Mutual Funds – Dutch Uncles https://dutchuncles.in Market Intelligence & Mentoring Resources for Startups and Small businesses | Dutch Uncles Sat, 09 Oct 2021 13:47:16 +0000 en-US hourly 1 https://dutchuncles.in/wp-content/uploads/2020/12/favicon.png Mutual Funds – Dutch Uncles https://dutchuncles.in 32 32 Good Money Habits To Start Off With https://dutchuncles.in/du-live/good-money-habits-to-start-off-with/ https://dutchuncles.in/du-live/good-money-habits-to-start-off-with/#respond Sun, 10 Oct 2021 03:35:07 +0000 https://dutchuncles.in/?p=38433&preview=true&preview_id=38433 Millennials who have their entire life in front of them, usually have the zeal of being independent, setting on their own financial choices, and so forth. In the fervour, many young investors miss out on managing bad choices. In the present economic situation, inflation erodes the value of your money over a stretch of time […]

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Millennials who have their entire life in front of them, usually have the zeal of being independent, setting on their own financial choices, and so forth. In the fervour, many young investors miss out on managing bad choices. In the present economic situation, inflation erodes the value of your money over a stretch of time if it is not invested wisely. Having said that, it is usually a dilemma for investors to choose the right financial window and get started with their money making process. This is where we need to acquaint ourselves with wise money management and investment practices that will help an individual to set a firm foundation for a smooth financial future.

In the recent episode of MentorED – a LIVE Workshop Series by Dutch Uncles, the esteemed speaker, Ms. Shweta Jain enlightened the audience who joined LIVE from across four platforms – LinkedIn, YouTube, Twitter, and Facebook – about the good money habits to start our investment journey with and shared some money management strategies as well. Ms. Shweta Jain, Author and Founder of Investography Pvt. Ltd. is a Certified Financial Planner who shares a passion for providing financial literacy to new and existing investors. With an experience of more than 16 years in the financial planning, research, and client services arena, Ms. Jain has conducted 1000+ workshops for more than 35,000 individuals and advisors for corporations like Google, HP, Accenture, JP Morgan, JC Penney, HPCL, etc.

In brief the session had the following takeaways:

  • Saving versus Investing – How inflation impacts portfolios
  • Insurance – How it is treated as a stepchild
  • Starting early versus starting late
  • How compounding works and why don’t we make money on our money
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Do not save what is left after spending, but spend what is left after saving

- Warren Buffett

Good Money Habits

What do you answer when someone asks you about your well-being? We generally say we are fine or we are doing okay or not so good, if we have any problems, right? Similarly, being financially well is equally important and one should not hide or shy away from seeking help. The foundation for being financially well comes with habits. A habit is something that makes or breaks your future. So when it comes to financial matters everything boils down to what you want out of life and what are the milestones you want to achieve.

Elaborating the concept of having good financial habits, Ms. Jain further mentioned in the session about the meaning of being financially independent, how insurance can be a gateway to a safer life, clarity regarding the savings and investments and the basic good habits that one should follow. Talking about financial independence, Ms. Jain gave few examples about what financial freedom meant to different people. It was surprising to know that everybody might have invested in the same stock but what they want out of those investments is different. This is because when we assign meanings to all these investments, the time frame is clear and one can map out their journey correctly. Once you know what financial independence means to you, you will automatically come to know what to do with your money.

Coming to the topic of insurance, it is divided into three categories: Life insurance, Health insurance, and Critical insurance. Ms. Jain claimed that insurance is her top most priority as it protects not only the individual but also their loved ones. The risks here are totally different from the risks in equity. Life insurance gives you the promise of protecting your family when you are not around anymore. Basically, if you have a sum of money today, your life or your family’s future is protected. If you are hospitalised you get health insurance and if you are recovering from a life threatening illness, a critical illness policy will help you sail through that time.

Having said that, what exactly should be the good habits that an investor should follow? Well, for that Ms. Jain mapped out a basic flowchart explaining how evaluating your insurance cover, evaluating loans is important and should be done periodically. One needs to save for their goals first and postpone spending in order to gain wealth and allocate their assets according to their risk taking capacity. She said, “when you look at your investment, do you want to eat better or do you want to sleep better”, if you want to sleep better then you should invest in safer assets and if you want to eat well, you will have to beat inflation and go for growth assets like equity.

Audience Asks

From my understanding, there’s no right time to invest but can you list some reasons as to why one should start investing early and what all financial options will be beneficial for millennials like us?

Ms. Jain answered this question by giving a personal example of how she started spending more, unconsciously, while owning a credit card. Eventually swiping her credit card became a habit, in her words, “a habit that I want to break”. Ms. Jain explained that there is no right time to invest and it is intertwined with your goals and aspirations. Talking about the beneficial aspect of investment, she said, if you have long term, high aspirations, then you should invest in equity. It is based on choices, whether you want to play safe and invest your entire money at once, for a long term goal, or if you want to take that risk and keep investing in small amounts on a monthly basis to reach that goal. Ms. Jain advised not to fall into the trap of FDs, rather start investing in equity, and be consistent.

I wanted to know something about SIP, which is more profitable – short term or long term, because I have seen people withdraw their money when there is a downward trend in the market.

Ms. Jain chuckled while answering this question and talked about the basic human nature of following a herd. She said, “Although it seems much safer, don’t follow the herd and do what is right for you”. Ideally SIPs in the long term are much more profitable but it is something that should be towards a goal. So if you have a short-term goal, there is nothing stopping you from investing in SIP, for that duration of time. Ms. Jain gave an answer related to her life, about how she is doing SIPs for her son’s school fees, which is a short term goal and for the long term, she is saving for her retirement as well. So it does not have to be an either-or decision, rather it has to be both and has to be oriented towards your goals. Long term SIPs are more profitable but a short term SIP is more beneficial.

Get MentorED with Ms. Shweta Jain on Good money habits

I guess, price rise of essential commodities is affecting all of us in the country. How can we make a smart investment considering the circumstances?

