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Mutual Funds Pyramid - Fixed Income to Equity Funds

HomeMutual Funds Pyramid – Fixed Income to Equity Funds

mutual funds

The pyramid of mutual funds stands between a saving instrument – Fixed deposit and an aggressive investment product – PMS.

Fixed Deposits – 6.25% (Risk free other than rate fluctuation). Taxable at saver’s nominal rate of tax.

MUTUAL FUNDS – THE RISK IN MUTUAL FUNDS?

IN THE BASE CATEGORY, RISK IS NOT TO THE PRINCIPAL BUT TO YOUR RETURN.

MONEY MARKET FUNDS – short duration: 1 to several weeks. Risk free principal with 6-8% return.

INCOME OPPORTUNITIES FUNDS – 1 year + investment horizon (1% penalty on principal for withdrawal before 1 year). Risk free principal with 7.5% –8.2% return p.a. (tax free if held for more than 3 years).

ARBITRAGE FUNDS – 1 year + investment horizon (1% penalty on principal for withdrawal before 1 year). Risk free principal with 6% –7% return p.a. (tax free if held for more than 1 year).

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BALANCED FUNDS – 65% allocation to large cap or multi cap equities | 35% allocation to money market and debt securities. Principal at low risk. Lock in – 18 months. Returns over 3-5 year tend to be variable and market driven.

Taxation – Tax free over 1 year

TAX SAVER ELSS – Equity Fund with 3 year lock in. Primarily meant for IT Deduction of up to 1.5 lakhs in a single financial year. For most funds, investments are made in large cap equity.

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FOCUS FUNDS – Up to 100% Allocation to Equities. The scheme will define its universe. For example the DSP Black Rock Focus 25 allocates all assets to a maximum of 25 stocks out of the top 200 companies by market capitalization in India. Principal at medium risk. 1 Year lock in (1% penalty on principal for withdrawal before 1 year). Returns over 3-5 year tend to be variable and market driven.

VALUE FUNDS – Up to 100% allocation in stocks whose prices are low relative to their historic performance, earnings, book value, cash flow potential and dividend yields. These are typically Multicap funds. Fund manager expertise and track record is important for these funds. Example – ICICI Value Discovery Fund. Principal at medium risk. 1 Year lock in (1% penalty on principal for withdrawal before 1 year). Returns over 3-5 years tend to be variable and market driven.

Taxation – Both funds tax free over 1 year

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MID, SMALL & MICRO CAP FUNDS – Up to 100% Allocation to Equities, typically in stocks outside of the top 300-500 stocks by market capitalization. Suitable for long term capital growth. Principal at high risk. 1 Year lock in (1% penalty on principal for withdrawal before 1 year). Returns tend to be variable and extremely market driven.

Return Generated by Select Funds (as of 11 July 2016)

Past performance will have no bearing on future results.

RETURNS OVER 1 YEAR IS ANNUALISED – I.E. CAGR

Particulars 6 Months 1 Year 2 Years 3 Years 5 Years
BSE Sensex 8.8% -2.0% 3.0% 12.0% 7.5%
HDFC Income Fund 6.9% 11.3% 11.8% 8.9% 8.7%
Franklin India Opportunities Fund 14.7% 2.8% 19.2% 23.8% 14.1%
ICICI Prudential Value Discovery Fund 11.2% 7.8% 17.9% 33.9% 19.5%
DSP BlackRock Micro Cap Fund 11.1% 18.9% 33.9% 47.9% 25.2%

*Returns based on direct plans (except for 5 year returns which are based on Regular plans)

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PORTFOLIO MANAGEMENT SCHEMES (PMS)

High Risk – High Reward instrument where fund manager has total investment discretion. Can outperform index and mutual funds in a rising market by many percentage points due to high concentration. Rated by investment rated agencies but not separately listed on an exchange.  You can however redeem your holdings at a short notice.

Minimum ticket size – Rs. 25,00,000/- As per SEBI Regulations. Consider for high beta returns for aggressive portfolios (over 50 lakhs in size), particularly in rising markets.

Since returns vary dramatically between various PMS schemes, it would not be ideal to compare a PMS product with the mutual fund returns.


I will help you design a high performing portfolio based on the factors above. Let me know if you need to discuss over the phone or if you prefer a personal meeting when you write in to me. Please write in to me at rajat@sanasecurities.com  or leave your details below:

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