as the Reserve Bank of India is concerned, the repo rate is what they manage. When the RBI cuts interest rates by 50 basis points, it means that they have reduced the repo rate by 50 basis points. What is repo rate? Repo rate is the rate at which the RBI lends money to the banks. The repo rate is the foundation of the base interest rates of the lending institutions. Let us now understand the concept of Government Security or Gilt yields. The reference Gilt Yield is the 10 year Government Security Yield. As discussed earlier, yield is the annualized return which the investor will get by holding the bond till maturity. The yield and price of a bond are very closely related; in fact yield is a derivative of the price of a bond. We had discussed earlier that, the price or yield of a Government Security or Gilt depends on the demand and supply situation. Now, what does the demand and supply of Gilts depend on? The most important factor is the repo rate. But there are other related factors as well like:-
  • Fiscal Deficit

  • Inflation

  • Foreign Exchange Rate

  • Liquidity
Even if the repo rate is constant, if these factors get adverse then the Gilt yields will go up and the prices will come down. On the other hand, if these macro factors improve, then Gilt yields will go down and the prices will increase.

Outlook on Government Securities yields

The chart below shows the historical trend of the reference 10 year Government Security yield.

Outlook on Government Securities yields

We can see from the chart above that, the 10 year Gilt yield has been on the decline from around 9% from 2014 onwards. There are several macro-economic reasons from the decline and there are enough reasons to believe that it will continue to decline further.
  • Lower Fiscal Deficit:

    The NDA Government targeted a lower fiscal deficit of 3.9% of the GDP for FY 2016. As per the latest economic estimates, the Government is on track to meet its fiscal deficit target this financial year. The Government’s goal is to bring down fiscal deficit further by FY 2017 – 2018 to 3% of the GDP. Lower the fiscal deficit, lesser is the Government’s need to borrow money and hence we can see lower yields and higher Gilt prices in the future.

  • Lower Inflation:

    Inflation has a direct impact on Gilt yields. Lower inflation will encourage the RBI to further reduce repo rates to stimulate demand in the economy. Falling crude prices have lowered Wholesale Price Inflation considerably this year. Consumer Price Inflation has crept up over the last few months, which is a worry, but the RBI has targeted an inflation rate of 5.8% by January this year, which seems achievable. The RBI reduced interest rates by 125 basis points this year. The long term inflation target of 5% is also achievable, albeit there are certain risks of not meeting it. However, as per a Morgan Stanley report, this year bountiful monsoon is expected and this may have a very beneficial effect on inflation.

  • Accommodative Monetary Policy Stance of RBI:

    The RBI Governor, Raghuram Rajan as reiterated his accommodative monetary policy stance in most of his policy announcements this year. This means that the RBI is committed to reducing interest rates, to spur economic growth, provided inflation remains in check within the policy parameters. This augurs well for Gilt Fund investors in the long term, the short term volatility notwithstanding.

  • Indian economy is structurally strong:

    A number of global reports have suggested that the Indian economy is structurally strong, at a time when the global economy is going through a period of tumult. In fact, many reports from leading institutions have predicted that India will be a strong outperformer, in terms of GDP growth over the next few years. This will put lower pressure on fiscal deficit and consequently Gilt yields. The structural strength of the economy along with lower commodity prices globally, may prove to be very beneficial for Gilt Fund investors.
That the macros of the Indian economy are strengthening over the past few years is evidenced from the returns of Gilt Funds over the last 3 to 5 years. Top performing Gilt Funds like Sundaram Gilt Fund, SBI Magnum Gilt Fund, L&T Gilt Fund, Tata Gilt – Mid Term fund etc. have given excellent returns over the past three to five years.