Price rise of commodities is what inflation is, infact, the reported inflation and the inflation that we see will be different. For example, healthcare and education inflation are all in double digits. So this means that our portfolios should be giving us double digit returns so that we live well, otherwise, we will be spending more and consuming less. And the only investment option for this is equity, whether it’s equity mutual fund, PMS, direct stocks or portfolios, this is the only asset class that will give you good returns in the long term. Investment in equity is like investment in business and not just “stock tickers”. Whether you are running your own business or are an employee, you can invest in the best businesses by investing in their stocks.

Give your money a chance to grow

Everything in financial planning or life is a trade off, so you need to figure out whether you want a vacation, which is a short term goal, or should you put that money aside for your retirement, which is a long term goal. More often we are focused on how much our equity portfolio has given us rather than how much we have spent on our portfolios. So make sure that you are allocating your assets correctly according to your requirements and do not push your equity to over-perform because with higher returns usually comes the need of taking higher risks. Investment is the journey that you need to learn on and nobody else can do it for you.

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]]> https://dutchuncles.in/du-live/good-money-habits-to-start-off-with/feed/ 0 Confused Over Picking the Right Stocks? Use CANSLIM https://dutchuncles.in/academy/confused-over-picking-the-right-stocks-use-canslim/ https://dutchuncles.in/academy/confused-over-picking-the-right-stocks-use-canslim/#respond Mon, 04 Oct 2021 13:35:09 +0000 https://dutchuncles.in/?p=38250&preview=true&preview_id=38250 Authors Larry Swedroe and Andrew Berkin’s book The Incredible Shrinking Alpha’s thesis is largely based on stock picking becoming terrible and getting worse over the years. In an interview, Larry Swedroe the Chief Research Officer in Buckingham Wealth Partners revealed that the abundant information and news available is digested rapidly by an investor. This results […]

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Authors Larry Swedroe and Andrew Berkin’s book The Incredible Shrinking Alpha’s thesis is largely based on stock picking becoming terrible and getting worse over the years. In an interview, Larry Swedroe the Chief Research Officer in Buckingham Wealth Partners revealed that the abundant information and news available is digested rapidly by an investor. This results in investors being unable to identify underpriced stocks with any regularity. 

What Larry said was not wrong. Where investing in the stock market seems lucrative but picking the right stocks has become tricky and difficult these days. With numerous opinions on social media, news, television floating regarding a company’s stock has made investors confused about picking the right one. But, here is one tip for the investors – ‘ Rome was not built in a day’. Therefore, mastering the art of stock picking cannot happen overnight. But a fundamental and technical analysis of stocks can help in picking the right one. One such way is by the CANSLIM method.

 What is the CANSLIM method? 

CANSLIM is a techno-fundamental strategy founded by an American entrepreneur, stockbroker William O’Neil. This strategy helps to pick quality stocks by focussing on companies that show growth in earnings because of innovation. The strategy suggests buying such stocks before it experiences a major surge.

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According to IBEF (Indian Brand Equity Foundation), the real estate sector is estimated to grow a massive Rs 65000 crore in 2040 from Rs 12000 crore in 2019.

Determining the right stocks using CANSLIM

CANSLIM – is an abbreviation of seven parameters. On analysing those seven parameters we can determine the top-performing stocks in the market. 

Let us understand each of these parameters: 

  • Current Earnings of a firm:

    Current earnings per share (EPS) of a company should be greater than its previous EPS over the last three quarters. The general rule says companies having a 25 percent growth rate relatively deliver high returns. 

  • Annual Earnings:

    The annual earnings of a company for three consecutive years should show a consistent increase to be eligible for pick up. The return on equity should be more than 17 percent for 3 to 5 years. 

  • New product, service, or highs:

    A company that brings innovation in products, introduces new services, new leadership practices, new pricing, or condition is identified with positive news. Any positive news makes the stock price go up and stocks of such companies are worth investing in. Without the release of any new products, services, or events, a company’s stock price is likely to depreciate. 

  • Supply and Demand:

    Stocks of companies worthy of investing should be scarce in supply backed by high demand. This creates a scenario where the stocks are excessively high in demand that causes a surge in price. Usually, stocks of those companies to be picked up that acquire a portion of their shares improving the EPS and ROE eventually improving investor’s confidence. In short, it looks more financially attractive. A minimum of 25 million shares should be issued to the public. 

  • Leader or Laggard:

    Investors should use the indicator relative strength index (RSI) to purchase market-beating stocks. RSI is a momentum indicator that measures the speed and change of price movements. If the RSI value is above 70 it means that the stocks are overbought and if below 30 it signifies oversold. The leading stocks from the leading industries are the optimal stocks to hold. 

  • Institutional sponsorship:

    If a stock has a high institutional investor it signifies the condition for the price surge. A company looks promising and signifies the high potential of growth if its institutional investors comprising investment banks, mutual fund firms and pension are taking an interest. Also, those stocks are to be avoided that are over-owned by such investors. There should be at least 10 institutional owners of the shares and the ownership should be 50 percent.

  • Market direction:

    Investors should trade along with the trend. Stocks showing a longer-term uptrend are suitable for investing. For measuring the uptrend, an investor should thoroughly analyse the market movements using the broad market indices, or use a 50-day moving average to confirm a strong uptrend before deciding to invest in a company.

Benefits of using CANSLIM

  • It is an appropriate strategy for those investors who cannot hold the stocks for more than 5 or 6 years. 
  • We often consider investing in such companies that have high P/E ratios, signifying high returns, and tend to overlook the ones with low P/E ratios. But, this low might be for a reason due to investor’s perception of undervaluing it. 

Therefore, the P/E ratio might not be the best metric for stock price movement. Instead, look for investing in companies having high-quality businesses with sustainable competitive advantages. In such cases, the CANSLIM helps identify such businesses. 

 Drawbacks to CANSLIM

  • The strategy is suitable for the bullish market where trading volumes are high. The strategy fails to work in a bearish market. 
  • Investors need to be careful and active while tracking their quarterly performance. 
  • The strategy is easy to understand but its implementation is difficult. Stocks picked using CANSLIM also bear a high risk as they will be the quickest to drop under a crisis. 

