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The Best Mutual Funds | How To Select

Plenty of Mutual Fund offers. Plethora of information. But, of no use. When it’s time to invest, it’s a common man’s common problem to choose the right one. Try to investigate. Most of the people are stuck in Funds, that were performed well in the past. But currently, not even meeting the benchmark index. All this happens, only when the investor lacks proper knowledge about guidelines, that need to be followed, while investigating into the Mutual Funds.


It’s simple, to pick a well suited Mutual Fund, that matches our requirements. Fund houses are ready with variety of Mutual Funds, that are well tailored to match the financial requirements of people from all walks of life. They are well planned and designed, keeping in mind the financial obligations of different streams of investors. So, it’s our choice to pick the right one to meet our financial goals.

Here are certain guidelines to come up that winner to suit to your financial goals. Let’s Beat the Benchmark Index like a Pro.

Know Your Goals, Risk Profile And Investment Horizons Before Choosing A Mutual Fund

The goal or the investment objective should be the first criteria while choosing the mutual fund for your investment. Goals can be classified as high, medium and low in terms of capital gains. Risk and return go hand in hand. High goal seekers with aggressive return expectations are compulsory to invest in equity oriented mutual fund schemes. These are comparatively riskier than other types of funds, with huge return opportunities. Debt funds are always there for risk averse medium and low goal investors.

A picture of a man's hands , calculating mutual fund returns and writing on a sheet.

An investor with long-term investment period is best to choose a long-term capital growth equity or balanced fund. A young investor with long-term goals, which would probably be high falls in this category. But, an investor with near and medium-term targets are better to engage with short-term debt oriented mutual fund schemes.

What is the category to select?

Debt? Equity? Or Hybrid? Your age, risk taking capacity, investment horizon and future targets are the factors that decide upon the category.

Check Back The Fund Managers Past Performance

Few funds are managed by an expert team. And, few are by a single star fund manager. In the first case, where there is an expert team to manage  the fund the performance would be very clear and peaceful.

Whereas, the fund managed by a single expert manager, we need to look his / her past performance track record. This facilitate us to guess his /her future performance.

Consistency Is The Main Criteria

Duly have a check on the fund performance during those market fall periods. If the fund had done well even in the bear phase, we can say that it has beaten the index.  Otherwise, if had done well in the bull market, and became dull during the fall, it’s a type of fair weather friend. Keep it away.

Consistency in performance is the symbol of its stamina to win. One can be sure to assume that it will beat the Index in the future too. Good to look for the consistency in performance, over longer periods like 3, 5 and 10 years. Have a look at NAV’s of past years. Look for its growth percentage.

Know About The Fund House’s Pedigree

The track record of a fund house is as important as any other factors that help us in selecting a good mutual fund. Try to identify, fund houses with a strong presence and excellent track record in the financial world. Such fund houses have their own investment experiences as well as efficient processes. Consistency in returns is the main feature of these schemes. Sustained performance over a long period of time results in consistent returns.

Make Use Of Statiscal Measuring Tools /Metrics

There are certain risk measuring statistical tools, that may otherwise indicate the investment risks associated with their returns. These indicators make use of historical data for the analysis of not only mutual funds, but also the stocks and bonds.

These ratios simply compare the mutual fund return with the market benchmarks.

Alpha (α)

The simplest definition of an alpha would be the excess return of a fund compared to its benchmark index. If a fund has an alpha of 10%, it means it has outperformed its benchmark by 10% during a specified period.

Beta (β)

Beta measures the mutual fund’s performance-swing /volatility, compared to a benchmark.

For example, a fund with a Beta of 1 means it’s NAV will move 10% upside↑ /downside ↓ in respect of the benchmark index.

High Beta – For aggressive goal seekers with risk taking capacity for the possible high returns

&

Low Beta – For less aggressive, risk averse investors, who are seeking for stable returns.

Standard Deviation (σ) (SD)

It’s the statistical return measuring method. It actually measures the deviation of returns from their mean value. In Mutual Funds, Standard Deviation  is used to measure the possible deviation in returns from its historical mean value.

Assume that a Mutual Fund with an Average Rate of Return of 12%. And a Standard Deviation of 3%. Then,  this Mutual Fund has the possibility of giving returns which will vary from 9% – 15%.