Indian economy is structurally strong

Taxation of Gilt Funds

If units of debt mutual funds are redeemed within 36 months of purchase, then short term capital gains is calculated by subtracting the purchase cost from sales consideration. Short term capital gains is added to the income of the investor and taxed as per the income tax rate of the investor. If the units are redeemed after 36 months from the date of purchase then long term capital gains apply. Long term capital gains for debt mutual funds are calculated by subtracting the indexed cost of purchase from the sales consideration. The indexed cost of purchase is calculated by multiplying the actual cost of purchase with the ratio of cost of inflation index in the year of redemption and the year of purchase. Cost of inflation index table is published by the Reserve Bank of India and is available in the public domain. Long term capital gains for debt mutual funds are taxed at 20.6% (including education cess) after indexation. If held for a period of over three years gilt funds are much more tax efficient investments than many fixed income investment options.
Conclusion
Investors should have at least a 2 to 3 year investment horizon for investment horizon in gilt funds. The NAVs of gilt funds can be extremely volatile. If you have moderate to high risk tolerance level and are looking for capital appreciation, then you can invest in Gilt Funds. In this blog, we have discussed the risk return characteristics of gilt funds. Investors should consult with their financial advisors and discuss if gilt funds will be suitable for their investment objectives. (Source - Advisorkhoj)

Mutual Funds or ULIPs: Where should you investMutual Funds or ULIPs: Where should you invest

In the first part of this post, Should you invest in ULIPs, we had discussed that Unit Linked Insurance Plans, popularly known as ULIPs, are now much better products than what they were before 2010. The IRDA regulations with respect to ULIPs in 2010 made significant changes with respect to the life cover of ULIPs as ratio of annual premium, policy surrender procedures (including charges) and most importantly with respect to the rationalization of costs of ULIP policies. In the first part of this post, we have also discussed that, ULIPs can be much better investment options than traditional life insurance savings plans for younger investors, who have higher risk appetites.
Despite these changes, which have certainly made ULIPs better life insurance cum investment products than before, I must tell you that, I remain a fan of mutual funds. I mentioned why, to the chartered accountant and financial planner gentleman, mentioned earlier in the first post, in my friend’s dinner party and I will explain again in this post. The financial planner argued with me that, we should not forget ULIP gives life insurance to the investor. It is a fair point; after all life insurance is an important financial need for all of us, but let us deliberate on that point. The minimum life cover or sum assured in ULIP as per IRDA regulations is 10 times the annual premium for investors below the age of 45. But is a life cover of 10 times your annual premium adequate? Life insurance thumb rules suggest a minimum life cover of 10 to 12 times your gross annual income. Your annual ULIP premium is only a fraction of your gross annual income. Therefore, it is clear that your ULIP policy will not be able to meet your life insurance needs. You have to buy additional life insurance to get adequate financial protection in the event of an unfortunate death.
Let us now compare the costs of ULIPs and mutual funds. We had earlier discussed in our life insurance blog that there are different costs in ULIPs. They are:-
  • Premium allocation charges

  • Policy administration charges

  • Mortality charges

  • Fund Management charges

  • Surrender charges
In this article, we will not go into a discussion of these different costs (for detailed understanding of the ULIP costs, please see our article, Demystifying Unit Linked Insurance Plan Charges and Returns). We will simply focus on the impact of these costs on yield of ULIPs. As per IRDA regulations, the maximum reduction in yield, excluding mortality charges, due to ULIP costs are capped as follows:-
  • In the first 5 years, maximum reduction in yield is capped at 4%.

  • From years 5 to 10, the maximum reduction in yield is capped at 3%

  • From year 10 onwards, the maximum reduction in yield is capped at 2.25%
By maximum reduction in yield, we mean the maximum amount your gross returns can go down due to the costs. It is important to reiterate here that, the maximum reduction in yields exclude mortality charges (the cost of life insurance cover). Therefore when we compare the costs of ULIPs without mortality charges and mutual funds, we are making a like to like comparison.

What is the cost in mutual fund?