Word of advice for the investors

Those investors can invest in stocks using CANSLIM who have a higher risk appetite. The stocks cannot be held for a longer time as much of their price value is parked in for future growth. Investors picking stocks through this strategy will make losses no more than 7-8% below the buy point, but one needs to apply all seven criteria to the stocks interested. Applying only a few will not help in picking the right ones. 

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]]> https://dutchuncles.in/academy/confused-over-picking-the-right-stocks-use-canslim/feed/ 0 Overnight funds: Safest, Quickest and Market Resilient Category Mutual Fund Investment https://dutchuncles.in/academy/overnight-funds-safest-quickest-and-market-resilient-category-mutual-fund-investment/ https://dutchuncles.in/academy/overnight-funds-safest-quickest-and-market-resilient-category-mutual-fund-investment/#respond Thu, 30 Sep 2021 05:35:12 +0000 https://dutchuncles.in/?p=38065&preview=true&preview_id=38065 We have several long-term investment options but there is a dearth of short-term investment. On top of that, options are narrowed if we want a short-term investment with good returns.  Owing to Central Bank’s lower projected growth and uncertainties over future policy, the conservative mutual fund investors are developing an interest in investing in short-duration […]

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We have several long-term investment options but there is a dearth of short-term investment. On top of that, options are narrowed if we want a short-term investment with good returns. 

Owing to Central Bank’s lower projected growth and uncertainties over future policy, the conservative mutual fund investors are developing an interest in investing in short-duration mutual funds such as overnight funds, floater funds, and liquid funds, etc. Such investments have increased due to their ability to deliver good returns in a short time. But, our article would like to draw the investor’s attention to SEBI’s new category of mutual funds – overnight funds introduced in 2018. 

According to the data released by the Association of Mutual Funds in India (AMFI), the net inflow of overnight funds was Rs 5932 crores. Moreover, this newly launched overnight fund’s overall market value or capital stands at Rs 89,293 crores as of 31st July 2021. The market value includes the returns a mutual fund has made on its investment. 

 What are overnight funds?

Overnight Funds are a new category of mutual funds that have a maturity period of one day. A fund manager invests the overnight funds in CBLOs (collateralized borrowing and lending obligation), overnight reverse repos, and other debt or money market securities that give returns within a day. 

In the meantime, if RBI brings any change in the interest rates, the prices will not be affected. 

The returns received within a single day of maturity will be reinvested by the fund managers to purchase more such new bonds or securities at new prices overnight, and this cycle repeats. 

Since these funds mature overnight, there are fewer chances of making capital gains or losses and remain unaffected by interest rate changes. It is therefore touted as the safest investment option in the mutual funds category. 

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According to the data released by the Association of Mutual Funds in India (AMFI), the net inflow of overnight funds was Rs 5932 crores.

The purpose of overnight funds  

The reason behind the growing popularity of overnight funds is that investors are able to use their funds in a better and profitable manner with low risk. Here are the purposes of investing in overnight stocks. 

  • It is a short investment

     The overnight mutual funds mature in just one day. This short period of investment allows investors to make better use of the extra cash they have at their hand.

  • Low-risk

    As the prices remain unaffected to varying interest rates with maturity being for a day, it limits the funds’ exposure to risk and keeps it to a minimum.

  • High-liquidity

    Overnight funds are regarded as the most liquid investment securities. It strives to give better returns than a savings bank account.

Who should invest in overnight funds?

  • Investors looking for greater liquidity and expecting returns more than a savings bank account. 

  • Risk-averse investors who want to park their money overnight.

  • Also, ideal for institutional investors such as banks, insurers, and corporates seeking overnight returns by investing their surplus funds.

  • Investors who require quick money during financial emergencies. 

 How are these funds taxed?

Investors receive dividends and capital gains from overnight funds. Receiving dividends does not attract taxes but capital gains do. Capital gains are the difference between the purchase price and the selling price of the fund. The tax rate on capital gains depends on the time an investor holds the units of an overnight fund. Capital gains tax is of two types- short and long term. 

  • Short-term capital gains tax:

    If the investor holds the funds for a period of up to 3 years and taxes are charged as per the income tax slab rate applicable to the investor.

  • Long-term capital gains tax:

    When an investor holds the funds for more than 3 years, he/she gets the benefit of indexation. Indexation means the purchase price is adjusted with the inflation that causes tax amount to reduce. Investors in the long term are taxed at 20% after indexation. 

Pros and cons of investing in overnight funds 

Word of advice for the investors

There is no doubt regarding overnight funds being the safest category of mutual fund investment since returns can be easily withdrawn. But, here are a few pointers that investors should keep in mind before investing in them. 

  • It is true that returns in short term investment are somewhat more than saving account but it should not be considered for the long term since it is not designed to optimise returns. They tend to offer relatively lower returns.
  • Investment in overnight funds should be aligned with investor’s financial goals and strategy. Under the protective umbrella of safety and high liquidity, investors should not compromise on their returns by thinking of investing in it as the only option of generating returns. To get high-quality returns or profits they can invest in other short-term mutual funds like liquid funds or ultra-short duration funds.
  • Before investing in any overnight funds, investors should measure the performance of a particular fund based on a week or one-month performance as they mature overnight. In addition to this, the returns and expense ratio is also to be considered as a higher expense ratio that will reduce the final returns. An expense ratio is an amount that is charged by the fund annually for managing the investment portfolio.

