How to choose the right Mutual Fund in declining markets?

As you probably know, a mutual fund is an investment that pools together money from a number of investors. It then uses professionals to manage and invest this money with the aim of achieving a return. The mutual funds industry is regulated by the Securities and Exchange Board of India. If you are interested in investing in mutual funds, here are some terms you need to understand.

AMC

An Asset Management Company is the fund house or the company that manages the money.
The mutual fund is a trust registered under the Indian Trust Act. It is initiated by a sponsor. A sponsor is a person who acts alone or with a corporate to establish a mutual fund. The sponsor then appoints an AMC to manage the investment, marketing, accounting and other functions pertaining to the fund. For instance, ABN AMRO Trustee (India) Private Limited is appointed as the trustee to the ABN AMRO mutual fund. ABN AMRO Asset Management (India) Limited is appointed as its investment manager. Various funds with different objectives can be floated under the umbrella of one parent. So ABN AMRO Equity Fund, ABN AMRO Opportunities Fund and ABN AMRO Flexi Debt Fund are all independent schemes of ABN AMRO Mutual Fund. They are managed by the ABN AMRO AMC.

NAV

The Net Asset Value is the price of a unit of a fund. When a fund comes out with an NFO, it is priced Rs 10. Later, depending on the value of the investments, this price could rise or fall.

Load

This is a fee that is charged when you buy or sell the units of a fund. When you buy the units of a fund, you pay a percentage of it as a fee. This is known as the entry load. Let's say you are investing Rs 10,000 and the entry load is 2%. That means you pay Rs 200 as the entry load and Rs 9,800 is invested in the fund.

Now, let's assume you are selling the units of your fund. And the Rs 10,000 you invested initially is now Rs 15,000. Let's further assume the exit load is 2%. So you pay Rs 300 and get back Rs 14,700. Generally, if funds charge an entry load, they will not charge an exit load. Or vice versa. Only one of the loads is charged. The load is a percentage of the NAV.

Portfolio

This is the term given to all the investments made by the fund as well as the amount held in cash.

Corpus

Let's assume a very small mutual fund has an initial investment of 1,000 units and each unit is

worth Rs 10. Hence, the total amount with the fund is Rs 10,000. This is referred to as the corpus. Later, some other investors invest Rs 2,000. Now the corpus will be Rs 12,000 (Rs 10,000 + Rs 2,000). The total amount invested (Rs 12,000) is called the corpus or the total amount of money invested in the fund.

AUM

Assets Under Management is the total value of all the investments currently being managed by the fund.

Let's say the corpus is Rs 12,000 but, due to a rise in the price of the shares it has invested in, the value of the units has increased. So the Rs 12,000 invested is now worth Rs 15,000. This figure is referred to as AUM.

Diversified equity mutual fund

This is a mutual fund that invests in stocks of various companies in various sectors.

ELSS

Equity Linked Saving Schemes are diversified equity mutual funds with a tax benefit under Section 80C of the Income Tax Act. To avail of the tax benefit, your money must be locked up for at least three years.

Balanced fund

A fund that invests in both equity (shares) and debt (fixed return investments) is known as a balanced fund.

Debt fund

These are funds that invest in fixed return investments like bonds. A liquid fund is one that invests in money market instruments, these are fixed return investments of a very short tenure.

NFO

A New Fund Offering is the term given to a new mutual fund scheme.

SIP

A Systematic Investment Plan refers to periodic investing in a mutual fund. Every month or every three months, the investor will have to commit to putting in a fixed amount. This will go towards the purchase of units.

Let's say that every month you commit to investing, say, Rs 1,000 in your fund. At the end of a year, you would have invested Rs 12,000.

If the NAV on the day you invest in the first month is Rs 20, you will get 50 units.

The next month, the NAV is Rs 25. You will get 40 units.
The following month, the NAV is Rs 18. You will get 55.56 units.

So, after three months, you would have 145.56 units. On an average, you would have paid around Rs 21 per unit. This is because, when the NAV is high, you get fewer units per Rs 1,000. When the NAV falls, you get more units per Rs 1,000.

First time investors in Mutual Funds act in the face of imperfect information and often get overwhelmed by uncertainties characterizing the investment situation. But there’s more to Mutual Fund investing than market timing.

First things first..

The first thing an aspiring unit holder must do is to establish what type of portfolio he wants to build. In other words, to decide the right asset allocation. Asset allocation is a method that determines how you invest your money in different investments with the proper mix of various asset classes. Remember, the type or class of security you own i.e. equity, debt or money market, is much more important than the particular security itself.

The popular thumb rule for asset allocation says that whatever the investor’s age, he should keep that percentage of his portfolio in debt instruments. For example, if an investor is 25, he should have 25% of his investments in debt instruments and the rest in equity. However, in reality, different circumstances and financial position for each individual may require different allocation. Portfolio variable is another factor that one needs to understand to practice asset allocation. These are age, occupation, number of dependants in the family. Usually the younger you are, the more riskier the investments you can hold for getting superior returns.