The cost in mutual fund is expressed in one simple measure, the Total Expense Ratio (TER) or simply expense ratio. Expenses in mutual funds are regulated by the market regulator SEBI. Expense ratios vary from one mutual fund scheme to another, based on the expenses of the scheme and the assets under management. Expense ratios in equity funds can range from 1.5 to 3%. In debt funds it is usually much lower. For the purpose of comparison of ULIP and mutual fund expenses, let us assume that the expense ratio is 2.5%. You can see that compared to the maximum expense cap specified by IRDA, a mutual fund with 2.5% expense ratio is significantly less expensive than ULIPs in the first 5 years. It continues to be less expensive than ULIPs from years 5 to 10 too. However, from year 10 onwards, ULIPs will be less expensive assuming that the mutual fund expense ratio does not change.
What is the impact of difference in costs on returns? To quantify this, let us assume that fund performances of both the mutual fund and ULIP are exactly the same. Assume that the gross return given by both the ULIP and the mutual fund is 12%. Let us assume your annual premium in the ULIP is 1 lac. Similarly you make an annual investment of 1 lac in the mutual fund. Assume that the policy term of the ULIP is 20 years. Let us now see the difference in final fund values at policy maturity / investment term of 20 years.
  • First 5 years:

    The fund value of your mutual fund investment will be higher than the ULIP fund value by 16,000 at the end of the first five years. Please note that, once you factor in mortality charges the fund value of your mutual fund investment will be higher by a bigger amount than the ULIP, but we are excluding mortality charges to make apples to apples comparison. So at the end of 5 years, your mutual fund investment will be higher by 16,000 compared to your ULIP investment and this difference will continue to compound over the investment / policy term. Assuming 12% returns on investment mentioned above the 16,000 difference will grow to 28,000 difference by the end of the 10th year.

  • Years 5 to 10:

    The fund value of your mutual fund investment will be higher than the ULIP fund value by 5,300 in years 5 to 10 years. If you add the 28,000 difference at the end of year 10, due to the higher mutual fund net yield in the first 5 years, the total difference in fund value at the end of first 10 years be 33,500. This difference compounded at the rate of 12% over the next 10 years will be 104,000.

  • Year 10 onwards:

    In this period the ULIP is cheaper. Assuming same gross performance, the fund value of your ULIP investment will be higher than the mutual fund by 12,800 in years 10 to 20 years. But still at the end of 20 years, the mutual fund investment will be of higher value. The 104,000 difference in fund value due to higher ULIP costs in first 10 years is offset only to the extent of 12,800. The net difference is still over 90,000.
Some readers may argue that, we have been unfair towards ULIPs by taking the highest possible costs for ULIPs while comparing with mutual fund costs. We should understand the mechanics of how the costs work. The various expenses of a mutual fund scheme are charged proportionately against the assets under management of the scheme. Some of these expenses are variable, while others are fixed. Therefore, when the assets under management grow the expense ratio comes down over time. If you look at the expense ratios of some large sized mutual fund schemes, you will observe that they are much lower than average expense ratios. Over a period of time as the assets under management of a mutual fund scheme grows one can expect the expense ratio to come down. The mechanics of ULIP expenses are different. If you go through the product brochure of different ULIPs, you will see that premium allocation and policy administration specified, usually as a percentage of your premium. In fact, in many ULIPs the total expenses are closer to the IRDA cap unlike large sized mutual fund schemes where the expense ratios are much lower than the SEBI cap. However, in the recent years, several low cost ULIPs have been launched where over a long investment horizon the costs might be comparable or even slightly lower than mutual funds. However, we do not have long term performance track record of these ULIPs and therefore it is difficult to gauge how these ULIPs will perform in the long term.

Comparison of ULIP and Mutual Fund performance

So far, we have discussed only the impact of costs. We will now see how ULIP funds have performed versus mutual funds. Some personal finance experts have mentioned to me that, mutual funds are more actively managed compared to ULIP funds. I do not know for sure whether that statement is true and therefore I will not assume that mutual funds are more actively managed than ULIP funds. We will look at the actual historical returns of top performing mutual funds and ULIP funds in different categories over the last 10 years.