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]]> https://dutchuncles.in/academy/overnight-funds-safest-quickest-and-market-resilient-category-mutual-fund-investment/feed/ 0 Financial Planning with SIP, STP and SWP https://dutchuncles.in/academy/financial-planning-with-sip-stp-and-swp/ https://dutchuncles.in/academy/financial-planning-with-sip-stp-and-swp/#respond Wed, 29 Sep 2021 05:35:07 +0000 https://dutchuncles.in/?p=38047&preview=true&preview_id=38047 Due to simplicity and low to moderate risk factor, mutual funds are often the most sought-after investment option. Since one can begin investing with as low as Rs 500, it is the simplest and effective investment for amateur investors to create wealth and secure their financial future. According to the data from the Association of […]

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Due to simplicity and low to moderate risk factor, mutual funds are often the most sought-after investment option. Since one can begin investing with as low as Rs 500, it is the simplest and effective investment for amateur investors to create wealth and secure their financial future. According to the data from the Association of Mutual Funds in India (AMFI), the pandemic did not deter people from investing in mutual funds. In 2020-21, the mutual fund industry added more than 8.1 million folios than 7.29 million in 2019-20. But, before we begin to invest, one must have clarity regarding strategies of investing strategically in mutual funds. 

Systematic investment planning (SIP), systematic transfer plan (STP), and systematic withdrawal plan (SWP) are strategic methods of investing in mutual funds that an investor should know about. 

What is systematic investment planning (SIP)? 

A systematic investment plan (SIP) is a tool for investing in mutual funds where we invest a fixed amount at regular intervals. The facility also offers flexibility to investors to invest a smaller amount every month. For instance, one can invest Rs 1000 in a mutual fund scheme every month, and suppose the individual is promoted or receives a hike in salary, he/she can invest Rs 1200 from next month. 

SIPs help in disciplined investment and are a convenient tool that reduces the probability of making losses due to market fluctuations, preserves capital, and is an effective way to double wealth. 

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In 2020-21, the mutual fund industry added more than 8.1 million folios than 7.29 million in 2019-20.

What is a systematic transfer plan (STP)?

Unlike SIP, where the transfer of money takes place from a savings bank account to a mutual fund plan, STP transfers money from one mutual fund plan to another. In STP the funds are transferred at regular intervals from one mutual fund scheme to another of investor’s choice. It is considered to be a smart strategy to reduce risks and balance returns since at times market conditions might prove to be unfavourable to the mutual fund scheme chosen by the investor thereby giving low returns. Therefore, it will be smart to shift the investment to other profitable mutual fund schemes.  

The transfer in STP takes place by investors selecting a mutual fund from which the transfer should take place to put in another mutual fund. The transfer of money can happen daily, weekly, monthly, or quarterly based on the STP chosen and the options available with the asset management company. 

Systematic transfer plans are of three types 

  • Fixed STP: A fixed sum of money is taken from one mutual fund to another. 

  • Capital appreciation STP: The profit earned by investing in a mutual fund is invested in other. 

  • Flexi STP: The money to be transferred varies. Here, the minimum amount is fixed by the amount decided by the investor and the maximum amount has no limitations, and depends on the volatility in the market. 

What is a systematic withdrawal plan (SWP)?

The above two facilities in mutual fund investment were related to investment, but a systematic withdrawal plan (SWP) is about withdrawing money invested in any mutual fund scheme at regular intervals. Sometimes, lower interest rates on mutual fund schemes make investors afraid of meeting their income needs. This problem is solved by mutual funds by offering an investment plan in which fixed amounts at regular intervals can be withdrawn on a monthly, quarterly, and yearly basis. The regular withdrawal from mutual fund investment thereby creates a regular flow of money. SWP also offers tax benefits where instead of earning profits in one go, it offers earnings in multiple intervals lowering the total tax. 

The difference – SIP vs STP vs SWP 

Lastly, the three different investment tools SIP, STP, and SWP depend upon the risk appetite of the investor. There is no right or wrong way to invest in mutual funds using these tools. STPs are suitable for investors if they have excess funds but are wary of market risks. STPs are a transfer from debt to equity funds that give investors stability, security, and higher returns. The regular withdrawals from SWP plans help investors to receive significant returns from funds and seek a source of income from it. SIPs on the other hand make an investor disciplined with his/her investment.

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]]> https://dutchuncles.in/academy/financial-planning-with-sip-stp-and-swp/feed/ 0 What Are Arbitrage Funds: Basics of Investment https://dutchuncles.in/academy/what-are-arbitrage-funds-basics-of-investment/ https://dutchuncles.in/academy/what-are-arbitrage-funds-basics-of-investment/#respond Wed, 29 Sep 2021 03:35:10 +0000 https://dutchuncles.in/?p=38023&preview=true&preview_id=38023 Arbitrage Funds are mutual funds that take advantage of price differences in the money and derivatives markets to generate profits. The profitability of such a fund depends on the volatility of the securities market. These funds are inclusive of different entities because they provide exposure to most of the portfolios in debt markets. Arbitrage mutual […]

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Arbitrage Funds are mutual funds that take advantage of price differences in the money and derivatives markets to generate profits. The profitability of such a fund depends on the volatility of the securities market. These funds are inclusive of different entities because they provide exposure to most of the portfolios in debt markets.

Arbitrage mutual funds are an excellent option for investors looking to make money in volatile markets without taking too much risk. While the associated risk is low, the returns in payoffs can be unpredictable. 

Buy here, sell there – Arbitrage funds basics

Most mutual funds are a collection of stocks that can turn in high profits on their sale during a price rise. Although it is a type of mutual fund, arbitrage funds do not follow the same strategy as general mutual funds. They are an attractive bet for investors who want to take advantage of volatile markets without taking too much risk.

Arbitrage mutual funds benefit from the price pressures of various markets. Arbitrage funds can include buying shares on the foreign exchange market and then selling them on the futures market. This happens because the main form of arbitrage occurs between these two markets, although limited. Resultantly, these funds have to trade a lot each year to make big profits.

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Arbitrage funds are taxed like equity funds. Investors need to watch expense ratios, which can be substantially high carefully.

Overview of arbitrage funds

    • Inter-exchange trades 

Suppose the shares in ABC company cost Rs. Rs 1,000 per share on the Bombay Stock Exchange (BSE). The same company’s shares cost Rs 1,010 per share on the National Stock Exchange (NSE). If the fund manager of an arbitrage fund identifies this opportunity, s/he can buy shares from the BSE and simultaneously sell them on the NSE. From there, they can earn an Rs. 10 profit at low transaction cost and no virtual risk.

