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06July2013
Last month marked the 20th anniversary of the "real" Indian mutual fund industry. It was in 1993 that private and foreign mutual fund companies were allowed
to setup operations and offer mutual funds to investors. Over these 20 years,
although the industry has grown steadily in terms of the assets under management, growth in the retail segment has been less than desired.
Balanced Funds:
The best of both
worlds - Nimesh
Shah
Financial Planning
Education Series
Various commentators have made observations along these lines in the past few weeks - praising the
mutual fund industry for creating products that are transparent and delivering good performance,
but chiding it for its lack of focus on increasing its retail client base. Writing in Business Standard,
long-time veteran, Dhirendra Kumar, observed that mutual funds are presently a product for people
who understand them and actively seek them out. He writes that "...while the fund industry has been
busy earning its daily bread from easy-to-sell products...the government has focused more on making funds safe and less on encouraging people to invest.
I would choose to look at it positively. The foundation of any sound industry is the presence of good
products that deliver value to its customers. In this regard, the mutual fund industry has indeed delivered on its promise. As a recent CRISIL performance study noted, a good majority of mutual fund
schemes have consistently delivered above-market returns for reasonably long-term investors (you
can read Vidya Bala's summary of this study here). Along with performance, mutual funds have also
delivered on convenience, risk mitigation, transparency, and, over time, low cost of investing.
Given these, I feel there are reasons for optimism for the future of this industry. If there is some regulatory stability and even a marginal easing of KYC regulations, investors will find it less onerous to enter the world of MF investing. Once they are in, the flexibility
and performance of this channel will keep them there.
Twenty years from now, hopefully, well find mutual funds as the preferred investment destination for investors in India.
If the product is here, can the market be far behind?
Happy Investing!
Disclaimer: Mutual Fund Investments are subject to market risks. Please read all scheme related documents carefully before investing.
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From the daily chart of ITC featured below, it is evident that the stock is in a short-term uptrend. The recovery off crucial support strengthens the bullish case scenario.
Disclaimer: Mutual Fund Investments are subject to market risks. Please read all scheme related documents carefully before investing.
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Disclaimer: Mutual Fund Investments are subject to market risks. Please read all scheme related documents carefully before investing.
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The stock has been bounced off the crucial support and has managed to edge above the resistance level on July 4. This is a positive sign and we expect
the price to head to the target of Rs.1,750. The positive view would be under threat if the stock falls below the stop loss level at Rs.1,320.
Mr. B. Krishna Kumar also hosts a weekly webinar that discusses the market outlook for the following week.
You can register for the webinar by clicking here:
https://www4.gotomeeting.com/register/927617871
Often investors believe it is in their best interest to withdraw from the equity market during market volatility. For example, in 2008
many investors decided to stop their systematic investment plans (SIPs) as the CNX Nifty fell by over 50%. Similarly, when the market
began to recover in 2012 (gained 28%) following the over-24% decline in 2011, most investors chose to book profits; this is evident
from the net outflow of Rs 15,160 cr from equity funds in the nine months ending February 2013. The month of March saw inflows
worth Rs.768 cr, though in April investors resorted back to profit booking with the net outflow for the month being Rs.270 cr.
This lack of confidence in long-term investment in the equity market mostly arises from lack of awareness, which clearly highlights the
need to inform investors that equity is an asset class where one needs to be invested for longer periods (over seven years) to get superior returns. The equity market represented by the CNX Nifty has given around 19% returns in the 10-year period ended March 28, 2013
compared with 2-3% in the 3-5 year period.
While 2012 was a positive year for equity markets (CNX Nifty up by 28%) led by positive global cues and steps introduced by the government since September 2012 on reform measures. Equity markets may not be able to deliver very big returns in 2013 like in 2012.
Further equity markets are expected to remain volatile due to political (pre-election period) and economic reasons (high current account and fiscal deficits & low growth).
On the debt front, interest rates appear to have peaked out and the Reserve Bank of India (RBI) is expected to cut interest rates further
(after the 25 bps cuts each in January, March and May 2013) in the next six months.
At this juncture, to prevent any one asset class from having a negative impact on returns, it is prudent to look at a diversified portfolio
Disclaimer: Mutual Fund Investments are subject to market risks. Please read all scheme related documents carefully before investing.
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comprising equity and debt. Balanced funds provide an asset allocation which is about two-thirds (over 65%) invested in equities and
one-third in debt. These funds offer a reasonable opportunity to participate in equities at relatively lower risks and generate better risk
adjusted returns from both equity and debt components. The funds are also actively managed - exposure to equity is increased if the
equity market is positive (see chart below).
Balanced Funds Equity Exposure Tactically Aligned with Equity Market
Note Average monthly equity exposure of balanced funds, category as per CRISIL Mutual Fund Ranking of December 2012
Increase /decrease in equity exposure is a combination of strategic change in allocation and mark to market
movement
Advantages
1) Diversification - Spreading ones investment across asset classes helps to reduce the market risks and moderate the effect of
any individual asset class on the portfolios value. Table 3 shows that when the equity market was down 24% in 2011, balanced
funds fell by less than 15% as these benefitted from exposure to debt, but when the market rose 28% in 2012, balanced funds gave
almost similar returns as pure equity funds. This clearly indicates the downside risk protection provided by the category.
2) Asset allocation is automatic and tactical If one were to hold separate equity and debt portfolios, managing these could
be a tedious task and would involve churning costs and tax implications; further, one may not be able to tactically adjust equity allocation as per market movement. Fund managers, on the other hand, are better placed to take a tactical call based on market movements. Balanced funds provide all these advantages in a single structure.
3) Tax benefits Balanced funds have an average 65% exposure to equities, which allow them to be taxed like equity funds. These
funds enjoy tax-free returns if the holding period is greater than one year; otherwise, they are subject to short-term capital gains tax
except for the dividend option. Dividends paid and received are tax free (without any dividend distribution tax) irrespective of the
holding period. For
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Suitability
Balanced funds are ideal for investors with a moderate risk profile and an investment horizon of over three years. Lower volatility and
tax benefits similar to equity funds make these funds a good investment option for such investors. The fund managers ability to rebalance the equity and debt allocation as well as take tactical calls on the equity allocation based on market cycles helps investors as
investors need not maintain equity and debt portfolios separately.
This is noticeable as balanced funds on an average returned 27% in 2012, marginally lower than the 28% gains in CNX Nifty mainly
because of the higher equity allocation in balanced funds
One must, however, conduct due diligence before any kind of investing.
(The author is MD & CEO of ICICI Prudential AMC Limited)
Mr. S. Sridharan is the Head of Financial Planning with FundsIndia. You can reach Mr. Sridharan at sridharan@fundsindia.com
Disclaimer: Mutual Fund Investments are subject to market risks. Please read all scheme related documents carefully before investing.
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Significantly, these do not offer any additional tax concessions to the investor either.
Investors need to pay tax depending upon the tax brackets their incomes fall in. On
maturity, however, the investor can avail the indexation benefits, which is 10 per cent
without indexation or 20 per cent with indexation, whichever is lower.
Disclaimer: Mutual Fund Investments are subject to market risks. Please read all scheme related documents carefully before investing.