Mutual Funds - Comparison of ULIP and Mutual Fund performance
Source: Morningstar

From the table above we can see that, while ULIP funds have matched mutual fund returns for some categories, mutual funds have outperformed ULIP funds in many categories. If we combine the impact of costs and potentially higher returns, mutual funds do make more attractive investment choices compared to ULIPs.
Conclusion
In Advisorkhoj we get many queries asking whether investors should continue with their ULIP policies. It is not always an easy decision. If you surrender or discontinue your ULIP policy within the lock in period, your fund value gets transferred to a discontinued fund after deduction of surrender charges. The final fund value of your units will be paid to you on the completion of the lock in period. Though the units in the discontinued fund earns interest at a rate specified by IRDA, the amount of value you lose in surrender charges can be substantial depending on when you surrender your policy. Therefore, you should do your homework properly before investing in ULIPs. We have discussed in this two part series that ULIPs are not as bad as it is made out to be by some quarters in the investment community, but a combination of term life insurance plan and good mutual funds can give better results than ULIPs.
Source : Advisor Khoj

SWP: ICICI Prudential Balanced Fund can be a good option for regular returns

Mutual Funds article in Advisorkhoj - SWP: ICICI Prudential Balanced Fund can be a good option for regular returns
Source : Advisor Khoj
Balanced Mutual Funds are hybrid equity oriented mutual fund schemes. These funds usually invest 65 – 75% of their portfolio in equity securities and the remaining in debt or money market instruments. The hybrid portfolio moderates the fund volatility to a certain degree while enabling potential wealth creation in the long term. Since at least 65 – 75 % of the portfolio is invested in equities or equity related instruments, balanced funds are subject to equity taxation.
Long term capital gains, for investment period of more than 1 year, is tax exempt. Short term capital gains applicable for investments of less than 1 year are taxed at 15%. Dividends from balanced fund schemes are also tax free.
Readers who are interested to learn more about Balanced Funds, I suggest them to read these articles posted on our website –

What is Systematic Withdrawal Plan (SWP) in Mutual Funds

Systematic Withdrawal Plan or SWP, as popularly known, is a service offered by Mutual Funds which provides investors withdrawal of a specific amount of payout at a pre determined time frequency, like weekly, fortnightly, monthly, quarterly, half-yearly or annually.
Unfortunately, this is a much underestimated investment strategy in India. If understood properly, this could become the most effective and tax efficient way to earn regular returns from Mutual funds. Through a series of our blog post on SWP, we will try educate the investors about SWP, how it works and the tax benefits etc. by showing some examples of top performing Balanced Funds.

How SWP worked in case of ICICI Prudential Balanced Fund - Growth

If you had invested 10 Lacs in the NFO of ICICI Prudential Balanced Fund on November 3, 1999 and withdrawn 8,000 per month from November 3, 2000, then the current value of your investment would have been 34.65 Lakhs even after withdrawing 15.12 Lakhs!
We came to this conclusion by presuming that the lumpsum investment of 10.00 Lakhs was made on the Scheme inception date i.e. November 3, 1999. We also presumed that the monthly SWP withdrawal of 8,000 was started after one year (starting date November 3, 2000) and thereafter on the 3rd date of every month so that each and every SWP amount in the hands of the investor is tax free.
Please look at the image below to understand how we have selected the different options in the research tool to get this result. You can also explore this SWP Research tool to explore SWP return of any fund you like.


Mutual Funds - How we have selected the different options in the research tool to get this result
Source: Advisorkhoj SWP Calculator (Data as on 15/7/2016)


SWP (Systematic Withdrawal Plan) results

From the above chart you can see that the investor would have withdrawn a total of 15.12 Lakhs through 189 instalments of monthly SWP of 8,000 each, thus, he would have got a tax free return of 9.6% every year. Even after withdrawing a tax free amount of 15.12 Lakhs, the current value of his investment stands at 34.65 Lakhs!

But how SWP can take care of inflation

Inflation is a very vital point when you are planning your investments. In fact, two things are very important in any investment planning – Post tax return and inflation adjusted return. Therefore, in this study, we will analyse what happens when we increase the SWP amount by 5% (presuming average inflation rate of 5%) every year?


Mutual Funds - SWP can take care of inflation
Source: Advisorkhoj SWP Calculator with Annual increase (Data as on 15/7/2016)


From the above image, you can see that the investor would have withdrawn a total of 20.70 Lakhs through 189 instalments of monthly SWP of Rs. 8,000 per month in the first year and ending with 14,000 per month in the last year. Therefore, he would have got a tax free return of 9.6% in first year which gradually increased every year and in the last year it was 16.80%. Even after withdrawing a tax free amount of 20.70 Lacs, the current value of his investment stands at 21.18 Lakhs! The fund gave an annualised (IRR) 13.25% return.
Let us now see how the SWP amount increased over a period of time, the increasing withdrawal % on the lumpsum amount and how the value of net investments changed annually post these systematic withdrawals.


