Category Archives: Mutual Funds

Mystery of Missing Returns

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Warm Greetings from PenguWIN:

            I wanted to share this message with you before you might observe and become anxious. A couple of our investors have noticed it and requested for clarification. It has no effect on the value of the fund but portrays the performance in poor light. The details might be slightly technical (no impact to you) which is the reason why I was holding this message but thought that this note be shared when investors started asking for the clarification.   

The Categorization and Rationalization of Mutual Fund Schemes was initiated by SEBI, last year, to ensure that the schemes are clearly distinct in terms of investment strategy, asset allocation, uniformity in characteristics of similar type of schemes to help investors take informed decisions.

SEBI had discussed this with the MFAC (Mutual Fund Advisory Committee) and as a result of deliberations, the committee proposed the following changes in Oct 2017 to be implemented by the fund houses by June 2018.

  • Group Mutual Fund Schemes, into 5 groups including Equity (investing in stock), Debt (investing in overnight securities with 1-day maturity, money market, debt for varying durations), Hybrid (mix of stocks and debt instruments – typical balanced funds), Solution Oriented (Retirement, Children) and others (Index Funds, Exchange Traded Funds, Fund of Funds, International Funds
  • Rationalization of the Market Cap (product of no. of shares and prevailing price) definition by ranking them in descending order:   
    • Top 100 companies in terms of market cap to be referred as Large Cap
    • Companies with market cap from 101 to 250 market cap to be referred as Mid Cap
    • Companies from 251 and above in terms of market cap to be referred as Small Cap

 

This exercise resulted in Mutual Funds to adopt a uniform definition of Market Cap which was different for each fund house earlier as there were no standard definitions, like a small cap company as per Fund house A referred as mid cap company by Fund house B. The exercise also limited fund houses to have only 1 scheme per category, specifically in Equity, Debt and Hybrid resulting in merger of funds, changes to attributes and nomenclature of funds. In the past several fund houses had more than 1 Large Cap, Mid Cap, Balanced Fund and so on.  

As part of the merger of 2 funds into a new category, the assets from each fund had to be transferred into a new pool and either 1 of the exiting fund managers or a new fund manager had to be designated as the fund manager for the merged entity.

For better understanding, I am taking the case of HDFC Balanced fund which is one of the top performers in the erstwhile balanced category and a significant number of our investors own this fund. HDFC MF also had HDFC Prudence, which is also a well-known name, managed by Prashant Jain, though the risk profile is higher. In this instance, HDFC Balanced fund and Premier Multi-Cap fund were merged to form HDFC Hybrid Equity fund.  As part of the merger, the value of holdings in HDFC Balanced and the invested amount has been presented in a way that all gains accrued by the fund is lost (refer to the attached picture that displays the actual transactions for an investor). The amount obtained by moving out of the old fund is portrayed as the cost of new fund (Hybrid Equity). As a result, the investment amount in the portfolio is bumped up to that extent resulting in poor returns.

In this case the actual investment made by investor was Rs. 3,61,854 (accumulated 3230 units @ 112 Rs.) and the amount received during exit from old fund was Rs. 4,75,010 which is a gain of Rs. 1,13,156/-. However, the current transaction shows a loss of Rs. 9,575/-

The only sure thing about luck is that it will change - Bret Harte 

<Blog # PenguWIN 1059 – Mystery of Missing Returns ! >    

Is your Investment in Real Estate and Gold Safe?

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Warm Greetings from PenguWIN:

            The crux of this article is about the volatility in asset classes, physical and financial with specific reference to Real Estate, Gold and Equity investing, more specifically Equity MFs

Investors who started investing in equity funds since 2017 and seen the value go up and up, will probably be a little impatient, experiencing the 2000+ points correction in Sensex in the recent past and the associated high level of volatility. I make sure that I tell this to all our clients (at times more than once), that Equity funds are long-term investment products and needs to be looked at only for 5+ years, more the better. There may be a few who are lucky to enter the market when it was low, make money and exited before the fall. Even these people will fail if they try to replicate it for the second time. But, accepting the reality is always difficult.

Let me take couple of my favourite examples.

Let’s assume that a person buys an apartment in Adyar/Besant Nagar area. A 1000 sqft 2 BHK (basic price of 16,000/Sq. Ft.) will set him back by 2 crores, including registration, car park, corpus fund, club fees, EB, water, sewer etc. Once he takes possession of the apartment and moves in, within a couple of months, let’s say there is a slump in the RE (Real Estate) market and basic price drops to 15,000/- per Sq. ft. The investor will feel bad as his Networth has gone down by 10 Lakhs. On the other side, if the price increases to 18,000/- sq. ft, he feels happy that he has got a good deal, saving 20 Lakhs. Whether it is a question of 10L loss or 20L gain, there will no action of purchase/sale of the house as its notional and he has to live in the house. The value matters when he moves to a different place within or outside the country and decides to sell it or when he bequeaths the property to his children and they decide to sell it.

The same holds good when people buy gold jewellery or even coins. Gold has lost about 35% of its value since 2012 (35% is the consumer price Inflation) and the current price in INR is lower than the Sep/Oct 2012 price which was Rs. 3000/- plus. Several people have asked me this question – Is it a good time to buy gold? No one has asked me if it was time to sell gold. The worst thing is if its close friends or relatives and you tell them the facts of Gold (inflation hedge, intrinsic value and so on) which may be negative at that particular time, they feel that this guy is keen to drive Goddess Lakshmi away from our house.