    • Transactions between the cash and futures markets

Assume that ABC’s shares are traded for Rs. 1,000 per share in the money (cash) market and Rs 1,015 in the futures market. In such a case, the arbitrage fund manager may buy shares in the money market and enter future contracts to sell the shares for Rs. 1015. They can sell the shares on the futures market at the end of the month and earn Rs. 15 at low transaction costs and no risk.

Advantages of Arbitrage Funds ~ Dutch Uncles

Benefits 

    • Low risk

Arbitrage funds generally pose a low risk to investors. There is no long-term investment risk as shares are bought and sold in one go. Volatile markets have the most potential for profits as well as losses. It depends on how you act on your trade and your risk appetite regarding investment in arbitrage funds. These funds are a good choice for prudent investors who want to take advantage of a volatile market but not take too much risk.

    • Tax treatment as equity funds

While investing primarily in stock equities, arbitrage funds are a mixture of funds as they leverage the benefits of both debt and equity investments. Therefore, they are treated as equity funds for taxation as long equity showcases an average of at least 65% of the investment portfolio. Holding an arbitrage fund for more than a year brings it under the tax bracket of capital gains, significantly lower than the ordinary income tax rate.

Drawbacks 

    • Unexpected payoff costs

The main disadvantage of arbitrage funds is their low credibility. If markets are constantly stable and smooth, investment in arbitrage funds is not much profitable. When arbitrage profit is insufficient, the fund may temporarily become a bond fund.

    • High Expense Ratios

Successful financing of an arbitrage fund transaction requires additional trades, representing a remarkably high percentage of your costs. In times of volatility, arbitrage funds are high yielding in nature. However, due to their mediocre reliability and substantial expenses, these should not be the only type of investment in your portfolio holding.

Are arbitrage mutual funds the right choice for you?

Debt funds and arbitrage funds have a similar risk profile. Many fund companies use liquidity metrics as the benchmark for their fund. Arbitrage is ideal for investors who want to invest in stocks but do not want to take the risk. In volatile markets, many speculative investors can make money by investing their money in an arbitrage fund.

Words of wisdom

Investing based on your capacity and plan is very important. Investment in arbitrage funds takes three to five years to create a reasonable return. Most arbitrage funds have withdrawal fees, and you should consider this before investing. These funds thrive in turbulent markets. Therefore, it is recommended to invest in a lump sum instead of a structured investment plan. When the market is volatile, investing in cash can yield significant returns.

You can invest the money in an arbitrage fund instead of putting it in a regular savings account. This way, you get the most out of your savings. However, if you have already invested in stocks, you can systematically transfer stocks from private equity to arbitrage. While this might cut down the returns, the risk can be brought down significantly.

Unlike other funds, arbitrage mutual funds place large orders and invest in distributing similar stocks in different markets. This allows investors to take advantage of market volatility without undue risk. In the end, it is best to talk to a financial professional about how an arbitrage fund would fit your investment plan before leaping.

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]]> https://dutchuncles.in/academy/what-are-arbitrage-funds-basics-of-investment/feed/ 0 Association of Mutual Funds in India (AMFI): The Referee for Mutual Funds https://dutchuncles.in/academy/association-of-mutual-funds-in-india-amfi-the-referee-for-mutual-funds/ https://dutchuncles.in/academy/association-of-mutual-funds-in-india-amfi-the-referee-for-mutual-funds/#respond Tue, 28 Sep 2021 03:35:09 +0000 https://dutchuncles.in/?p=38011&preview=true&preview_id=38011 The Association of Mutual Funds in India – AMFI – is an industry organisation established in 1995 for managing the Indian investment funds segment. Most Indian mutual fund managers and companies are members of AMFI. The organisation strives to develop the Indian investment fund market and maintain ethical and professional standards. AMFI is a government […]

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The Association of Mutual Funds in India – AMFI – is an industry organisation established in 1995 for managing the Indian investment funds segment. Most Indian mutual fund managers and companies are members of AMFI. The organisation strives to develop the Indian investment fund market and maintain ethical and professional standards.

AMFI is a government non-profit organisation supervised by the Securities and Exchange Board of India (SEBI). SEBI incorporated it on 22 August 1995. As of April 2015, AMFI had 44 registered members. AMFI members are the asset management companies that are registered with the organisation. These members have collective assets under management (AUM) worth over Rs. 27 lakh crores.

Objectives of Association of Mutual Funds in India (AMFI)

AMFI is a self-regulatory agency established collectively by Indian fund houses and asset management companies (AMC). It is an institution entitled to supervise the activities of investment funds and the financial management of investors.

The mutual funds’ sector in India is still an underdeveloped financial domain. There have been many misconceptions and fears regarding the stock market and investment funds due to the lack of awareness and financial education. 

The lack of knowledge initially hindered even minor participation in the mutual fund investment segment. Therefore, over the years, regulators such as SEBI and AMFI have become active and are playing an essential role in investing in financial education.

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The Association of Mutual Funds in India protects the interests of investors and financial management companies.

Role of AMFI: Creating investor awareness

AMFI is involved in developing a clear and transparent framework for the Indian mutual fund arena. Over decades, it has been an instrumental player in protecting the interests of investors and fund houses. It has made financial investments easier and more transparent to appeal to more people.

All fund houses, trustees, agents (intermediaries) and financial advisers have to register with AMFI. It presently has 44 members, including 42 SEBI-registered asset management firms. The Association of Mutual Funds in India’s foundation advocates for risk-free mutual fund investments and highlights the benefits of investing safely.

The Association of Mutual Funds in India aims to:

    • Demonstrate ethical and uniform professional standards in all member organisations under AMFI.
    • Encourage members and investors to comply with business rules and guidelines.
    • Get advisories, AMCs, distributors, agents, and other entities included in the capital market or financial service areas to comply with their guidelines.
    • Act as a bridge between SEBI and members and ensure that SEBI’s financial instructions are followed.
    • Represent the Reserve Bank of India, Finance Ministry, and SEBI on everything related to the industry.
    • Educate the public on investment opportunities and benefits.
    • Disseminate information on partnerships, as well as research and training in various contexts of mutual funds.

