Various Fund Houses announces the Deduction of Transaction Charge from Subscription Amount for Purchase through Agents.

With effect from 1 November 2011

Accordance with the SEBI circular dated 22 August 2011 various fund houses like AIG Mutual fund, Principal Pnb Mutual Fund, Goldman Sachs Mutual Fund, JM Financial Mutual Fund, J.P Morgan Mutual Fund, Bharti AXA Mutual Fund and L&T Mutual Fund, UTI Mutual Fund, SBI Mutual Fund, Franklin Templeton Mutual Fund and others has announced that with effect from 1 November 2011, it shall deduct the transaction charges on purchase / subscription received from first time mutual fund investors and investor other than first time mutual fund investors through the distributor / agent. The charges are as under:

1) First Time Mutual Fund Investor (across Mutual Funds): Transaction charges of Rs. 150/- for subscription of Rs. 10,000 and above will be deducted from the subscription amount and paid to the distributor / agent of the investor and the balance shall be invested.

2) Investor other than First Time Mutual Fund Investor: Transaction charge of Rs. 100/- per subscription of Rs. 10,000 and above will be deducted from the subscription amount and paid to the distributor / agent of the investor and the balance shall be invested.

However, transaction charges in case of investments through Systematic Investment Plan (SIP) shall be deducted only if the total commitment (i.e. amount per SIP installment x No. of installments) amounts to Rs. 10,000/- or more. The transaction charges shall be deducted in 3 or 4 installments.

3) Transaction charges shall not be deducted / applicable for:
 

a) purchase / subscriptions for an amount less than Rs. 10,000/-
b) transaction other than purchases / subscriptions relating to new inflows such as Switch/Systematic Transfer Plan (STP) / Dividend Transfer Plan (DTP), etc;
c) transactions carried out through the stock exchange platforms.

Source: http://www.indiainfoline.com/Markets/News/Various-Fund-Houses-announces-the-Deduction-of-Transaction-Charge-from-Subscription-Amount-for-Purchase-through-Agents/3996483645

Small, mid-cap mutual funds outperform in Q2: Crisil

Small and mid-cap equity mutual funds outperformed other equity funds for the second consecutive quarter ended September 2011 as per the Crisil Research. According the agency's mutual fund rankings, the same trend was observed in the previous quarter as well.

Global issues coupled with domestic worries like high inflation and rising interest rates took a toll on the performance of indices this year. The S&P CNX Nifty and S&P CNX 500 indices delivered negative returns of 12.47% and 12.04%, respectively, in the quarter under review.

They posted the lowest quarterly returns over the last eight quarters. However, mutual funds performed better with large cap, diversified and small and mid cap equity funds outperforming both the indices.

The rankings said that small and mid cap funds fared relatively better with a negative 6.83% return as compared to negative 10.48% by large cap funds and negative 10.01% by diversified funds in the quarter ended September 2011.

A key reason for equity funds outperforming the benchmark indices has been the decrease in equity exposure.“Given the current uncertain environment, the average equity holding of equity funds has gone down from 95% as on September 30, 2010 to almost 93% as on September 30, 2011.

Crisil Fund Rank 1 equity funds have been more proactive and have reduced their equity exposure from 96% to 92% during the same period,” said Jiju Vidyadharan, Head – Funds & Fixed Income Research of Crisil.

Source: http://business-standard.com/india/news/small-mid-cap-mutual-funds-outperform-in-q2-crisil/150047/on

You can hold mutual fund units in the demat form

You can now hold your mutual fund units in a d-mat form, in the same way you hold your shares. The benefit of this is that it will enable you to get a single consolidated statement for your holding across shares and mutual funds.

You can buy mutual funds through the stock exchange on either the National Stock Exchange ( NSE) or Bombay Stock Exchange ( BSE). To start with, you need to register with your existing stock broker by filling up a two-page form as mandated by the regulator. Once that is done, mutual fund units can be bought through your broker the way you buy and sell shares. Once you buy them, you can hold them in your demat account in the same way you hold your shares.

You can also redeem your mutual fund units the way you sell stocks - by placing an order through the stock exchange platform. Subsequently, you can submit the delivery instruction slip to your depository participant (DP) to transfer the mutual fund units, the same way you submit it for shares.