Mutual Funds - The SWP amount increased over a period of time


You will notice how we have increased the SWP amount annually by 5% on the initial investment. You will also notice that during the first 3 years, the net investment value dropped to less than the initial investment amount i.e. 10.00 Lacs. You also must have noticed that barring these 3 years, the remaining 13 years the net investment never went down to less than the initial investment of 10.00 Lacs. It proves that if you remain invested over long period in balanced funds then the trailing returns should be positive.
Now let us see the annual returns of ICICI Prudential Balanced Fund against VR hybrid Equity Oriented index


Mutual Funds - The annual returns of ICICI Prudential Balanced Fund against VR hybrid Equity Oriented index
Source: ValueExpress


You will notice that the fund has beaten the VR-Hybrid Equity Index in most of the years excepting 2000, 2007 and 2008 when the markets passed through the most volatile times.

About ICICI Prudential Balanced Fund

ICICI Prudential Balanced Fund is a hybrid equity oriented fund, popularly known as balanced funds. Launched in November 1999, it is another popular fund in the Balanced Fund category from India’s No.1 AMC, ICICI Prudential Mutual Fund having AUM of 3,018 Crores (As on June 30, 2016). It is one of the best performing Balanced Funds in the industry with a long track record of around 17 years. Sankaran Naren, the veteran Fund Manager, manages this fund along with Manish Banthia and Yogesh Bhatt.
The fund has got excellent rating from valueresearch i.e. 4 Star. CRISIL Rank for this fund is 3, according to their mutual fund ranking for the quarter ending Mar 31, 2016. The top 5 stocks that the fund is invested in, are – Power Grid, Coal India, Cipla, Reliance and Bharti Airtel Ltd. The 3 top sectors are Energy, Financial and Healthcare.
We reviewed this fund sometime back which you might like to read superb performance in the last 5 years

Lumpsum returns of ICICI Prudential Balanced Fund

So far we discussed the SWP returns of ICICI Prudential Balanced Fund and found how amazing the results were. Let us now examine the lumpsum returns of this fund. Had you invested 10 Lacs in the NFO of this fund on November 3, 1999 the current fund value would have been a whopping 91.12 Lakhs, a decent CAGR of 14.63% since inception.
Most importantly, ICICI Prudential Balanced Fund would have also comfortably beaten the returns of fixed deposits, Gold and Silver. Please see the chart below


Mutual Funds - ICICI Prudential Balanced Fund would have also comfortably beaten the returns of fixed deposits, Gold and Silver


An amount of 10.00 Lakhs invested at the same time in Gold, Silver and Fixed Deposit would have got you only 67.73 Lakhs, 46.73 Lakhs and 33.42 Lakhs respectively compared to 91.12 Lakhs given by ICICI Prudential Balanced Fund.

SIP Returns of ICICI Prudential Balanced Fund

The SIP returns of ICICI Prudential Balanced Fund have also been amazing! If you had started a monthly SIP of 5,000 on November 3, 1999, then you would have accumulated a corpus of 45.77 Lacs as on today (based on NAV of 15/07/2016) whereas you had invested only 10.50 Lacs through 201 instalments of 5,000 each. During this period the fund has given a XIRR return of 16.28% which is one of the best amongst the peer group of schemes. Check our SIP Return Calculator
Conclusion

ICICI Prudential Balanced Fund has given amazing SWP returns since inception and may be a good choice for investors looking for regular income from their lumpsum investments. However, investors should note that past performance of mutual funds are no guarantees for future returns. Mutual fund investments are subject to market risk and therefore investors must consult their financial advisors and check if investment in ICICI Prudential Balanced Fund is suited for their investment needs based on their risk profile.