AMFI reviews the Code of Conduct rules and takes disciplinary action if its members violate the law. Mutual fund investors may contact AMFI to file a complaint and register their grievances against a fund manager or house in case of an irregularity. 

AMFI Registration Number (ARN)

The AMFI Registration Number (ARN) is a unique number assigned to financial agents, distributors and other financial market participants who act as brokers. It can only be attained by National Institute of Securities Markets (NISM) certified personnel or entities. If you are a senior citizen, qualifying for the CPE (Continuing Professional Education) is compulsory. Without this number, you cannot sell or trade any mutual fund.

AMFI Registration Number (ARN) | Dutch Uncles

AMFI offers ARN ID cards to companies and resellers operating in mutual funds trade. Please note that the NISM certificate is only valid for three years. This certificate includes AMC name, cardholder’s photo, AMFI Registration Number (ARN), and business address. It helps investors verify the legitimacy of brokers or AMCs 

ARN important is extremely important for investors

Financial market middlemen such as brokers, agents or intermediaries play an essential role in attracting potential investors for mutual funds. To ensure that only eligible people can sell, participate in mutual fund trade and engage with potential buyers, AMFI only authorises individuals or organisations with an AMFI Registration Number. 

All external applicants must register and pass the exams to become an AMFI entity of advisors. Never engage with an intermediary that does not have ARN while investing in mutual funds. Before you start investing money, you need to verify the AMFI registration number of your broker.

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]]> https://dutchuncles.in/academy/association-of-mutual-funds-in-india-amfi-the-referee-for-mutual-funds/feed/ 0 Asset Management Company: Maximising Returns Through Their Diversified Portfolio https://dutchuncles.in/academy/asset-management-company-maximising-returns-through-their-diversified-portfolio/ https://dutchuncles.in/academy/asset-management-company-maximising-returns-through-their-diversified-portfolio/#respond Mon, 27 Sep 2021 08:35:12 +0000 https://dutchuncles.in/?p=37951&preview=true&preview_id=37951 Individual investors or new investors lack the experience of utilising their resources to consistently produce strong investment returns. This is precisely the time when asset management companies come to the rescue. Let us deep dive a little more about what an asset management company does. What is an asset management company? Asset management companies are […]

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Individual investors or new investors lack the experience of utilising their resources to consistently produce strong investment returns. This is precisely the time when asset management companies come to the rescue. Let us deep dive a little more about what an asset management company does.

What is an asset management company?

Asset management companies are firms that collect funds from various individual and institutional investors and invest in various securities such as stocks, bonds, and real estate. They own a dedicated team of fund managers who manage the investment and the research team selects the right stocks or securities to invest in.
Fund managers identify investment options that align with objectives. For instance, if the fund objectives are to receive steady returns with low risk, then the appropriate investment option will be to invest in bonds issued by government firms or private firms. If the fund’s objective is to get maximum returns then the investment will take place in equity markets for investing in shares.

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The reputation of the asset management company (AMC) plays a pivotal role for the investors to invest in funds.

How does an asset management company work?

When investors invest in an asset management company they are investing in a fund managed by the firm. The return of the investment depends on the performance of the fund that is market-linked. A well-managed fund can give higher returns.

The source of revenue for asset management companies is through charging fund management fees from the investors. A fund is expected to generate maximum returns in its categories to increase its investor base.

The reputation of the asset management company (AMC) plays a pivotal role for the investors to invest in funds. To strengthen the investor base and deliver quality returns, an asset management company follows a three-step process.

Efficient Asset Allocation:

To maximise returns for its investors, AMCs invest their money in different investment instruments. The distribution of funds into the equity or debt market depends on favourable market conditions and interest rates. Here, the experience and expertise of fund managers play an important role in efficiently allocating money to different asset classes.

Formulating an Investment Portfolio:

Building an investment portfolio is crucial for any asset management company. For, it undergoes rigorous research and analysis so that the portfolio becomes risk-proof, and resilient during turbulent market conditions. Fund managers make investments taking calculated risks.

Assessment of Performance:

Asset management companies are answerable to their investors for the fund performance. It sends regular updates on sales and repurchases NAV (Net Asset Value), portfolio details to its investors.

How should an investor select an asset management company?

The money that investors put in is their hard-earned money, therefore investors should take extra precaution in an asset management company for themselves. Experienced investors should check the performance history of mutual funds schemes managed by the asset management company during times of market volatility. While choosing an asset firm they can do the following:

  • Check the reputation of an asset management firm by assessing the consistency of returns delivered from its fund management
  • Check the reviews of the firm by taking feedback from other investors.
  • Check the investment style of the fund manager. The returns received relies on the sound skills and investment style of a fund manager. Generally, mutual fund investment styles help one to gauge the competence of an asset management company.

The asset management companies are regulated by the Securities and Exchange of India (SEBI) and passively regulated by the Association of Mutual Fund of India (AMFI).

AMC, Asset Management Company- Explained

Advantages of going with an asset management company

  • Assets are managed by experts.
  • Returns are confirmed despite market volatility.
  • Well-diversified portfolio
  • Improvised investment options

There are many products that are not available for individual investors to invest in but with asset management firms, investing in those wide ranges of financial products is possible.

Drawbacks of asset management firms

  • Can be expensive for investors as the firms sometimes charge exorbitantly to manage assets.
  • If the market underperforms and the fund manager is unable to defend the risk it can result in huge losses.
  • Few asset management companies restrict their services to wealthy investors having high net worth, government entities, financial intermediaries, and the different corporations and shabbily manage the portfolio of investors not fulfilling the prescribed wealth criteria of the company.