However, buying mutual funds through the stock exchange has its flaws. Firstly, your broker could charge you a fee for buying mutual funds, and, secondly, you will have to pay an annual fee for maintaining your depository account and charges for every transaction that you do.

If you are currently holding mutual fund units in the physical form, which are represented by statement of account, you can convert this statement of account into the dematerialised form.

For converting these units, you can get a conversion request form (CRF) from your depository participant (DP) and submit it along with the statement of account to your DP. After due verification, the DP would send the CRF and statement of account to the asset management company (AMC)/registrar and transfer agent (RTA). The AMC/RTA, after due verification, will confirm the conversion request executed by the DP and the mutual fund units will be credited to your demat account.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/analysis/you-can-hold-mutual-fund-units-in-the-demat-form/articleshow/10562040.cms

Know your fund fact-sheet

Retail investors may not have the wherewithal or time to study and grasp the 40-50-page-long fund offer document / fund information document of a mutual fund. For passive investors the next best alternative is the fund fact-sheet. A fact-sheet is a monthly report prepared and published by a mutual fund for each of its fund offers. 

A fact-sheet is a single-page document that explains all pertinent information on the fund and is easily accessible on mutual funds Web sites. Retail investors are advised to read and understand the fact-sheet before making any investment decision. Anyone with a basic knowledge of the securities market can easily understand a facts-sheet. This article dissects the important terms used in such documents.

Assets Under Management

AUM is the market value of assets a mutual fund manages on behalf of its investors. There are funds such as Baroda Pioneer Balance Fund, with an average AUM of Rs 2.6 crore (August 2011), on one side of the spectrum and others such as ICICI Prudential Dynamic Plan, with an average AUM of 3,814.40 core (July 2011), on the other side.

The bigger the fund size, the more the fund can diversify its portfolio. At the same time, large funds may be difficult to manage.

Changes in AUM can be a good indicator of the fund's performance, and can be gleaned by comparing the current month's fact-sheet with previous month's. If the increase in AUM is higher than the NAV returns over the same period, it means that the fund has received inflows, apart from performing well.

Portfolio

Mutual funds are expected to have a diverse portfolio. The portfolio provides information on where funds are invested, what proportion of funds is invested in various sectors and in specific companies. This will help understand the fund's risk profile and strategy.

Portfolio Turnover

Portfolio turnover is the rate of trading activity in a fund's portfolio of investments. It reflects how actively the fund is managed. Portfolio turnover ranges from 0.10 times to three times of the AUM. The more the turnover, the higher a fund's trading costs (brokerage, transaction tax, capital gains tax). Trading costs reduce net asset value (NAV) returns delivered by the fund. High performing funds have an average portfolio turnover of 0.5- to 1.

Expense Ratio

The expense ratio is the proportion of assets used to pay marketing costs, distribution costs and management fees. The expense ratio varies between 1.75 per cent and 2.5 per cent for equity funds and between 1.5 per cent and 2.25 per cent for debt funds. The higher the fund's AUM, the lower the expense ratio. Over a long term of five or more years, a one per cent difference in expense ratio may eat up to 10 per cent of your returns. An important point to be considered here is that expenses are deducted whether a fund delivers good returns or not.

Load

A load is a commission charged at the time of purchase (entry load / front end load) or sale (exit load / back-end load) of mutual fund units. In India, SEBI abolished entry load from August 1, 2009. The majority of Indian mutual funds charge exit loads ranging from 0.05-1 per cent. If investment is held for more than one year many funds exempt exit load.

Return

Returns are reported — compounded and annualised. Generally, returns are reported monthly, half year, last one year, last three years, last five years, and since inception.

If a fund reports 18.6 per cent since inception (1996) it means Rs 100 invested in 1996 is now worth Rs 1197.6. Past performance, though, may or may not be sustained in future.

Standard Deviation

Standard deviation (SD) is a measure of volatility and quantifies the fluctuations of NAV movements. A high SD denotes high risk. Suppose a fund has a SD of 7.9 per cent and returns of 15.6 per cent it means the return may fluctuate between 7.6 per cent and 23.6 per cent. Another fund with 24.10 per cent SD and 15.63 per cent may see its return fluctuate between -8.5 per cent and 39.7 per cent.