So, it is most obvious that, risk taking investors will prefer to choose funds with high Standard Deviation (SD). And risk averse, the funds with low SD.

Sharpe Ratio

One of the most popularly considered and used indicators to measure, Risk Vs Return is Sharpe Ratio. It was developed by Nobel Laureate William F.Sharpe. Hence is known as Sharpe Ratio.

Each investment in the Mutual Fund Portfolio comes with its own degree of risk. Returns should always be in proportion to the amount of risk taken by any investment. Only such investments are worth buying.

Sahrpe Ratio measures the excess return per unit of risk taken over the risk-free return. Here, risk-free return is the return given by risk-free instruments like Treasury Bills and Government Bonds

Sharp Ratio (S) = (Mean Portfolio Return-Risk Free Rate) /Standard Deviation of the Portfolio Return

Symbolically,

(S) = rp – rf /σp

The Sharpe Ratio tells, how well the Mutual Fund has performed in proportion to the risk taken by it.

The higher the Sharpe Ratio, the better would be the ‘risk-adjusted- return’ of the Mutual Fund Portfolio

A good mutual fund is one which gives better returns than its peers for the same kind and amount of risk taken.

Loads and Charges

As said by the American Science Fiction Writer and Novelist, “Nothing of Value Free…..”, applies to Mutual Funds also. As an investor, it is very important to know the charges levied by the Mutual Funds. Less or more, directly or indirectly all those Fund Managing and Distributing expenses are collected from the investors anyhow. But, where the care should be taken is to select the Mutual Fund that charges less.

There are two types of fee that an investor need to pay as one time payment. They are broadly,

Loads

Entry Load

This load is levied at the time of buying the Mutual Fund Units. Actually, this entry load is collected by selling the units at a higher price than the existed unit price. So, the purchasing price hikes. But, this load has been abolished by SEBI in August 2009. So, no need of worrying about it.

Exit Load

This load is a factor of the holding period. If an investor stays invested till the end of the holding period, as mentioned in scheme related documents, it is exempted. No exit load is charged.

Before the holding period, it will be charged at the rate as mentioned in the scheme related documents. Usually, the percentage of charging varies from 0.5% – 3%. And, this charge is collected by the fund, by buying back the units at the lower than the current NAV.

Hence, if the investor is not sure about the holding period, better to choose a scheme with lower exit load.

Charges

Transaction Charges

These are also one time charges, to be paid by the investor at the time of purchasing the scheme. These are collected by the fund to pay to the intermediary /distributor. Hence, is also known as a Sales Load.

This fee is applicable for the investment amount of over Rs.10,000/-.

Rs.100/- for the SIP commitment of Rs. 10,000/- or above. These charges are deducted over 4 installments starting from the 2nd installment to 5th installment.

Recurring Charges

These expenses are charged on a daily basis and is deducted from the net asset value. The daily NAV is declared after deducting /adjusting these expenses. There are certain guidelines and mutual funds can’t charge more than the stipulated fee structure.

Even though, the fee structure is regulated, it varies based on the Net Assets of the Mutual Fund. More the net assets held by the fund, less are the recurring expenses and vice versa.

Expense Ratio

When you come up with Mutual Funds of similar nature, the next step is to consider their expense ratios. It’s better to choose the fund with low expense ratio. This will benefit you in the long run.

The whole fixed expenses of the Mutual Fund are spread out equally over the investors. In the case of funds with higher asset base, these expenses are spread over the large number of investors. Hence, the higher is the Assets Under Management, the lower is the ‘Expense Ratio’ or ‘Expense to Assets Under management Ratio’.

So, it is advisable to choose funds with high ‘Assets Under Management (AUM)’, and avoid the funds with less Asset Base /Assets Under Management.

Portfolio Turnover Ratio

The total cost incurred by the scheme is a function of the turnover ratio. The greater the ratio, the more is the cost charged by the fund. So, a fund with the lower turnover ratio is preferable over the fund with a higher turnover ratio.

Indiabulls Ventures | A Growth Stock

CMP: 27


Formerly known as Indiabulls Securities, Indiabulls Ventures is one of the group companies led by Indiabulls Private Limited.

