Fidelity Mutual Fund has great brand value and has become synonymous with research, but somehow that does not translate into outstanding returns.
Schemes from this fund house are not chart toppers. Opt for them if you are
looking for stability and consistency.
Fidelity India Special Situations (2007 - 2009) has never been a first quartile performer, but has occupied positions in all the other three quartiles during the 3-year period. However, it could be argued that the inherent nature of the fund will result in periodic underperformance.
Fidelity Equity (2006 - 2009) just about managed a 1st quartile performance in 2006. In 2007, it dropped to 3rd quartile, which was understandable when the market got overheated and the fund manager refused to chase fads,avoided Real Estate and stayed away from stocks whose valuations were ridiculous.
But in the downturn in 2008, the fund managed a 2nd quartile performance and
stayed in that bracket in 2009 too.
Fidelity India Growth (2008 - 2009) has always had top 2nd quartile annual performances in its short history.
Fidelity Tax Advantage (2007 - 2009) has either been a 1st quartile or 2nd quartile performer.
Over a 3-year period (February 28, 2010), the annual diversified equity
category average return has been 8.30%. Fidelity Equity (10.05%)
outperformed while Fidelity India Special Situations underperformed
(5.71%). Fidelity Tax Advantage outperformed its category average
(7.96%) with a return of 11.11%.
Monday, April 26, 2010
Saturday, April 24, 2010
ACTIVE VS PASSIVE INVESTMENT
At first glance, it would seem that most equity mutual funds are sitting pretty well on profits—last year, 99.03 per cent of active funds gave positive returns. Dig deeper and you find one in three active funds underperformed the bellwether Sensex. As compared to the Sensex’s returns of 76 per cent, some actively managed equity funds returned just 41 per cent. As in any bull market, the rising tide lifted most stocks and so it was not that difficult for fund managers to chalk up a positive performance. Yet, over the long run, most fund managers find it difficult to beat the averages consistently every year, year on year. The funds that are leaders of today could be the laggards of tomorrow.
In the quest for market-beating performance, mutual fund investors could often chase the top performers and churn their fund portfolios, but just as often find that these funds did not perform well the next year. In such a scenario, it’s best to balance out your mutual fund portfolio by including index funds—funds that only track their benchmark index.
Index funds are passively-managed funds which invest in those securities that lie in their benchmark indices and in the same proportion. There are mainly two types of funds: one that holds all the stocks which are the constituents of the chosen index in the same proportion, and the other that follows the sample of benchmark index. In India we have two widely-tracked indices: the NSE-Nifty and the BSE-Sensex. Around 34 schemes track these two indices. Out of these schemes, six are Exchange Traded Funds (ETFs). Among the rest, 19 are Nifty-based index funds, while the remaining track the Sensex. A few of them track some sector-specific indices, such as the banking and PSE indices.
Active versus passive
Index funds are still not very popular in India as they are in most developed countries. That’s because there are valuation gaps in the stockmarket and pockets where the fund manager can use his acumen to pick outperforming stocks. In the US, there are not many valuation plays that fund managers can exploit as the market is more mature and well-researched. On the other hand, mutual fund distributors were selling more actively-managed funds than index funds. But with the new distribution structure, the onus will be on investors to select funds, if they don’t want to go through a distributor. However, you need to pay the distributor for his services. It is not a very easy task to choose the right fund among around 250 actively-managed funds on your own. If you are not that much investment-savvy, or do not have the time and the resources to track the hundreds of actively-managed MF schemes that are available, you can add an index fund to your portfolio. This should help you cover the broad market.
The beauty of an index fund is passive management and, because of this, its low cost structure. If you look at the returns, index funds have performed equally well vis-a-vis other actively-managed funds. The average return of index funds on a 5-year and 3-year basis is 18.19 per cent and 6.19 per cent respectively, whereas the average return of an actively-managed equity fund are 20.92 per cent and 8.52 respectively, for the same period, on the BSE. Among index funds, some have delivered as high as 23 per cent compared to benchmark returns of 20.79 percent. Some of the actively managed funds have given returns as low as 5 per cent on a 5-year basis, which is far lower than passively-managed index funds.
