| Is it Time to Invest Now ? |
Is it time now………..to enter the market? Seems to be the question in every investor’s mind. Has the market bottomed out? will we see a steady rise? Which sectors will do well? If we do want to enter then which route should we adopt to enter-direct or through mutual funds? Etc. etc.
We’ve seen the way things have gone in the IPO markets. The book building process has all but marginalised the role of the small investor. The secondary market, with its big players like FII’s and mutual funds too seems to be headed in the same direction. A small investor can hardly control any of the influences in the market, so it is better that he approaches the market through a route where he can minimize his risk and this is the mutual fund route.
A mutual fund is simply a collection of stocks and/or bonds. Most mutual funds are "actively managed," meaning the mutual fund shareholders, through a yearly fee, pay a mutual fund manager to actively buy and sell stocks or bonds within the fund. Diversification of risk and instant Liquidity are crucial benefits of investing through mutual funds.
Building a portfolio of diversified blue chip stocks is not easy and it costs money. In addition to that one needs time to understand the stock market the sectors and the companies that one has invested in. Having done that once is not sufficient. You then have to keep your eyes and ears open to any development that may affect your investment. And last but not the least, monitor the dividend and other benefits. Given our busy schedules and involvement in jobs and profession it is not an easy thing to do. Not to say that mutual funds don't need to be monitored. But the monitoring can be at much relaxed pace may be once a quarter or so. In addition one need not get into the nitty-gritty of monitoring individual stocks and sectors. Open-ended mutual funds that allow one to enter and exit at any point of time are unlike other investments where there is a fixed tenure.
The tax benefits for investing in mutual
funds are many. Under Sec 88 of the I.T. Act - Twenty percent of the amount invested in
specified mutual funds (called equity linked savings schemes or ELSS) is deductible from
the tax payable by the investor in a particular year subject to a maximum of Rs2000 per
investor. Under Section 54EA of the I.T. Act, investment of the entire or part of the net
consideration obtained from the transfer of long-term capital assets for a period of three
years in mutual fund units, exempts the asset holder from paying capital gains tax. Under
Section 54EB of the I.T. Act, investment of the entire or part of the capital gains
obtained from the transfer of long-term capital assets for a period of seven years in
mutual fund units exempts the asset holder from paying capital gains tax. Section 10(33)
of the I.T. Act -The investor in a mutual fund is exempt from paying any tax on the
dividend received by him from the mutual fund, irrespective of the type of the mutual
fund. This benefit is available as the units of mutual funds are treated as capital assets
and the investor has to pay capital gains tax on the sale proceeds of mutual fund units
sold by him. For investments held for less than one year the tax is equal to 30% of the
capital gain. For investments held for more than one year, the tax is equal to 20% of the
capital gains with the
indexation benefit or 10% without the indexation benefit. Accordingly, for those seeking a
regular income from their mutual fund investments, it may be more profitable to shift to
the growth or re-investment options of income funds. You can meet your requirements of
regular income by way of partial redemptions of units from time to time, or by making use
of for the systematic withdrawal option after a gap of at least one year of investment. In
such a case your income will be by way of long term capital gains which will attract lower
taxes.
Having established that it is indeed a good thing to get into mutual funds, there seems an endless choice of them. Basically mutual funds can invest in stocks, debentures, corporate bonds, government securities, call money or commercial paper T-bills, certificates of deposits, cash or a combination of all the above in varying ratios with different aims like preservation of capital, long term appreciation, medium returns with medium volatility-etc.
Normally PURE EQUITY FUNDS are pooled amounts of money that are invested in stocks. If your aim as an investor is not regular income but capital appreciation then growth schemes should be considered. Within growth schemes - Fund managers look for companies, with high-expected growth rate in revenues, the stocks will have higher than average price to earnings ratio and may trade above book value, expectation is that such growth will justify the stock price and will increase further in near future, the main income from such investment will be capital gains and not dividends, generally, the feature of small to medium capitalization companies. In VALUE Schemes the emphasis is more Fund managers look for assets, that are undervalued or managers believe, that investors are not appreciating full potential for that company or industry. These companies have low price to the earnings ratio or book value or may have hidden assets on intellectual properties. Strategy is to buy the asset cheap and sell when market value rises.
Then there are Sector dedicated funds in which fund managers focus their investments on specific industries such as IT or internet or metals. They expect that these industries will either grow at the fastest rate or the price appreciation of stocks of these companies will be faster than normal. The other variants of equity funds can also include those tracking performance of specific indices such as BSE Sensex or Nifty 50 i.e-index funds.