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]]> https://dutchuncles.in/academy/asset-management-company-maximising-returns-through-their-diversified-portfolio/feed/ 0 Why Are Bond Traders In Loss When The Market Goes Up? https://dutchuncles.in/academy/why-are-bond-traders-in-loss-when-the-market-goes-up/ https://dutchuncles.in/academy/why-are-bond-traders-in-loss-when-the-market-goes-up/#respond Sat, 11 Sep 2021 08:35:11 +0000 https://dutchuncles.in/?p=37300&preview=true&preview_id=37300 By using bonds as your investment instrument, you acquire a guarantee in a debt instrument on which the issuer pays interest to you – the holder – or the principal is delivered at a later date. In bond investments, regular allowances are paid to you by the issuing entity semi-annually, annually and sometimes monthly. Bonds […]

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By using bonds as your investment instrument, you acquire a guarantee in a debt instrument on which the issuer pays interest to you – the holder – or the principal is delivered at a later date. In bond investments, regular allowances are paid to you by the issuing entity semi-annually, annually and sometimes monthly. 

Bonds make external assets available to borrowers to support long-term investments or, in the case of government bonds, to provide cash flow. Bonds and stocks are both instruments in the market, but the main difference is that the shareholders own parts of a company by its stocks. On the other hand, bondholders have a creditor stake in the company as they are lenders.

Economy and stock-bond relation

Economic conditions are essential in determining the status of these financial instruments. As the economy grows, stocks become more profitable as companies keep pace with economic growth. This is because as they increase their income, they add stock value. If the economy is contracting, bonds are a better investment as they will protect your investment while providing a steady income.

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Bonds are not entirely risk-free. If the company goes under during the bond period, you can stop receiving interest payments and might not get back your entire principal.

Market relation with stocks and bonds

Bonds influence the stock market by competing with shares for investors’ money. Bonds are safer than stocks but have low yield outcomes. This causes bonds to fall as the value of stocks rise (when the stock market is up). 

One of the best ways to counter inflation (price rise) is selling bonds and buying stocks when the economy is good. But if an economy slows, consumers shrink, corporate profits fall, and stock prices stoop as well. This is when investors choose the regular interest payments guaranteed by bonds.

Sometimes the value of stocks and bonds can rise at the same time. This happens when there is too much capital or liquidity in the investment market. There are also times when both stocks and bonds fall. In such a situation, investors panic and sell most of the financial assets which they deem risky. During such times, gold prices often rise.

Bond or Stock – which is better for you?

Depending on your personal goals, either bonds or stocks can be the right investment avenues for you. Bonds are for you if you don’t want to pay regularly and worry about inflation; otherwise, stocks are the way to go.

A sound investment plan is based on the diversification of investment, that is, not putting all your eggs in one basket. This means you should always mix stocks and bonds in your investment group. Diversity of investments can play an essential role in reducing risk over time. You can change the combination and allocation of financial assets based on your business cycle and financial goals.

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]]> https://dutchuncles.in/academy/why-are-bond-traders-in-loss-when-the-market-goes-up/feed/ 0 ‘Skin in the Game’ Rule: A Boon For Mutual Fund Investors https://dutchuncles.in/academy/mutual-fund-investors-to-benefit-from-the-skin-in-the-game-rule/ https://dutchuncles.in/academy/mutual-fund-investors-to-benefit-from-the-skin-in-the-game-rule/#respond Fri, 10 Sep 2021 08:35:11 +0000 https://dutchuncles.in/?p=37279&preview=true&preview_id=37279 Billionaire investor Warren Buffett has popularised one of the most fundamental phenomena in the mutual funds investing space – skin in the game. This financial idiom translates to the situation where prominent and high-ranking insiders of fund companies spend their money buying shares in the companies they run, usually based on publicly undisclosed tips. Skin […]

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Billionaire investor Warren Buffett has popularised one of the most fundamental phenomena in the mutual funds investing space – skin in the game. This financial idiom translates to the situation where prominent and high-ranking insiders of fund companies spend their money buying shares in the companies they run, usually based on publicly undisclosed tips. 

Skin in the game is important to investors because it shows that if a company’s executives invest in more shares, it might be much more profitable than the on-the-face appearance.

The Securities and Exchange Commission of India – SEBI – recently released a framework to align the interests of asset management companies (AMCs) and investing partners (mutual fund owners, shareholders, etc.). Under the new guidelines, asset managers must invest 0.03% to 0.13% in each plan pool, depending on the individual plan’s level of risk.

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'Skin in the game' refers to executives, owners, or heads having a significant stake in the shares of the company they manage.

Under existing rules, finance companies had to add Rs. 50 lakh of their own money for each mutual fund scheme. Now, SEBI has removed the upper ceiling. Instead, it has factored in the fund size and risk in the investment to ensure more skin in the game.

SEBI has also announced that companies must pay a part of the compensation (20%) for critical employees (C-suite and stakeholding executives) in units of the scheme they manage directly or look over indirectly. The idea is that this will connect the central staff of the AMC with the interests of their scheme’s unitholders.

Positive impact on mutual fund investors

Mutual funds asset managers raise funds from many investors to invest in a pool of stocks, bonds and short-term loans. Investors buy shares of mutual funds, and each stock is essentially their part ownership in the fund and the income it generates.

The new SEBI rule is set to avoid activities where ‘fund insiders’ redeem a significant part just before the announcement of a mutual fund schemes’ closure (or failure). Thus, the regulator has included a lock-in period of three years, which means that investments cannot be sold or redeemed for three years. 

This rule also applies to the fund manager’s liability and the concept of incentive pay. It will ensure that investment by fund houses in the schemes will align with the strategy’s riskiness, assets under management (AUM), and investor’s interests irrespective of their size. 

As a mutual fund scheme size will grow, AMCs will have to invest more funds. This is an encouraging step and will help align the interests of AMCs with that of unitholders more closely.

What do the new rules say?

According to SEBI, AMCs must conduct a planned risk analysis based on the preceding month’s risk assessment. They have to use the risk-o-meter for it. The investment needs to be held until the end of the project period. Risk measurement by risk-o-meter provides a picture of the risk in a mutual fund corpus. 

The risk-o-meter chart is prepared following the Association of Mutual Funds in India (AMFI) guidelines. This is similar to a speedometer, showing the five investment risk (danger) levels in different colours.