Lower expenses
Selection of the right index fund is not rocket science. It is far easier than the selection of an actively-managed equity fund. Here, you need to look at the two main parameters: expense ratio and the tracking error. The lower the expense ratio, the better is the fund. For instance, assume you invest Rs 50,000 each in ING Nifty Plus and Franklin India Index-Nifty, for a period of 20 years. Note that while ING Nifty charges 2.5 per cent towards expenses, Franklin India Index charges 1.5 per cent. Assuming that the market grows by 15 per cent for the next 20 years on a compounded basis, Franklin India Index will yield you Rs 6,29,342, while ING Nifty will yield you Rs 5,27,254. That is a clear difference of Rs 1,02,088, or 19 per cent.
The objective of index funds is to achieve the return of index they are tracking so, usually, the returns from index funds are almost the same. But, in many cases, you will find the return of index does not match the index fund you have invested in. There are plenty of reasons for this. The stocks that the fund has invested in may have declared a dividend. In other cases, the cash levels and expense ratios that the fund holds might be different. This leads to a mismatch between the net asset value of the index fund and the closing values of the index. This mismatch is also called a tracking error. The better-managed index funds are the ones that have the lowest tracking error.
You just need to look at the expense ratio of the fund and the actual return from the fund versus its benchmark return. Always go for funds having the least expense ratio and less difference between the fund's return and the benchmark's return. Usually index-based ETFs have the least expanse ratio. On an average it is around 0.71 per cent, which is around 50 per cent less than non-ETF index funds. If you are a tech-savvy investor and looking for index funds, you may choose to go the ETF way. Alternately, you could opt for non-ETF index funds.
In the quest for market-beating performance, mutual fund investors could often chase the top performers and churn their fund portfolios, but just as often find that these funds did not perform well the next year. In such a scenario, it’s best to balance out your mutual fund portfolio by including index funds—funds that only track their benchmark index.
Index funds are passively-managed funds which invest in those securities that lie in their benchmark indices and in the same proportion. There are mainly two types of funds: one that holds all the stocks which are the constituents of the chosen index in the same proportion, and the other that follows the sample of benchmark index. In India we have two widely-tracked indices: the NSE-Nifty and the BSE-Sensex. Around 34 schemes track these two indices. Out of these schemes, six are Exchange Traded Funds (ETFs). Among the rest, 19 are Nifty-based index funds, while the remaining track the Sensex. A few of them track some sector-specific indices, such as the banking and PSE indices.
Active versus passive
Index funds are still not very popular in India as they are in most developed countries. That’s because there are valuation gaps in the stockmarket and pockets where the fund manager can use his acumen to pick outperforming stocks. In the US, there are not many valuation plays that fund managers can exploit as the market is more mature and well-researched. On the other hand, mutual fund distributors were selling more actively-managed funds than index funds. But with the new distribution structure, the onus will be on investors to select funds, if they don’t want to go through a distributor. However, you need to pay the distributor for his services. It is not a very easy task to choose the right fund among around 250 actively-managed funds on your own. If you are not that much investment-savvy, or do not have the time and the resources to track the hundreds of actively-managed MF schemes that are available, you can add an index fund to your portfolio. This should help you cover the broad market.
The beauty of an index fund is passive management and, because of this, its low cost structure. If you look at the returns, index funds have performed equally well vis-a-vis other actively-managed funds. The average return of index funds on a 5-year and 3-year basis is 18.19 per cent and 6.19 per cent respectively, whereas the average return of an actively-managed equity fund are 20.92 per cent and 8.52 respectively, for the same period, on the BSE. Among index funds, some have delivered as high as 23 per cent compared to benchmark returns of 20.79 percent. Some of the actively managed funds have given returns as low as 5 per cent on a 5-year basis, which is far lower than passively-managed index funds.