Funds with low SD are preferred. Few funds report yearly annualised SD where as others report annualised based on last 36-month data points. Caution, therefore, needs to be exercised while interpreting SDs.

Risk-Free Rate

The risk-free rate represents the interest that an investor would expect from an absolutely risk-free asset. Such a rate is used in risk-adjusted performance measures like Sharpe and Treynor ratios. For calculating Sharpe ratio different mutual funds use different risk free rates.

Sharpe Ratio

Sharpe ratio is one of the most popular risk-adjusted portfolio performance measures. It takes into consideration the return on portfolio, the risk free rate (opportunity cost), and SD. Sharpe ratio is calculated using the formula (Return on Portfolio – Risk Free Rate) /SD. The numerator in the formula denotes the premium that investors gain for taking the risk.

The Sharpe ratio for Axis Equity Fund, for instance was -0.36 as of July, considering a 364-day T-bill as risk-free rate. For the same period, assuming a 91-day T-bill as the risk-free rate would throw a sharpe ratio of -0.48.

In general, the higher the Sharpe ratio the better the fund returns. The point to be noted here is, to calculate Sharpe ratio funds use different time periods. Axis Equity fund use annualised data where as BNP Paribas uses the last three-year data. Hence comparison is nto easy unless one takes similar data points to calculate onself.

Benchmark

Mutual funds use benchmark index to compare the fund performance. Depending on fund portfolio and investment objective, mutual funds choose an appropriate benchmark index. BNP Paribas Equity use S&P CNX Nifty, ICICI Prudential discovery fund use CNX MIDCAP Index, Axis Tax Saver fund use BSE 200, and Franklin India Prima Plus use S&P CNX 500. Benchmark index is also used to calculate the Beta of the fund.

Treynor's Ratio

Treynor's ratio is another popular risk-adjusted performance measure. Treynor's ratio is calculated using the formula: Return on Portfolio – Risk Free Rate / Beta. The calculation and uses are similar to Sharpe ratio except that Treynor ratio uses market risk (beta) where as Sharpe's ratio uses individual portfolio risk (SD).

BETA

Beta measures the co-movement between fund and its benchmark. A beta value of 1 represents that the fund will move in tandem with benchmark index. A beta of less than 1 means fund is less volatile than the benchmark. A beta of greater than 1 indicates that the fund is more volatile than the benchmark. Axis equity fund has beta of 0.89 (July, 2011).

ICICI Prudential Services Industries fund has a beta of 1.07 (Sep, 2011). Higher beta value reduces risk-adjusted returns. For example, if we consider Franklin India Flexi Cap Fund three-year annualised return of 17.2 per cent, risk free rate of 7.9 per cent and beta of 0.86 as of July, the risk adjusted portfolio return (Treynor's ratio) is 10.8 per cent. If we assume beta value as 1.07 then the risk adjusted portfolio return will be 8.70 per cent.

R-Squared

R-Squared represents the fund movements that can be explained by movements in benchmark index. R-Squared value ranges between 0 and 100. A high R-Squared (above 85) indicates the fund's performance patterns are similar to benchmark index.

Source: http://www.thehindubusinessline.com/features/investment-world/mutual-funds/article2580346.ece

Look beyond past returns to choose the best fund

The last 4-5 years have been very interesting for the Indian equity markets. They tested the patience of investors and merit of fund managers. The extremes of highs and lows made investors sit up and closely watch the stocks picked by their funds and fund managers. Some schemes beat the benchmark indices in the rising market of 2006-07. They also managed to limit the losses in the 2008 crash. But many failed.

“Last four years have seen all cycles of the markets - massive uptick, downtick, panic, mania, bull run, bear phase etc. Stocks defensive in 2008 are aggressive now. The performance of funds vary depending on stock selection,” says Sankar Naren, chief investment officer, ICICI Prudential AMC.

Though long-term annualised return is normally used to gauge a fund’s performance, a look at the 'up capture' and 'down capture' ratios would help zero in on the best one.

Up/downside capture ratio shows you whether a given fund has outperformed—gained more or lost less—compared with a benchmark during periods of market strength and weakness, and if so, by how much. Broadly there are four different combinations of up/downside capture ratios.