‘Indiabulls’ is one of the India’s foremost diversified conglomerates with businesses spread over Real Estate, Financial Services, Securities and Power.

The company is currently active and performing well in the following sectors.

  • Equity/ Commodity/ Currency Broking
  • Marketing and Distribution of Residential Properties
  • Developing and Leasing of Commercial Properties

Bagging the highest quality grade BQ1 for its quality brokerage services, assigned by CRISIL, the company has a very loyal customer base. This is one of the indicative traits of a growth stock. Quality service assurance is a signal for its great future prospects. Currently the stock is available at its best to buy price. Just buy and hold for your future prospects.

Click here to check the Target Price of Indiabulls Ventures Ltd.

Indiabulls Ventures – Financial Ratio Analysis

Technical Analysis

 

CMP: Rs.27

Has tested the low of Rs. 20 levels, thrice. Has a clear indication that soon going towards the second highest level. Tested its 29 level for the first time since 6 months, currently trading at 27 levels, along with strong fundamentals, ‘Indiabulls Ventures’ is my pick for all the long-term investors, seeking exceptional growth rate.

Fundamental Analysis

 

Good dividend paying companies are ought to have good earnings. Have the capacity to earn and distribute the profits. A defined signal of its future growth.

The company has not paid any dividend since from the last payout of 25% interim. Can be considered as a positive sign towards its capital growth. In other words the company might have has employed the profits in its growth, expansion of the business or its service quality improvement. Fine sign of our capital growth.

Current P/E is 16.45. Before two quarters it might have been definitely less than this. Improvement in P/E along with other fundamentals is a clear sign of its future growth prospects.

With P/B of 2.5, the market is estimating its future prospects as positive and constant.

 

FMP’s | Are Not Guaranteed Return Schemes?

Fixed Maturity Plans /FMPS are also known as ‘Fixed Term Plans‘. These are ‘Close Ended Schemes’ floated by various Mutual Funds. The maturity period ranges from 1 month to three/five years. The tenure is fixed. Even though, almost all the FMPs are predominantly debt oriented, some of them may have small equity component. The objective behind this is to protect the investor’s investments from market fluctuations and to ensure the guaranteed returns over a predetermined fixed tenure /maturity period.


How Do Fund Managers Manage The FMPs

Fixed Maturity Plans are passively managed by the Fund Managers in the favor of investors to generate a fixed income over the fixed investment tenure. Fund Managers lock the investments in the debt securities, whose maturity period coincides with the maturity period of the plan.

As said before, FMPS are the closed ended debt mutual fund schemes with fixed tenure. So, these closed end schemes typically invest the major portion of about 80% in risk free debt instruments like AAA rated bonds, and the remaining 20% is routed towards the riskier avenues like equity.

It is the very structure of FMPs, that ensures the protection of capital as well as the expected return. By the end the stipulated period, the debt portion of the total investment grows to give back the principal along with its interest return. The return on the equity portion is related to the existed market situation. And the return fluctuates as per the fluctuations in the market. In the up market condition the return is good and the equity portion brings the potential upside. Similarly unfortunate market crashes may bring back the minimum, but the corresponding unfortunate loss.

Where Do The FMPs Make Their Investments

The debt portion of FMPs usually invests in commercial papers (CPs), money market instruments, certificate of deposits (CDs), corporate bonds and sometimes even in bank fixed deposits. Depending on the tenure of the FMP, the fund manager invests in a combination of the above mentioned instruments of similar maturity. Say, if the tenure of the FMP is about a year, then the fund manager invests in paper maturing in one year. The expense ratio, usually varies from 0.25 to 1 per cent.

Why FMPs Are Not ‘Guaranteed Return Schemes’

It’s true that FMPs offer many advantages over other fixed income products. But, at the same time, there are several risk factors that need to be concerned. These risk factors, sometimes may adversely affect the returns. That’s why FMPs are ‘Not Guaranteed Return Schemes’. In other words, the returns that the plan promises at the time of investment is only indicative.

To get back the indicative returns, we need to avoid those risk factors anyhow. Few risk factors that we need to be concerned are mentioned below.