Lower expenses
Selection of the right index fund is not rocket science. It is far easier than the selection of an actively-managed equity fund. Here, you need to look at the two main parameters: expense ratio and the tracking error. The lower the expense ratio, the better is the fund. For instance, assume you invest Rs 50,000 each in ING Nifty Plus and Franklin India Index-Nifty, for a period of 20 years. Note that while ING Nifty charges 2.5 per cent towards expenses, Franklin India Index charges 1.5 per cent. Assuming that the market grows by 15 per cent for the next 20 years on a compounded basis, Franklin India Index will yield you Rs 6,29,342, while ING Nifty will yield you Rs 5,27,254. That is a clear difference of Rs 1,02,088, or 19 per cent.
The objective of index funds is to achieve the return of index they are tracking so, usually, the returns from index funds are almost the same. But, in many cases, you will find the return of index does not match the index fund you have invested in. There are plenty of reasons for this. The stocks that the fund has invested in may have declared a dividend. In other cases, the cash levels and expense ratios that the fund holds might be different. This leads to a mismatch between the net asset value of the index fund and the closing values of the index. This mismatch is also called a tracking error. The better-managed index funds are the ones that have the lowest tracking error.
You just need to look at the expense ratio of the fund and the actual return from the fund versus its benchmark return. Always go for funds having the least expense ratio and less difference between the fund's return and the benchmark's return. Usually index-based ETFs have the least expanse ratio. On an average it is around 0.71 per cent, which is around 50 per cent less than non-ETF index funds. If you are a tech-savvy investor and looking for index funds, you may choose to go the ETF way. Alternately, you could opt for non-ETF index funds.
Friday, April 23, 2010
Diversification and Taxes
One investor diversifies his allocation in mutual funds by investing in 2 or 3 equity oriented balanced funds dividend payout option and another by selecting equity and debt funds dividend payout option.
What happens after one year of investing? If whenever dividends are declared, equity oriented balanced fund dividends are tax free in the hands of investor.
In effect even the debt portion of the fund (average 35%) also becomes tax free which otherwise is taxed in pure debt fund.
This makes a compelling reason to select good equity oriented balanced funds to diversify than to try and do it on your own by investing separately in equity and debt funds.
What happens after one year of investing? If whenever dividends are declared, equity oriented balanced fund dividends are tax free in the hands of investor.
In effect even the debt portion of the fund (average 35%) also becomes tax free which otherwise is taxed in pure debt fund.
This makes a compelling reason to select good equity oriented balanced funds to diversify than to try and do it on your own by investing separately in equity and debt funds.
Understanding Triggers in MF
Trigger is an event on the occurrence of which the fund will automatically
redeem/switch the units on behalf of investors.
Once you invest in a fund, there are two basic transactions that you can execute;
redeem your units or transfer them to another fund. When these transactions are automated
based on an event taking place, it is referred to as a Trigger.
So once you decide on the Trigger, the execution of the transaction is automated.
Who sets the Trigger? The investor.
Who executes the Trigger? The fund house.
When is it executed? On the day the Trigger point has been reached, which is mostly
value specified.
Let’s say you bought 100 units of Fund A when the Net Asset Value (NAV) was Rs 12.
You want to redeem all your units when the NAV touches Rs 15 (Trigger point). You
can keep track of your investment on a daily basis and send a redemption request
when that happens, or you set a Trigger. If you opt for the latter, the fund house will take over and track your investment and sell the units when the NAV touches Rs 15.
It sounds like a winner. But this concept yet has to gain momentum.
Trigger-based plans enable investors to shift conveniently between
debt and equity. The investor determines the Trigger and the portfolio
gets rebalanced accordingly. Simple, specially if he wants to just sell his
units or shift them to another scheme from the same fund house. The
hindrance is if the investor wants to shift his investment to a scheme
from a different Asset Management Company (AMC). So he may exit
from an equity scheme from Fund House A but not want to put his
money in a debt scheme in Fund House A, but rather, in Fund House B.