High upside – High downside

These are the funds which outperform the benchmark index during a rising market. During a correction or bear phase, same funds carry the risk of falling more than the index. For example, the SBI Magnum Midcap Growth scheme gave excellent annual returns of 47 per cent and 71 per cent, respectively during 2006 and 2007, when the equity markets were breaking all previous record highs. In 2009 when markets recovered after 2008 crash, it gave a whopping annual return of 104 per cent.

However, during the 2008 crash, the same fund eroded in value by 72 per cent. From January this year to September, it fell 16.73 per cent. The five year annualised return of the fund is a mere 2 per cent. This is explained by its up capture and down capture ratios. According to Morningstar, a global mutual fund research company, the 5 year up capture ratio of the fund is 104.21 while the down capture ratio is 119.7. This means that while the fund manager ensured out-performance during a bull run, it could not limit the downside while the markets were correcting. Data indicates that the fund value fell 19.79 per cent more than the benchmark. This is true across categories – be it large cap, mid cap or small cap funds. Several funds like Taurus Starshare, L&T Opportunities, JM Basic, LIC Nomura MF Equity, and Sundaram India Leadership funds show similar traits.

Low upside – High downside

It indicates that while the fund failed to match the return of the index in a rising market, it fared equally bad by giving higher negative returns than the index in a falling market. For example, Principal Growth Fund, a large cap oriented scheme. Its 5 year up capture ratio is 81.55 while the down capture is 99.

This is more risky than the previous category since the scheme fails to outperform the index in a rising market, it falls equally or more than the index in a falling market. This shows in its annual returns of 2007 and 2008. In the bull run of 2007, it yielded 53.28 per cent while in the next year, the scheme fell 63.69 per cent. January to September this year, the fund value plunged 23.25 per cent while its 5 year annualised return is negative 0.67 per cent. Some of the other schemes that fall in this category are BNP Paribas Midcap, ICICI Pru Midcap, SBI Magnum Multicap, and L&T Contra.

High upside – Low downside

This is the smartest set. These are schemes which on one hand beat the benchmark index in a rising market, and on the other, protect the downside in a falling market. Most top funds that have performed consistently and have a good 5 year annualised return fall in this category.

For example, IDFC Premier Equity Plan A, a small and midcap oriented fund. It has a 5 year up capture ratio of 104.5 and the down capture ratio of 74.46. The fund returned 110 per cent in 2007 while it fell 53 per cent in 2008. The 5 year annualised return of the fund stands at a staggering 23 per cent. January to September this year, it has dropped 8 per cent.

It gave better returns than the benchmark during the rising market and protected the downside when the markets crashed. Some other funds in this category are HDFC Top 200, HDFC Equity, Canara Robeco Equity and UTI Dividend Yield.

“The hallmark of a good fund manager is not how s/he performs when the markets are going up but how s/he performs when the chips are down. The fund should not fall more than the benchmark index. Else what is the point of investing in a mutual fund,” says Sanjay Sachdev, president and CEO, Tata AMC.

Low upside – Low downside

This category may not beat the benchmark when the markets are rising but would not fall much in a falling market. They can be a good choice for risk averse investors who would like to invest in a fund that would protect the downside in a falling market.

UTI MNC fund is an example. The 5 year up capture ratio of thefund stands at 67.67 per cent while the down capture is 52 per cent. This means that while the fund did not match up the benchmark index returns, it captured the losses of falling market up to only 52 per cent. In 2007, the fund gave a return of 32.45 per cent while it fell 42.78 per cent in 2008. The 5 year annualised return remains at 13 per cent. January to September return this year stands at 1.34 per cent which is not bad considering most of the equity funds gave negative returns.

The other funds in this category are Birla Sun Life MNC, UTI Equity, and ICICI Pru Dynamic.

It may be a smart strategy to have a look at the up and down capture ratios of the funds before finally taking a call on the choice of fund. Websites such as www.morningstar.co.in, have such details about each equity fund. “Investors must stay away from such funds that fall too much in a falling market. Funds with high up capture and low down capture ratios are ideal for investors,” suggests Dhruva Chatterji, senior research analyst with Morningstar, India.

You must not look at only the recent past performance as that may be misleading. Do check how the fund performed both in the rising market as well as the falling market.

Source: http://www.indianexpress.com/news/look-beyond-past-returns-to-choose-the-best-fund/867895/0