How SIPs in Top Balanced Funds have created as much wealth as Large Cap Funds

Mutual Funds article in Advisorkhoj - How SIPs in Top Balanced Funds have created as much wealth as Large Cap Funds
Source From : Advisor Khoj
In our last few posts in this series we had discussed how SIPs in best diversified equity funds, best mid and small cap funds, best ELSS Funds, best thematic funds and best large cap funds have created wealth for the investors in the long term.
While doing the above series, we thought of restricting our analysis to equity fund categories only as our belief was no other category can beat or match the returns of different equity fund categories. However, when we did this analysis for Balanced funds, we were surprised to find that the SIP returns of top performing Balanced were as good or even better (in some cases) as SIP returns of Large Cap Funds in the last 10 years. Let us look at the chart below –

SIP returns of Top Performing Balanced Funds

Mutual Funds - SIP returns of Top Performing Balanced Funds


As seen in the above chart the annualised SIP returns (XIRR %) of top performing Balanced Funds were between 13 – 16% for the 10 year period. Now, let us see what the SIP returns from Large Cap Funds were during the same period.

SIP returns of Top Performing Large Cap Funds

Mutual Funds - SIP returns of Top Performing Large Cap Funds


As you can see in the above chart the annualised SIP returns (XIRR %) of top performing Large Cap Funds were also between 13 – 16% for the 10 year period.
Therefore, we can say that, in the long term there is hardly any difference as far as the SIP returns of Top Balanced and Large cap Equity Funds are concerned. And, it is the reason for doing this post for the benefit of our readers whose risk appetite may be moderate but they can still enjoy the equity like returns by investing in Balanced Funds through SIP mode.

What are Balanced Funds

Balanced Funds are excellent investment options for investors with moderate risk profile. These funds are hybrid funds, with 65 - 70% of the portfolio invested in equities and the rest in fixed income securities. In fact, investors who are unable to decide where to invest – Debt or Equity – the Balanced Funds could be best choice as they can generate excellent returns for the investors with limited downside risks.
Financial advisors suggest diversification of assets for building a good portfolio. Balanced funds help in this as it rebalances the allocation between equity and debt automatically according to the fund mandate. Therefore, investing in Balanced funds reduces the need to constantly move around funds as it auto rebalances the allocation.
The other advantage of Balanced Funds is that the taxation is like equity funds. That means, like equity funds, capital gains arising from investments in Balanced Funds held for over 12 months is tax free. Moreover, dividend received from Balanced Funds is also tax free like equity funds.
To learn more about Balanced Funds, I suggest our readers to go through these articles –
For this study, we have selected 8 top Balanced Funds based on their 10 years SIP performance (Based on NAV of 12/7/2016). We have taken only one fund from one AMC. We want to reiterate that, by no means, it is a comprehensive list of the entire top performing Balanced Funds that gave good SIP returns in the last 10 years. Our objective is to show how long term investments in Balanced Funds have created wealth for the investors and how its returns are comparable to equity funds. Also, that it could probably be the best choice for moderate risk taking and new mutual fund investors.
The funds in our selection gave SIP returns ranging from 13 - 16% annualized. Since SIP investments are made over a period of time, the method of calculating SIP returns is different than that of Lump Sum investments. SIP returns are calculated by a methodology called XIRR, which is a variant of Internal Rate of Return (IRR). XIRR is similar to IRR, except XIRR can calculate returns on investments that are not necessarily strictly periodic.
For our study, we have assumed a monthly SIP of 5,000 made on the 12th day of every month starting from August 2006 and ending on 12th July 2016. Therefore, the investor would have invested 6.00 Lakhs through 120 instalments of 5,000 each. We have taken Regular Plan – Growth option for this study and the data is as on July 12, 2016.
Now, we will analyze all the 8 funds selected for our study.

