Enter equity markets through Systematic Investment Plans into Mutual Funds

Equity markets saw a steep correction in September and it is continuing this month as well. Majority of the stocks and sectors stumbled with fears of rupee depreciation against the dollar, rising crude prices, current account deficit and hardening interest rates. Investors are worried. But new investors participating in equity mutual funds through the Systematic Investment Plan are least worried. And the reason is they are only buyers. They buy mutual fund units of equity funds every month. And this correction is best suited for them as they will be accumulating more units. It is proved that SIP investors make the best returns in long term mainly due to two features - Rupee Cost Averaging & Power of Compounding.

I advice investors to go for SIP for their long term financial goals. And generally it would be for minimum 10-15 years. So the first half of the duration is our buying period. We buy at various levels and it is good if markets are volatile. Due to market corrections, we accumulate more units each time when the price of the units is lower. Our purchase price gets averaged to the best possible extent. We may not make any profits in the initial few years. But we accumulate units for future profits. That's called Rupee Cost Averaging.

By this time, the compounding would have started. Markets don't stay low or high always. It moves like a ocean wave in the short term. But if you see the long term, its always a straight line trending upwards. When markets move up, all the units purchased at lower prices suddenly starts growing significantly. Every unit starts gaining phenomenal profits for you. The unit prices would grow 4 to 5 times of the purchase price over a period of time. That's called power of compounding.

Let's take an example of last 15 years. In this period, we witnessed steep market corrections as well as big market rallies. In 2004, when Vajpayee Government lost the elections, markets fell by 842 points. In 2008, from its lifetime high Sensex crashed by 61% in 1 year during the global financial crisis. It bounced back by 157% in 1.5 years from there. In 2010, sensex corrected 28%. And bounced back by 96% in 3 years. There were many such smaller ups and downs in the market. Now again, markets are correcting. The downside from here may or may not be limited. But this too shall pass and markets will bounce back.

In the same 15 year period, Mutual Funds SIPs have delivered more than 15% compounding returns per annum. 15,000 rupees invested every month has become more than 1 Crore when the total investment was just 27 lakhs (over a period of 15 years, not at once). That's 73 Lakhs profits contributed by the market. Your contribution was just 1/4th of the goal. This happened to only those investors who continued their SIPs inspite of big ups and downs. Those who stopped or exited during fearful times burnt their fingers. Those who continued, created wealth.

So, there's no good time or bad time for starting a SIP. But starting a SIP during a volatile period like now is definitely a good time. So rejoice and take a plunge into equity now. Start your SIP into mutual funds today. Have a financial goal, select right mix of mutual funds, keep investing every month, patiently digest volatility and start your journey towards wealth creation. Rest, leave it to SIPs.

Srivatsa Hebbar
Inverika Investment Solutions LLP

Are Mutual Fund Retirement Schemes Apt For You?

Indian millennials are increasingly becoming cautious towards their investment needs and retirement is no longer a forgotten goal. In response to which, mutual fund houses have swiftly added retirement schemes to their offerings. These funds have further aroused investors’ interest due to their inclusion under Section 80C exemptions.  

*Image Courtsey - www.aag.com

But, are these retirement schemes really a good bet for future retirees? Let’s uncover the features of these schemes to understand if investment in these schemes does justice to your retirement goal. 

Mandatory lock-ins and exit load

Mutual fund retirement plans come with a mandatory lock-in period of up to 3-5 years, which is similar to ELSS schemes that have a lock-in period of three years. Moreover, these schemes charge exit load anywhere between 1% and 3% for withdrawals before reaching the age of 58-60. While exit load is stipulated to discourage early withdrawals, yet it makes these schemes less attractive than regular equity schemes or even ELSS. 

Here’s a snapshot of the currently available retirement schemes and their features. 

Higher expense ratio

As evident from the above table, retirement funds carry higher expense ratio than equity schemes, mainly due to low AUM. This makes your cost of investment in these expensive than what it would have been for diversified equity schemes. 

	Exposure to Equities	Exit load	Lock-in	Expense Ratio
HDFC Regular Savings Fund	1) Equity Plan - 80%-100% 2) Hybrid Plan - 60%-80% 3) Debt Plan - 5%-30%	1% till 60 Years	5 Yrs	1.81%
UTI Retirement Benefit Pension Plan	Up to 40%	1% till 58 Years	NIL	2.11%
Franklin India Pension Fund	Up to 40%	1% till 58 Years	3 Yrs	2.49%
Reliance Retirement Fund	1) Wealth Plan - 65%-100% 2) Income Generation Plan - 0%-35%	1% till 60 Years	5 Yrs	2.30%

Returns

Performance of these schemes has been at par with diversified equity funds so far. Also, exposure to equities in these schemes needs to be factored in while comparing returns among them. For example, HDFC and Reliance allow equity exposure up to 100% while UTIl and Franklin have capped it up to 40%. 