The Trigger will just enable him to sell his units. He will have to make
the effort to buy the units of the scheme from the other fund house.
When It Works For You...
Automated: Investors need not track their investment
or the market. It is conveniently taken care of.
Discipline: There is no emotion involved, which often
works against the investor. If you get carried away
with the stock market, a Trigger will help you stay disciplined.
Goal Based Investing: It helps you to stick to your
goals of capital appreciation.
Loss Limitation: Since limits can be assigned to
upside and downside movement of investment value,
a market slide will not take away your gains.
When it works against you...
Disturbed Asset allocation: If gains are regularly booked in equity
investments as a bull run gains momentum, the portfolio may get
skewed towards debt and restrict gains from a market rally.
Revisiting The Trigger: One cannot be totally disconnected
from their investments. A lot of these Triggers
cease to exist after being executed the first time.
Investors may need to apply for another Trigger again.
Alternatively, if the Trigger is not executed within a
certain time, it may expire and would need to be reactivated.
Aimless Profit Booking: Profits may end up getting
booked even if there is no goal in sight. Hence the
money could remain un-utilised for years to come.
Load & Taxes: Redemptions could attract taxes. For
instance, redemption in equity funds within one year of
investment will attract capital gains tax. Not to mention
exit loads if the tenure of the investment is brief.
redeem/switch the units on behalf of investors.
Once you invest in a fund, there are two basic transactions that you can execute;
redeem your units or transfer them to another fund. When these transactions are automated
based on an event taking place, it is referred to as a Trigger.
So once you decide on the Trigger, the execution of the transaction is automated.
Who sets the Trigger? The investor.
Who executes the Trigger? The fund house.
When is it executed? On the day the Trigger point has been reached, which is mostly
value specified.
Let’s say you bought 100 units of Fund A when the Net Asset Value (NAV) was Rs 12.
You want to redeem all your units when the NAV touches Rs 15 (Trigger point). You
can keep track of your investment on a daily basis and send a redemption request
when that happens, or you set a Trigger. If you opt for the latter, the fund house will take over and track your investment and sell the units when the NAV touches Rs 15.
It sounds like a winner. But this concept yet has to gain momentum.
Trigger-based plans enable investors to shift conveniently between
debt and equity. The investor determines the Trigger and the portfolio
gets rebalanced accordingly. Simple, specially if he wants to just sell his
units or shift them to another scheme from the same fund house. The
hindrance is if the investor wants to shift his investment to a scheme
from a different Asset Management Company (AMC). So he may exit
from an equity scheme from Fund House A but not want to put his
money in a debt scheme in Fund House A, but rather, in Fund House B.
The Trigger will just enable him to sell his units. He will have to make
the effort to buy the units of the scheme from the other fund house.
When It Works For You...
Automated: Investors need not track their investment
or the market. It is conveniently taken care of.
Discipline: There is no emotion involved, which often
works against the investor. If you get carried away
with the stock market, a Trigger will help you stay disciplined.
Goal Based Investing: It helps you to stick to your
goals of capital appreciation.
Loss Limitation: Since limits can be assigned to
upside and downside movement of investment value,
a market slide will not take away your gains.
When it works against you...
Disturbed Asset allocation: If gains are regularly booked in equity
investments as a bull run gains momentum, the portfolio may get
skewed towards debt and restrict gains from a market rally.
Revisiting The Trigger: One cannot be totally disconnected
from their investments. A lot of these Triggers
cease to exist after being executed the first time.
Investors may need to apply for another Trigger again.
Alternatively, if the Trigger is not executed within a
certain time, it may expire and would need to be reactivated.
Aimless Profit Booking: Profits may end up getting
booked even if there is no goal in sight. Hence the
money could remain un-utilised for years to come.
Load & Taxes: Redemptions could attract taxes. For
instance, redemption in equity funds within one year of
investment will attract capital gains tax. Not to mention
exit loads if the tenure of the investment is brief.
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