Risk-o-meter | Dutch Uncles

AMCs and fund groups have to ensure that the temporariness of the mark to market loss is certified by the statutory auditor. Mark to market loss is the value of an asset concerning its current market price. For example, stocks that an individual holds in their Demat account are marked to market every day. This move will chiefly increase the cost and benefit many mutual fund investors.

AMCs are not required to invest in exchange-traded funds (ETFs), Index Funds, Overnight Funds, Funds of Funds schemes, and closed-ended funds, where the subscription period has closed as on date of coming into force of Mutual Funds Amendment Regulations.

In effect, the ‘skin in the game’ rule is necessary to consider the larger investing ecosystem, which includes investors as significant stakeholders. It will also increase ownership and discipline among fund managers while improving personal accountability.

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]]> https://dutchuncles.in/academy/mutual-fund-investors-to-benefit-from-the-skin-in-the-game-rule/feed/ 0 Basics of SIP or Systematic Investment Plan: A Guide to Mutual Fund Investment https://dutchuncles.in/academy/basics-of-sip-or-systematic-investment-plan-a-guide-to-mutual-fund-investment/ https://dutchuncles.in/academy/basics-of-sip-or-systematic-investment-plan-a-guide-to-mutual-fund-investment/#respond Thu, 02 Sep 2021 03:35:08 +0000 https://dutchuncles.in/?p=36733&preview=true&preview_id=36733 The investor accounts in mutual funds since 2015-16, are on a growth trajectory. According to the data released by the Association of Mutual Funds in India, the investor accounts in mutual funds have grown from 59 lakh in 2015-2016 to 81 lakh investor accounts in 2020-21. The increase in the number of investors in mutual […]

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The investor accounts in mutual funds since 2015-16, are on a growth trajectory. According to the data released by the Association of Mutual Funds in India, the investor accounts in mutual funds have grown from 59 lakh in 2015-2016 to 81 lakh investor accounts in 2020-21. The increase in the number of investors in mutual funds will continue to surge as gradually people understand the importance of long-term wealth creation through mutual funds. Even though there has been an increase in the number of investors in the mutual fund’s space, confusions about SIP (Systematic Investment Plan) exist. Some say, ‘Can I invest in a SIP to achieve my goal,’ others say, ‘I have invested in SIP’. However, here’s what it actually means: 

A Systematic Investment Plan is an investment tool or facility offered by mutual fund firms. The plan helps investors to systematically invest fixed amounts of money in mutual funds periodically (monthly, quarterly, or semi-annually, etc.). A steady investment becomes easy for an investor to meet the financial goals. 

Why should mutual fund investment happen through SIP? 

SIP to an investor imparts financial discipline. It makes an investor regular with its investments. For instance, if the investor has decided to invest a fixed amount every month in a mutual fund scheme, he/she can be in a dilemma to invest or not by analysing the market conditions and might think of postponing the investment. The investor might think of delaying more till the market condition improves. A SIP puts an end to all the worries. The money is invested regularly in a scheme without any effort except researching fees and loads to calculate expense ratios and the fund’s past results.

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According to the data released by the Association of Mutual Funds in India, the investor accounts in mutual funds have grown from 59 lakh in 2015-2016 to 81 lakh investor accounts in 2020-21.

How does SIP work?

Investing through SIP allows an investor to purchase a certain number of fund units or shares for a certain mutual fund by making investments. The journey of investment happens for a long time during the lows and highs of the market. The investor does not need to think about the correct market timing to invest as for beginners it can be risky. It allows the investor to think of the tenure and frequency to automate the investment and instructs the bank to transfer the amount from the account into a mutual fund SIP of the investor’s choice. 

Benefits of Systematic Investment Plan 

  • Compounding power gives better returns

When investing in mutual funds becomes regular through SIPs, the returns get reinvested. Over time, under the snowball effect, the returns grow manifold. Therefore, to maximise gains one should invest for an extended period.

  • Begin with low investment 

One can begin investing through SIP in mutual funds as low as Rs 500. After which, one can increase the monthly investment amount when there is an increase in salary through the step-up SIP feature. This helps investors reach their investment goals at a faster rate.

  • Rupee cost averaging 

The investor has the freedom to purchase units or ownership of a mutual fund according to the performance of Net Asset Value (NAV). If the NAV of the fund is low we purchase more units and fewer units when NAV is high.

Different types of SIPs in India 

Mutual fund companies have introduced multiple SIPs tailored to the needs of different types of investors. Here are some of the popular ones:

  • The Flexible SIP 

As the name suggests, a flexible SIP allows adjusting the investment amount based on the financial conditions as well as the conditions of the market. It gives a pre-decided formula according to the market conditions when it is weak, it allows investors to invest more and suggests a lower amount when markets are optimistic. Investors, when faced with a financial crunch, can reduce the amount and increase the same if they have more disposable funds. With flexible SIPs, the investors can adjust the amount. 

  • The step-up SIP 

Step-up SIP allows an investor to increase the SIP amount at fixed intervals. Suppose the initial invested amount in a scheme is Rs 1000, the investor can instruct the fund company to increase the amount by Rs 500 after every six months to which the next investment amount becomes Rs 1500. The step-up option is appropriate for salaried individuals who are expecting a hike shortly.

  • Perpetual SIP 

Sometimes investors forget to mention the end date for the SIP. Any SIP without the end date mentioned becomes a perpetual SIP. Investors can stop the plan by submitting a written application to the mutual fund firm.

  • Trigger SIP 

In this SIP, the investor can set a limit or condition for the investment. For instance, if the investor can withdraw the amount, upon setting a condition that it is to be withdrawn when the net asset value of the scheme fails up to a certain level as per the investor or condition like if market indices Nifty or Sensex levels fall to a certain level. These conditions are generally set by the investors who have adequate knowledge and experience to set such conditions. 

What lies ahead for beginners to invest through SIPs in mutual funds? 

There are various types of SIPs for investors. While every investor can go with the basic SIP, one can consider one of the options mentioned above if the plans suit your finances and investment needs. Before investing, the investor should understand how particular SIP functions and the charges involved that are deducted with the returns.

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