Though many of the investors I encounter, have significant allocation to RE and Gold, they don’t get perturbed due to changes in price while even minor changes to stock markets (going down) is something that makes them anxious as they can easily relate numbers. So, even if the investor buys a fund for 1 lakh, that turns out to 1.25L in a year, the subsequent fall to say 1.1L is apparent as the mind relates to only the 1.25L figure, forgetting that the original investment of 1L.

Equity investing is for the long term (may not be that long as in the case of RE) and our patience will be tested by the market similar to RE and Gold, more severe at times. Some are unable to digest the volatility, especially people who have invested for short term that is just 1/2/3 years, going by the healthy returns of 2017. They tend to think that if 2017 has given 30% returns, then our investment should be able to fetch atleast 24% or 12% per year, in 2 years (fair assumption from their perspective). There are others who get excited by the returns that their friends and family members have made and move huge money to equity funds (Big Bang Investing), in a matter of few days, trying to make up for opportunity loss.

Whether 2018 or 2019 turns out to be as rewarding like 2017 (I will also be delighted to see my portfolio go up further), a time horizon of more than 5 years, higher the better, will definitely reward us with good returns and will continue to be the asset class that will provide the best returns.

People who hold less than 100% equity portfolios – Balanced Funds, Equity Savings, MIP can expect stability of returns in less than 5 years, approx. 3 to 4 years

What is the basis for my confidence? Equity market growth is a reflection of how the economy (GDP) does in the country, growth of companies in revenue and profitability, increase in consumption, increase in per capita income. The scepticism that prevailed in the market for the past few quarters is attributed to some of these indicators, not in green, while the markets were scaling new peaks. However, the Dec 2017, Q3, results have been positive and analysts expect that this momentum will continue in the coming quarters. Excluding the troubled Banking and Financial Services sector, Net Profit of a sample of 2043 companies rose to a six-quarter high of 27.5%, Net Sales by 11.5% YoY. We practice what we preach and your money is in safe hands.

We will only do with your money what we do with our won – Warren Buffett

 

<Blog # PenguWIN 1058 – Is your Investment in Real Estate and Gold Safe ! >          

Wishes for a Happy Diwali 2017

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Dear Friends,

                            Advance Diwali wishes from team PenguWIN !

Right from my childhood days, Deepavali day has been my favourite day of the year (birthday comes latter) as I used to be deeply obsessed with Crackers. I have even had ideas to open a fireworks shop during Diwali eve, not with money-making motive, but get a chance to visit Sivakasi and buy fireworks at cheap prices so that I get a huge quantity to burst. But till date, it remains an unfulfilled wish.

I am aware that Fireworks cause health hazards, but was unaware of its intensity – Apparently, burning snake tablets is equal (how many boxes is something that was not published and obviously it’s not just 1 tablet or a box containing a dozen tablets) to 475 cigarettes (courtesy NDTV). Fireworks have been banned in many places in NCR (in and around Delhi) and I guess it’s only a matter of time that it ceases to exist for retail consumption.

I would like to brief about a category of equity funds called Equity Savings Fund, which as a concept I am really impressed. The fund category has only a 2-year history and long-term performance is yet to be tested. All major fund houses have launched this fund, starting 3rd quarter of FY 15-16. After the 2014 budget when the Finance Minister changed the taxation of debt funds, all debt funds need to be held for 3 years for indexation benefit and subsequently taxed at 20%. Manufacturers in mutual fund industry (who create new schemes) are extremely savvy and came up with the concept of Equity Savings Fund.

For a fund to be categorized as Equity Fund, it has to have a minimum of 65% exposure to Equity (Stocks) and the balanced fund category is based on this principle, though SEBI continues to say that Balanced Fund should be 50%:50%, Equity and Debt. Meanwhile a separate category of funds called Arbitrage Funds came into existence, where the fund manager tries to identify opportunities of mispricing between cash and futures markets. Without getting too technical, Arbitrage Funds belongs to equity category but potential returns are like debt category (about 5 to 6% ROI now). There is no issue of losses in these funds as purchase and sale of securities are done at the same time.

Using the advantage of Equity for high returns, Debt for stable returns and Arbitrage for Equity tax treatment and stable returns, Equity Savings Fund was conceptualized. They take 1/3rd exposure to Equity, Debt and Arbitrage, with specific schemes taking a little higher or lower proportion of securities. They maintain a minimum of 65% exposure to Equity and Arbitrage so that the fund enjoys equity taxation. From a risk perspective, it’s a lot lower than Balanced Funds giving a comfort feel to investors.

This category of fund, caps both the upside and downside quite well through its composition and has potential to generate 10% to 12% (net of tax) over a 3-year time frame. If this fund category proves its mettle, they will become a great hit among investors who don’t have the appetite for high exposure to Equity and Tolerate Volatility. Balanced Funds have attracted huge inflows in the recent run, higher than any other equity fund category – good returns with reduced risk. Equity Savings Fund could well be the next category to bet on.  

< PenguWIN TITBIT # 103 – Equity Savings Fund>