So when is the best time to invest in the pure equity funds. Well the funds have taken a beating in the last year or so, there NAV’s are down, and if experts are to be believed then we’ve pretty much reached rock bottom. So it would be safe to invest in some top performing pure equity schemes like Tata Equity Fund, HDFC growth Fund, Alliance Equity Fund, Birla Advantage etc. But remember the time horizon, you should be looking at is plus 5 years at least-especially for pure equity funds.
BALANCED FUNDS mix some stocks and some bonds. A typical balanced fund might contain about 50-65% stocks and hold the rest of shareholder's money in bonds. It is important to know the distribution of stocks to bonds in a specific balanced fund to understand the risks and rewards inherent in that fund. They aim to reduce the risks of investing in stocks by having a stake in both the equity and the debt markets. These schemes adopt some flexibility in changing the asset composition between equity and debt. The fund managers exploit market conditions to buy the best class of assets at each point in time. By mixing stocks and bonds (and sometimes other types of assets as well, like call money or commercial paper), a balanced scheme is likely to give a return somewhere in between those of stocks and bonds. Bonds add stability during market downturns and volatile periods, while stocks provide growth. Since the return on different types of assets rise and fall at different times, the risk is usually lower in balanced schemes than in pure growth or income schemes.
So is it the right time to invest in balanced funds now-well with the interest rates more or less stable, the bond yields will remain firm, and with the market expected to have bottomed out, one can look at balanced funds as a investment with the upside being, that if the IMD money does lead to a softening in the interest rates, then the bond yields will go up. Thus these funds will show a rise on account of the market moving up as well as the bond yields going up. The time horizon again is between 3-5 years at least. Balanced performers like Alliance 95, SBI Magnum balanced, Tata Balanced Fund etc can be looked at after analyzing that their portfolio management styles match your needs and philosophy.
INCOME FUNDS- Fund managers invest in securities that provide regular income stream. Generally invest in corporate debentures, bonds etc. The value of such funds is sensitive to the interest rates. Ideally suited for investors who want regular income, like retired people. These schemes invest mainly in income-bearing instruments like bonds, debentures, government securities, commercial paper, etc. These instruments are much less volatile than equity schemes. Their volatility depends essentially on the health of the economy e.g., rupee depreciation, fiscal deficit, inflationary pressure. Performance of such schemes also depends on bond ratings. These schemes provide returns generally between 7 to 12% per annum. Beside investing in Government of India securities and money market instruments, they are slightly more overweighed on corporate India. Approximately 50-60% of the portfolio would consist of fixed income instruments issued by corporate India.
In debt funds, it is useful to compare the extent to which the growth in NAV comes from interest income and from changes in valuation of illiquid assets like bonds and debentures. This is important because as of today there is no standard method for evaluation of untraded securities. The valuation model used by the fund might have resulted in an appreciation of NAV. Some of the promising bond funds are:-Birla Income plus, Alliance Liquid Income, Alliance MIP, Dundee Bond Public Sector, JM Liquid KP pension plan, Sundarum Bond Saver-etc.
GILT FUNDS invest in government bonds, money market securities or some combination of these.
Gilt schemes tend to give a higher return than a money market scheme at the same time retaining the qualities of a liquid fund. Gilt schemes generally give a return of 8.5-10% per annum. They are slightly volatile because 95% of the traded volume of fixed income instruments in India comprise of gilt schemes and therefore pricing of such schemes is done daily. The prime objective is to preserve the principal of the investment, to earn a yield on investment, which is just above expected inflation, and invest mostly in government or quasi-government securities. In the last year these funds have shown positive returns-their duration is normally less than one year, say one to six months. Gilts funds like- JM G Sec Regular, Templeton GSF, DSP ML G Sec Fund plan etc can be looked at for investment.
Money market schemes invest in short-term debt instruments such as T-bills, certificates of deposits, commercial papers, call money markets, etc. Their goal is to preserve the principal while yielding a modest return. They are ideal for corporate and big investors looking for avenues to park their short-term surplus funds. The return depends upon short-term interest rates. Normally the return varies between 7-8% per annum for money market schemes. In recent times as the interest rates grew more volatile- fund managers began moving into G-Sec exposure in bond funds and then when the G-Sec market started getting volatile, shifting towards money market instruments. Portfolios of bond funds and gilt funds started getting structured very defensively with the shorter term maturity securities hogging a large share of the pie. Infact when in doubt – don’t invest; keep it in cash! And Gilt-or liquid funds are a good way of keeping money in cash rather than at a bank.
Investing in mutual funds requires a lot of reading and research. The decision has to come from you but the task is easier if you lay down your needs and parameters of investment before investing. So start small, but start nonetheless.
Aru Srivastava
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