Default Risk

Bank Certificates Of Deposits are the safest debt instruments with zero default risk. Whereas Commercial Papers offer higher interest rates with more risk. So, indicative portfolios with the major portion 0f corpus in less /zero risk instruments like Bank CDs is best to choose to avoid the default risk. If, one has the capacity to bear the default risk, then indicative portfolios with predominantly invested in Commercial Papers are best to invest. One can expect more returns.

Credit Risk

You should also check the scheme’s offer document for the minimum credit rating of the securities the fund intends to invest into. The investors should also note that the higher the credit ratings of their securities, the lower the returns would be for the FMPs and vise versa. However lower credit rating securities have higher credit risks; hence investor should keep in mind the same.

Expense Ratio

The higher the expense ratio the lesser are the returns. The high costs will eat up the total returns, reducing the overall return benefit.

So, FMPs with lower expense ratios are preferable over the FMPs with higher expense ratios.

Growth Or Dividend Option

There are two options to choose between while investing in FMPs. They are the growth and dividend options. Investment tenure is the main criteria to choose between these two options.

Growth option is good for long-term investment, that’s most probably more than a year. Because, the capital gains taxed @SST, if the tenure is under 1 year. For more than 1 year tenure period, the investor can be benefited from the long-term capital gains tax rate. Which is @10% without Indexation benefit, and @20% with Indexation benefits.

Dividend option is best for, under one year investment tenure. Under this option returns are in the form of dividends. These dividends are charged by the dividend distribution tax, which is @12. 5% for retail investors.  This, along with education cess and applicable surcharges are paid by the fund. And are tax-free in the hands of individual investors.

Maturity Of  The Scheme And Indexation Benefit

Some of the FMPs launched between January and March every year, offer double-indexation benefit. As the scheme is purchased in one financial year and the matured after two financial years, these schemes are benefited by the double indexation.

Under double indexation, the overall tax liability gets reduced, as the long-term capital gains are adjusted for inflation. That means, for two years the capital gains are adjusted @rate inflation and only the pure capital gains are taxed. Thus, the overall tax liability is reduced.

For example, a scheme is launched in March 2011 i.e. FY10-11, it will mature in April 2013 i.e. FY12-13. While the investment is made in FY10-11, the redemption takes place in FY12-13. Thus, by investing in FMPs with the maturity of a little over a year, the purchase and sale years are spread over two financial years, called double indexation, which effectively reduces one’s tax liability.

 

Return On Debt (ROD) | Its Impact On The Company Performance

‘Return On Debt’. Spells short. But it’s as important as any other financial ratio, and also tells a  lot about the financial health of a company. Especially when there are big number of debts that peeps out of the balance sheet. So easy to analyze, but difficult to manage, ROD ratio has its own impact on any company’s performance.


Let’s try to have a few important points – What it may otherwise indicate the impact of ROD on any company’s performance as well as on our returns.

What Is ‘ROD’ Or The ‘Return On Debt’ Ratio

The ROD is a financial ratio, that compares the company’s net earnings to its long-term debt.

‘Return On Debt’ = Net Earnings / Net Long Term Debt

Here, debt means either taken /issued by the company. And sometimes the both the cases. And this ‘long-term-debt’ is in various forms and in distinctive interest rates depending on the creditor or the issuer. Anyhow, what we need to calculate is the ratio of the net earnings of the company to its net debt.

This ratio shows the amount of net earnings that is generated, for each coin that a company holds in debt. And, this ROD can either be positive /negative.

A positive ROD has been always beneficial to the company. And, it indicates that some income is being generated by the debt issued /taken by the company. Where as a negative ROD is a threat.

We can locate the long term debt data on the balance sheet as well as the notes to financial statements. The information explains the amount of debt taken out /issued and the number of years related to it.

How Important Is ‘Return On Debt’ In Any Company’s Financial  Analysis

Mostly, the ratio of ‘ROD’ is not used in the simplest financial analysis. But, it’s an important calculation that needs to be performed, while evaluating company’s solvency. It is generally used by the owners of the company while making a decision on, which financing sources would be better for the company.

It’s common to carry a certain amount of debt by any company. But, the amount should be limited. The more the debt to its earnings level, the more the credit risk’ is.

Moreover, companies carrying a significant amount of debt related to capital and/or assets are more prone to economic downturns during a decline in earnings.