HDFC Balanced Fund

HDFC Balanced Fund was launched in September 2000. This marquee fund from HDFC Mutual Fund has a huge AUM base of nearly 6,207 Crores (As on June 30, 2016). It is the one of the most popular and best performing Balanced Funds. Chirag Setalvad is the fund manager of this fund since 2007.
If you had started a monthly SIP of 5,000 in HDFC Balanced Fund - Growth option, in August 2006, you would have accumulated a corpus of 14.21 Lakhs with an investment of only 6.00 Lakhs in 10 years. Over the 10 year period the fund has given compounded annual return of 16.66%. Check SIP returns of this fund.
The fund has got excellent rating from valueresearch i.e. 4 Star. CRISIL has also accorded a very good rating – Rank 2, in its recent mutual fund ranking for the quarter ending Mar 31, 2016.
The top 5 stocks that the fund is invested in are, Infosys, HDFC Bank, Reliance Industries, ICICI Bank and SBI. The 3 top sectors are Financial, Technology and Energy.

TATA Balanced Fund

TATA Balanced Fund this is another marquee fund launched by TATA Mutual Fund in October 1995. This is the oldest fund in our study and has the highest AUM of 6,280 Crores (As on June 30, 2016). It is one of the most popular and best performing Balanced Funds with a track record of more than 20 years. Akhil Mittal and Pradip Gokhale are the new joint fund managers for this fund.
If you had started a monthly SIP of 5,000 in TATA Balanced Fund - Growth option, in August 2006, you would have accumulated a corpus of 13.74 Lakhs with an investment of only 6.00 Lakhs in 10 years. Over the 10 year period the fund has given compounded annual returns of 16%. %. Check SIP returns of this fund.
The fund has got excellent rating from valueresearch i.e. 4 Star. CRISIL has also accorded a very good rating – Rank 2, in its recent mutual fund ranking for the quarter ending Mar 31, 2016.
The top 5 stocks that the fund is invested in are, Infosys, HDFC Bank, Reliance Industries, Yes Bank, Power Grid Corporation and HCL Technologies. The 3 top sectors are Financial, Construction and Healthcare.
You may like to read the fund review – A top pick for the balanced fund investors

Reliance Regular Savings Fund - Balanced Option

Reliance Regular Savings Fund – Balanced Option, launched in June 2005, this is a popular fund from Reliance Mutual Fund stable having AUM of 2,691 Crores (As on June 30, 2016). It is one of the best performing Balanced Funds in our study with a track record of around 11 years. Amit Tripathi and Sanjay parekh are the joint fund managers for this fund.
If you had started a monthly SIP of 5,000 in Reliance Regular Savings Fund – Balanced Option Growth plan, in August 2006, you would have accumulated a corpus of 13.27 Lakhs with an investment of only 6.00 Lakhs in 10 years. Over the 10 year period the fund has given compounded annual returns of 15.38%. Check SIP returns of this fund.
The top 5 stocks that the fund is invested in are, Infosys, HDFC Bank, Reliance Industries, Maruti Suzuki and TATA Motor DVR. The 3 top sectors are Financial, Automobile and Energy.

Birla Sun Life Balanced 95 Fund

Birla Sun Life Balanced 95 Fund, launched in 1995, it is another popular and old fund in Balanced fund category by Birla Sun Life Mutual Fund stable having AUM of 3,140 Crores (As on June 30, 2016). It is one of the best performing Balanced Funds in our study with a track record of more than 20 years. Mahesh Patil, one of the finest Mutual Fund Managers in the MF industry, manages this fund along with Pranay Sinha.
If you had started a monthly SIP of 5,000 in Birla Sun Life Balanced 95 Fund - Growth option in August 2006, you would have accumulated a corpus of 13.19 Lakhs with an investment of only 6.00 Lakhs in 10 years. Over the 10 year period the fund has given compounded annual returns of 15.26%. Check SIP returns of this fund
The top 5 stocks that the fund is invested in are - Infosys, HDFC Bank, Maruti Suzuki, TATA Motors and ICICI Bank. The 3 top sectors are Financial, Automobile and Energy
We reviewed this fund two years back but the same is still relevant. You may like to read the same 19 years of superb performance by Birla Sun Life 95 Fund