How to pick the right fund/s?

Next, focus on selecting the right fund/s. The key is to select the fund/s based on their investment philosophy and consistency in terms of returns. To ensure you are selecting the right type of funds that are appropriate for your needs, consider following:

Determine what your financial goals are.

Are you investing for retirement? A child’s education? Or for current income?
Consider your time frame. Do you need money in three months time or three years? The longer your time horizon, the more risk you may be able to take.

How do you feel about risk? Are you in a position to tolerate the ups and downs of the stock market for the possibility of higher returns? It is necessary to know your own risk tolerance. It can be a guide for choosing the right schemes. Remember, regardless of the potential returns, if you are not comfortable with a particular asset class, you should consider other options.

Fund Candy

Diversified equity funds
Index funds
Opportunity funds
Mid-cap funds
Equity-linked savings schemes
Sector funds like Auto, Health Care, FMCG, IT, Banking etc.
Balanced funds for those who are not comfortable with 100% exposure to equity
If selected properly, these equity and equity-oriented funds have the potential to deliver returns that could be far superior to other asset classes.

Remember, all these factors will have a direct impact on the fund you choose and the return that you can expect to get. If you are a long-term investor with some appetite for risk and are looking for returns to beat inflation, equity funds are your best bet. MFs offer a variety of equity and equity-oriented schemes (See table ‘Fund Candy’). For a beginner, it makes sense to begin with a diversified fund and gradually have some exposure to sector and specialty funds.

Keeping track..Filling up an application form and writing out a cheque is not the end of the story. It is equally important to keep an eye on how your investments are performing. While having a qualified and professional advisor helps both in terms of making the right decision as well as measuring performance, it makes sense to know how to do yourself with a little help from these

sources:
Fact sheets and Newsletters: MFs publish monthly fact sheets and quarterly newsletters that contain portfolio information, a report from the fund manager and performance statistics on the schemes managed by it.

Websites: MF web sites provide performance statistics, daily NAVs, fund fact sheets, quarterly newsletters and press clippings etc. Besides, the Association of Mutual funds in India, AMFI, website, contains daily and historical NAVs, and other scheme.
Newspapers: Newspapers have pages reporting the net asset values and the sales and redemption prices of MF schemes besides other analysis and reports.
Remember, it is very important for you to be well informed. To achieve this, you need to spend a little time to understand and analyze the information to enhance the chances of success. Even if you spend one percent of the time that you spend on earning money, it’ll be a good beginning. Above all, take help of a professional advisor to select the right fund as well as the right mix of one time investment, SIP and the STP.

Top 10 open-ended equity diversified funds giving negative returns

ING Dividend Yield, Sahara Growth and Birla Sun Life Asset Allocation Aggressive are among the top ten open-ended equity diversified funds in India. Despite performing well since their launch, these funds have, however, given negative returns during the last one year, with their NAVs being at 10.73, 51.70 and 18.74, respectively, as on October 14 this year, as per Value Research. 

Here is a look at the top 10 funds’ performance during the last one year:

ING Dividend Yield

Launched in October 2005, this open-ended equity diversified fund is at the top position in the Value Research’s Top 10 list and has given a negative return of 23.08 per cent during the last one year, while return since launch is 2.36 per cent.  Return (%): 1 Year: (-) 23.08  3 Months: (-) 10.06  Category 1-Year Return (%): (-) 38.59  NAV (as on Oct 14): 10.73  Fund Manger: Manish Bhandari, since August 2007.  Fund Objective: The scheme seeks to provide medium to long-term capital appreciation by investing predominantly in equity or equity-related instruments, which offer high dividend yield.  Top 5 Holdings (as on Sept 30): GAIL, ONGC, Tata Power, Bajaj Auto and Castrol India. Sahara Growth Sahara Growth is at No 2 position in the Value Research’s Top 10 list. The fund has given (-) 23.47 per cent return during the last one year. However, its return since launch in August 2002 is in the positive territory at 30.46 per cent.  Return (%): 1 Year: (-) 23.47 3 Months: (-) 4.57  3 Years: 18.20 Category 1-Year Return (%): (-) 38.59  NAV (as on Oct 14): 51.70  Fund Manger: A N Sridhar, since February 2007.  Fund Objective: The scheme aims to achieve capital appreciation by investing in equity and equity-related instruments.  Top 5 Holdings (as on Sept 30): HUL, RIL, NTPC, Tata Communications and BPCL. Birla Sun Life Asset Allocation Aggressive   This fund has given (-) 24.82 per cent return during the last one year, although its return since launch in January 2004 is 14.21 per cent. Return (%): 1 Year: (-) 24.82 3 Months: (-) 9.14 3 Years: 10.01  Category 1-Year Return (%): (-) 38.59 NAV (as on Oct 14): 18.74 Fund Mangers: Satyabrata Mohanty (since December 2005) and Ajay Garg (since February 2007). Fund Objective: The scheme aims to provide income and capital appreciation along with diversification by investing in a basket of debt and equity mutual fund schemes of the AMC, in line with the stated asset allocation. Top 5 Holdings (as on Sept 30): Birla Sun Life Advantage, Birla Midcap Fund, Birla Sun Life New Millennium, Birla Sun Life Dynamic Bond-R and Birla Sun Life Income Fund. IDFC Imperial Equity   IDFC Imperial Equity Fund has given a negative return of 25.41 per cent return during the last one year and its return since launch in February 2006 is 7.59 per cent. Return (%): 1 Year: (-) 25.41 3 Months: (-) 4.14 Category 1-Year Return (%): (-) 38.59 NAV (as on Oct 14): 12.14 Fund Manger: Kenneth Andrade, since January 2006. Fund Objective: The scheme aims to invest in well-managed growth companies that are available at reasonable value. Top 5 Holdings (as on Sept 30): RIL, ONGC, Bharti Airtel, Bajaj Auto and SBI. Birla Sun Life Dividend Yield Plus   This fund has given 26.47 per cent return since its launch in February 2003. However, its one-year return is in the negative territory at (-) 25.59 per cent.  Return (%): 1 Year: (-) 25.59 3 Months: (-) 6.81 3 Year: 3.92 Category 1-Year Return (%): (-) 38.59 NAV (as on Oct 14): 38.03 Fund Manger: Ankit Sancheti, since November 2007.  Fund Objective: The scheme aims to generate returns by investing in high dividend-paying companies. Top 5 Holdings (as on Sept 30): ONGC, Wyeth, Glaxosmithkline Pharma, GAIL and Tamil Nadu Newsprint & Papers. Reliance Regular Savings Equity   Reliance Regular Savings Equity Fund has given a negative return of 26.62 per cent during the last one year. However, its return since launch in May 2005 is in the positive territory at 13.24 per cent.Return (%): 1 Year: (-) 26.62 3 Months: (-) 17.69 3 Year: 15.11  Category 1-Year Return (%): (-) 38.59 NAV (as on Oct 14): 15.33  Fund Mangers: Arpit Malaviya (since Oct 2007) and OmPrakash Kuckien (since Nov 2007) Fund Objective: The scheme aims to generate consistent returns by actively investing in equity or equity related securities.  Top 5 Holdings (as on Sept 30): RIL, Pratibha Industries, ICICI Bank, Divi’s Labs and HDFC Bank. FT India Life Stage FoF 20s   This fund has given 16.53 per cent return since its launch in November 2003. However, its one-year return is in the negative territory at (-) 26.66 per cent.  Return (%): 1 Year: (-) 26.66 3 Months: (-) 8.58 3 Year: 9.39 Category 1-Year Return (%): (-) 38.59 NAV (as on Oct 14): 21.10 Fund Mangers: Sukumar Rajah (since Nov 2003), Sachin Padwal-Desai (since Feb 2006) and Pallab Roy (since June 2008). Top 5 Holdings (as on Sept 30): Franklin India Bluechip Fund (50.22%), Templeton India Income Builder, Templeton India Income Fund, Templeton India Growth Fund, and Franklin India Prima Fund. HDFC Growth Fund   This fund has given a negative return of 26.89 per cent return during the last one year and its return since launch in August 2000 is 21.50 per cent. Return (%): 1 Year: (-) 26.89 3 Months: (-) 7.55 3 Year: 17.84 Category 1-Year Return (%): (-) 38.59 NAV (as on Oct 14): 49.22 Fund Manger: Srinivas Rao Ravuri, since April 2006. Fund Objective: The scheme is aimed at generating long-term capital appreciation by investing 80-100 per cent of its assets in equity and equity-related instruments. Exposure to debt and money market instruments is pegged at around 20% of the corpus. Top 5 Holdings (as on Sept 30): RIL, Bharti Airtel, ICICI Bank, ONGC and SBI. DSPML Top 100 Equity Reg   At No 10 position in the Value Research’s Top 10 list is DSPML Top 100 Equity Reg Fund. This fund has given an impressive return of 36.59 per cent since its launch in February 2003, although its one-year return is (-) 27.17 per cent. Return (%): 1 Year: (-) 27.17 3 Months: (-) 7.69 3 Year: 20.21 Category 1-Year Return (%): (-) 38.59 NAV (as on Oct 14): 58.21 Fund Manger: Apoorva Shah, since April 2006 Fund Objective: The scheme seeks to generate capital appreciation from a portfolio that largely consists of equity and equity-related securities of the 100 largest corporates, by market capitalisation, listed on either BSE or NSE. Top 5 Holdings (as on Sept 30): HUL, ONGC, Bharti Airtel, Crompton Greaves and Infosys Tech. (Source: Value Research)