 

Value Stocks | Hidden Gems For Value Investing

Good Management and Coprporate Governance. Hopeful Sector. Upcoming Industry. Analysis Says – The Company Fundamentals are Strong. Excellent future prospects. Technicals are suggesting to buy. Yes. Definitely the stock falls in the ‘Value Stocks’ category.


The secret of many people to become millionaires! The success mantra of many Mutual Funds to out-perform! Value investing is nothing but chasing those hidden gems to own. Just invest and forget to hug your future fortune. That’s what ‘The Value Investing Is!

What Are ‘The Value Stocks’

All those stocks that tend to trade much below their intrinsic value can be considered as ‘Value Stocks‘. These stock’s current market price don’t match with either the fundamentals of the company or its earning levels. And, thus considered to be an undervalued stock by the ‘Value Investors’.

How To Spot A Value Stock

If the company is paying good dividend, earning levels are excellent and sales growth rate is OK, but the stock is available at low price. We can exactly say that the stock is a value stock.

Other characteristics would be, high dividend yield, low P/E (low price to earnings ratio) and low P/B (low price to book value)

Why To Invest In Value Stocks

As the value stocks /securities are trading at a lower price than how the company’s performance may otherwise indicate, there will be a breaking down point in the near or the far future of every value stock. Difficult to guess, but sure to be assessed. The target price will be at least its intrinsic value.

Investing in a value stock is an attempt to capitalize on market inefficiencies. By investing in a value stock, we can make sure that, we are going to encash the inefficiency of the market to recognize the stock’s underlaying value.

How To Invest In Value Stocks

Just spotting a stock with the required ratios is not enough to decide upon that the stock is undervalued and can invest without any further investigation. Of course, this would be the first step to develop a rough list of stocks – that may be our best choice of value picks. So, just the screen test and making a list of stocks that we expect to be undervalued is over.

Apart from this there are two more steps of analysis required to be done before investing. They are ‘Qualitative Analysis’ and ‘Quantitative Analysis’.

What Is Qualitative Analysis

The entire analysis of the company, side stepping the financial ratio analysis (quantitative analysis) is called the qualitative analysis. Here there are no financial ratios not their analysis. But, it involves analyzing the company in the vague light of distinctive practical matters, which directly or indirectly affect the company’s performance  and its stock value anyhow.

Factors like industry to which the company directly /indirectly related to, future scope of that industry, company management, corporate governance, company competitiveness with its competitors, government subsidies, quality of the goods produced, climatic conditions and finally the demand for its products /services etc, need to be analyzed in depth before deciding upon the stock to be a Value Stock. Unlike quantitative analysis, qualitative analysis needs more attention and is very time consuming.

Qualitative Analysis is best made by the investors, that is relevant to them. The companies they worked for, goods they sold once or well known with the products and their demand are best to be chosen for analysis.

It’s wise to buy companies, that you understand better

– Warren Buffet

What Is Quantitative Analysis

There is a myth among the common investors that ‘The Quantitative Analysis, is a little bit difficult ratio analysis performed by the expert analysts. But, the existed IT tools made it a crazy one minute analysis done by any common people. No financial expertise is required.

Once the ratio analysis is over, the next step is to analyze the impact of their values. All the investors with basic knowledge of how these financial ratios should be for the company’s out-performance in the near future, are said to be in good position in value stock picking.

Other Strategies To Invest In Value Stocks

Few value investors opt to invest in stocks of companies whose products or services have been in demand for a long time and are likely to be continued.

Innovation‘ – This sounds like a synonym of development. And of course the stepping stone of true development. But, this would be a great threat to certain companies and sometimes the whole industry too. History witnessed a few long-standing companies and industries victimized by new innovations. Their products /services became obsolete and the companies lost forever. Here, what we need is critical thinking skills. If there is a proof that, the company has been in the business for a longstanding period and has the ability to fast adapt the new changes and innovations, then we can be free to choose such businesses for further analysis. At this point it may be worthwhile to analyze management and the effectiveness of corporate governance to determine how the company reacts to new innovations and changing environments. Investment in such a business is considered to be always safe and  fruitful.

That’s all. Thank for reading this topic.

Don’t forget to leave a reply in the form below to share your valuable opinion with me and all.