ICICI Prudential Balanced Fund

ICICI Prudential Balanced Fund, launched in November 1999, it is another popular fund in the Balanced Fund category from India’s No.1 AMC, ICICI Prudential Mutual Fund having AUM of 3,018 Crores (As on June 30, 2016). It is also one of the best performing Balanced Funds in our study with a track record of around 17 years. Sankaran Naren, the veteran Fund Manager manages this fund along with Manish Banthia and Yogesh Bhatt.
If you had started a monthly SIP of 5,000 in ICICI Prudential Balanced Fund - Growth option in August 2006, you would have accumulated a corpus of 12.88 Lakhs with an investment of only 6.00 Lakhs in 10 years. Over the 10 year period the fund has given compounded annual returns of 14.82%. Check SIP returns of this fund
The fund has got excellent rating from valueresearch i.e. 4 Star. CRISIL Rank for this fund is 3, according to their mutual fund ranking for the quarter ending Mar 31, 2016.
The top 5 stocks that the fund is invested in are – Power Grid, Coal India, Cipla, Reliance and Bharti Airtel Ltd. The 3 top sectors are Energy, Financial and Healthcare.
We reviewed this fund sometime back which you might like to read an ideal balanced fund for investors with moderate risk appetite

Franklin India Balanced Fund

Franklin India Balanced Fund launched in December 1999, it is another popular fund in the Balanced Fund category from Franklin Templeton Mutual Fund having AUM of 1,160 Crores (As on June 30, 2016). It is also one of the best performing Balanced Funds in our study with a track record of around 17 years. Sankaran Naren, the veteran Fund Manager manages this fund along with Manish Banthia and Yogesh Bhatt.
If you had started a monthly SIP of 5,000 in Franklin India Balanced Fund - Growth option in August 2006, you would have accumulated a corpus of 12.43 Lakhs with an investment of only 6.00 Lakhs in 10 years. Over the 10 year period the fund has given compounded annual returns of 14.82%. Check SIP returns of this fund
Valueresearch has given this fund a 3 Star rating whereas CRISIL Rank is 1 for this fund, according to its mutual fund ranking for the quarter ending Mar 31, 2016.
The top 5 stocks that the fund is invested in are – HDFC Bank, AXIS Bank, Indusind Bank, Infosys Yes Bank. The 3 top sectors are Financial, Automobile and Energy.

SBI Magnum Balanced Fund

SBI Magnum Balanced Fund launched in December 1995, it is another popular fund in the Balanced Fund category from SBI Mutual Fund having AUM of 5,184 Crores (As on June 30, 2016). It is also one of the best performing Balanced Funds in our study with a track record of more than 20 years. Sri Dinesh Ahuja and R. Srinivasan are the joint Fund Manager for this fund.
If you had started a monthly SIP of 5,000 in SBI Magnum Balanced Fund - Growth option in August 2006, you would have accumulated a corpus of 12.37 Lakhs with an investment of only 6.00 Lakhs in 10 years. Over the 10 year period the fund has given compounded annual returns of 14.05%. Check SIP returns of this fund
Valueresearch has given this fund a 3 Star rating whereas CRISIL Rank is 4 for this fund, according to its mutual fund ranking for the quarter ending Mar 31, 2016.
The top 5 stocks that the fund is invested in are – HDFC Bank, SBI, E-Clerx Services, Divi’s Lab and Infosys. The 3 top sectors are Financial, Services and Technology.

DSP BlackRock Balanced Fund

DSP BlackRock Balanced Fund launched in December 1995, it is another popular fund in the Balanced Fund category from DSP BlackRock Mutual Fund having AUM of 1,226 Crores (As on June 30, 2016). It is also one of the best performing Balanced Funds in our study with a track record of more than 20 years. Sri Dinesh Ahuja and R. Srinivasan are the joint Fund Manager for this fund.
If you had started a monthly SIP of 5,000 in DSP BlackRock Balanced Fund - Growth option in August 2006, you would have accumulated a corpus of 11.79 Lakhs with an investment of only 6.00 Lakhs in 10 years. Over the 10 year period the fund has given compounded annual returns of 13.15%. Check SIP returns of this fund
Valueresearch has given this fund a 3 Star rating whereas CRISIL Rank is 3 for this fund, according to its mutual fund ranking for the quarter ending Mar 31, 2016.

The top 5 stocks that the fund is invested in are – HDFC Bank, Yes Bank, Ultratech Cement, SBI and BPCL. The 3 top sectors are Financial, Chemicals and Automobiles.

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