	1 Year	3 Year	5 Year	10 Year
HDFC Regular Savings Fund	35.62%	-	-	-
UTI Retirement Benefit Pension Plan	16.72%	10.21%	12.24%	9.11%
Franklin India Pension Fund	11.01%	9.61%	13.09%	8.73%
Reliance Retirement Fund	39.69%	-	-	-

Final take

Clearly, mutual fund retirement schemes have an upper hand over traditional retirement options such as National Pension Scheme (NPS) or insurance pension plans in terms of liquidity and exposure to equities. 

However, given the high rate of expense ratio and extended lock-in, diversified equity schemes are relatively better options to rely on. At the same time, retirement need differs from individual to individual that calls for a more customised plan than a generalised one.

About The Author: Reenika Avasthi is associated with Inverika Investment Solutions LLP as a Content Writer and Financial Planner. She is a Certified Financial Planner and a freelance content writer in the field of personal finance. Her interest in writing and spreading investor awareness motivated her to start blogging. 

Beat Escalating Education Costs Through Mutual Fund Children Plans

Children education cost is skyrocketing with each passing year, making the effectiveness of traditional products like fixed deposits highly questionable in the current scenario. Equities stand out of all options as a means to achieve children education goal.

Getting to reality

Before jumping to any ad-hoc number, it is imperative to note down three key numbers that are vital to your child’s education goal. 

1. Corpus needed
2. Number of years left until your child’s education begins
3. Expected rate of return

As said earlier, it is highly critical that you set the above three numbers right or else the whole process of education planning will turn futile. 

Let’s assume that the current cost of education in India at 18 years of age is Rs 20,00,000. The same is expected to grow to Rs 70 Lakh (rounded) after factoring in inflation at 7%. The following table illustrates the monthly SIP amount required to attain the required sum at varying rate of return and number of years.  

	Number of Years Until The Education Begins
Expected Rate of Return	10	15	20
10%	₹ 34,961.98	₹ 17,518.71	₹ 9,706.97
12%	₹ 31,516.76	₹ 14,828.81	₹ 7,668.33
15%	₹ 17,862.50	₹ 5,863.18	₹ 2,043.68

As apparent, the amount of SIP per month reduces vastly when there are enough number of years in your hand and the returns generated are higher. Thus, it is important to start investing earlier to lessen the burden of monthly outflows. 

How to move ahead with your plan?

The next obvious question is how to select a viable route to invest in equities. In the given condition, mutual fund plans offer themselves as the best investment alternative. Investment in mutual funds can be done in two ways.

Equity-oriented schemes- You can start a SIP into one or two equity-oriented schemes and earmark it towards your child’s education. However, you will have to periodically evaluate the performance of these schemes to know whether SIP should be continued or not in the said scheme. A scheme underperforming for more than three years should be immediately discarded and replaced with a well-performing scheme. 

Mutual fund children plans - Many fund houses offer child plans that are basically hybrid schemes with a mix of debt and equity instruments. These schemes allow parents to invest on behalf of their minor child. These schemes stipulate a condition that the redemption proceeds are credited only in beneficiary kid’s bank account.

Here is a snapshot of some of the child plans offered by various mutual fund houses along with their performance so far. 

Scheme Name	Inception Date	1-Year Return	3-Year Return	5-Year Return	10- Year Return
HDFC Childrens Gift Fund - Investment Plan	March 02, 2001	15.59	13.37	18.10	14.13
HDFC Childrens Gift Fund - Savings Plan	Jan 01, 2013	7.70	10.93	NA	NA
SBI Magnum Children’s Benefit Plan	Jan 25, 2002	15.90	15.11	14.42	10.98
ICICI Prudential Child Care Plan - Study Plan	Aug 31, 2001	10.07	12.39	15.38	12.28

Exit load under these schemes is as high as 3% within the first year of redemption. This discourages parents to withdraw from corpus prematurely and help it stay intact till the intended goal nears.

Another benefit associated with these plans is that they connect emotionally with parents than a regular equity-oriented scheme. It is more likely for parents to continue investments in these schemes even during rough financial phases just because of emotional quotient. Hence, there are higher chances of disciplined investing in these schemes. 

About The Author: Reenika Avasthi is associated with Inverika Investment Solutions LLP as a Content Writer and Financial Planner. She is a Certified Financial Planner and a freelance content writer in the field of personal finance. Her interest in writing and spreading investor awareness motivated her to start blogging. 

Should You Always Invest In Five-Star Rated Funds?

The craze for five-star rated mutual fund schemes is growing rapidly among investors. Many believe that choosing only five-star rated schemes will ensure outperformance of their portfolio. But, there is more to this than meets the eye. 

Fact # 1 - Ratings are not permanent - Don’t be misled by the belief that five-star ratings are permanent. Ratings can change within no matter of time if schemes fail to hold on to their exemplary performance. This means that a five-star rating can easily be downgraded to three-star or four-star in an event of declining performance and thus, relying just on this parameter is counterproductive. 

Fact # 2 - Category-specific ratings - Ratings are assigned as per the category of the mutual fund scheme. For example, there will be a separate set of ratings for equity-diversified schemes and another set for tax-savings schemes and so forth. A scheme is rated five-star among its category even it that category as a whole is not putting a good show. For example, an infrastructure based (sectoral specific) scheme might be assigned five-star even if its performance is lagging behind an equivalent rated equity-diversified scheme. So, it's equally important to know what category you are investing in rather than rushing to pick up just five-star rated funds. 

Fact # 3 - Past performance - Five-star rated status is highly dependent on a scheme’s past performance. As Mutual fund disclaimer points out “Past performance is not indicative of future returns”, therefore, it is not wise to invest mainly on the rating criteria. Also, five-star rated funds have less scope to maintain their rankings compared to three or four-star rated funds, which have the scope to improve and rise. 

Look for methodology

Not all rating agencies assign the same rating to a scheme due to the difference of methodology adopted to rate it. Hence, it is wise to look for the rating parameters used by rating agencies to circle a scheme. In general, consistency of returns and degree of risk should be compared to filter the relevant schemes. 

Is rating useful at all?

Given the several hidden factors associated with rated funds, it is essential to understand if an investor should pay heed to rating statuses at all. The answer is not explicitly ‘No’ as it will not be fair to throw this parameter out while evaluating schemes. 

Ratings do matter in decision making but not entirely. It is recommended to choose between three to five-star rated schemes while keeping an eye on important factors like expense ratio, fund-size, category etc. Also, it is important to analyze a scheme’s performance over a period of time like 1, 3, 5, 10 years to understand the consistency of returns over both short and long-term horizons.

About The Author: Reenika Avasthi is associated with Inverika Investment Solutions LLP as a Content Writer and Financial Planner. She is a Certified Financial Planner and a freelance content writer in the field of personal finance. Her interest in writing and spreading investor awareness motivated her to start blogging. 

Obsessed With Fixed Deposits? Here’s A Better Alternative

Are you constantly inclined towards parking your surplus funds in safe instruments like fixed deposits? What if a better option exists that gives you best of both worlds i.e. safety like FDs and better returns too. 

Mutual funds have introduced ‘Equity Savings Fund’ that distribute its investment between debt, arbitrage, and equity asset classes. Usually, 30%-40% of the total corpus is allocated towards equity, consisting mainly of large cap stocks that helps keep the portfolio stable. Another 30%-40% is invested in arbitrage and remaining goes into debt. 

Alternatively, you can opt for ‘Equity income fund’ to further reduce your equity exposure to 20%, focussed on large-cap stocks. The fund allocates 45% into arbitrage and the balance in debt. 

Equity savings fund vs fixed deposits

Apart from better returns, equity savings fund scores over fixed deposits on other fronts as well. 

Taxation - It is common knowledge that the interest earned on fixed deposits is taxable, hence, post-tax returns can drop substantially if an individual falls into a higher tax bracket. On the flip side, equity savings fund enjoy tax-status of equity funds. This implies that investment in these funds for over a year will be accounted as long-term capital gains that are not taxable. Investments for less than a year are taxed as short-term capital gain at 15%. 

Inflation - An investment makes sense only if it is successful in fetching returns over and above inflation. The real gain occurs when the returns beat inflation. Currently, the inflation rate is hovering around 6% p.a. that makes returns from fixed deposits in the range of 7%-8% unattractive. Moreover, the tax impact further ruins the return potential of deposits. Conversely, equity savings fund has been able to deliver double-digit returns over one year period that smartly beats inflation. 

Equity savings fund vs other asset classes

It is important to understand how equity savings fund fare against not just fixed deposits but also other asset classes. The same is put together in a table below for a better understanding. 

Asset Class	Pros	Cons
Debt Funds	A higher debt portion makes it relatively safe.	Equity return compromised Tax applicable as per slab rate for holding period of less than 3 Years
Hybrid Funds (Debt Oriented)	Safer option alongside some exposure to equity.	Tax applicable as per slab rate for holding period of less than 3 Years
Equity Funds	Promising returns in long-term.	High risk involved for short-term investments
Equity Savings Fund	Enjoy equity tax status Portfolio stability while seizing return potential from equity	Diminishing returns from arbitrage portfolio during market down phase.

Ideal investment period

Investment in certain funds works best if they are made for the right investment horizon. From this perspective, equity savings fund qualify to be a part of a portfolio if the investment tenure is more than one year. Anything below the said time horizon will attract tax and will be counterproductive.

About The Author: Reenika Avasthi is associated with Inverika Investment Solutions LLP as a Content Writer and Financial Planner. She is a Certified Financial Planner and a freelance content writer in the field of personal finance. Her interest in writing and spreading investor awareness motivated her to start blogging.