Tutorials of Mutual Funds

Mutual Fund

A mutual fund is an investment vehicle where a person or group of persons, called
mutual fund managers, choose a group of stocks and sell them in one package. Mutual funds are generally lower risk investments for a beginner or intermediate investor.

Mutual Funds are professionally managed pool of money from a group of investors. A mutual funds manager invests your funds in securities, including stocks and bonds, money market instruments or some combination and decides the best time to buy and sell. By pooling your resources with other investors in mutual funds, you can diversify even a small investment over a wide spectrum.

Global Direct Services provides access to free Mutual Funds information.Mutual Fund - A group of people, partnerships, and/or clubs that pool their money together to invest in a larger portfolio of stocks than they could afford to do on their own. The Mutual Fund money is turned over to a paid Fund Manager to make the investment decisions.

Mutual Funds are a great way to create a diversified investment portfolio with a lot less money, which typically results in a lot less risk of depreciation. There are several different Mutual Funds available, many of which are available on the internet.

Mutual funds come in different flavours

Many questions can arise in the mind of the investor while investing in a mutual fund. How do I choose a fund that is right for me?

The important step is to define your financial goals and, determine the level of risk you are comfortable with and the investment time frame. Generally, the higher the potential return, the higher the risk of loss.

Mutual funds can be classified on the basis of structure, investment objective, and payout plans. Structure wise, there are three basic types of mutual funds: open ended, close ended and interval funds.

Structure

An open-ended fund is available for subscription and repurchase on a continuous basis. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices, which are declared on a daily basis. Open-ended schemes do not have a fixed duration. The key feature of open-end schemes is liquidity.

A close-ended fund does not provide the facility of subscription throughout the year; it is open for a subscription for a fixed duration as specified in the prospectus of the fund. The investor can apply for the units of the fund only during the initial offer period following which units can be bought and sold only at the stock exchange, where the fund is listed, at the market price.

Interval funds combine the features of open-ended and close-ended schemes. They may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV linked prices.

Investment objective

Besides, the structure, each fund has a different investment objective.

Equity funds: Their objective is the growth of capital over the long term. Equity funds also known as growth funds as these funds invest in equities and liquid money market securities. They have a high risk attached as the returns from them are also spectacular. They are suitable for investors who have a long-term investment objective and have surplus funds after investing in basic and safe investment avenues.

Balanced funds: Balanced funds hold a combination of equity and debt investments and cash equivalent. They have the objective of providing both regular income and moderate growth while minimizing risk.

Sector funds: These are the funds, which invest in the securities of only those sectors or industries as specified in the offer documents, e.g., pharmaceuticals, software, FMCG, etc. The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give returns higher than even the plain or vanilla growth schemes, which have investments spread over different sectors, they are also more risky.

Tax Saving funds: Just like insurance policies of PPF, these schemes offer tax rebates to the investors under specific provisions of the Income Tax Act, 1961. These schemes are growth oriented and invest pre-dominantly in equities. Thus you get the dual benefit of tax rebate on the amount invested as well as a growth in your capital. But these schemes come with the risks associated with equity schemes.

Index funds: They replicate the portfolio of an index such as the BSE Sensitive Index, S&P NSE 50 index (Nifty), etc These schemes invest in securities in the same weightage as comprising in their chosen index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to "tracking error".

Exchange traded funds: They combine the best features of open ended and close-ended funds. They track an index and can be traded like a single stock on the stock exchange. It is priced continually and can be bought or sold throughout the trading day.

Money market funds: These funds invest in treasury bills, call money and certificates of deposit. The objective of these funds is to maximum protection of capital. Hence, they provide relatively low returns. This kind of fund is appropriate for investors who want to park funds for a short duration. These schemes are popular with institutional investors and high net worth individuals with short-term surplus funds.

Income funds: These funds invest in corporate bonds, commercial paper, certificate of deposit and government securities. The objectives are regular income and capital preservation. They are moderately low-risk and are suitable for investors who need a regular source of income.

Gilt funds: Gilt funds predominantly invest in government securities and money market instruments. As the investments are in government paper these funds have little risk of default and hence offer better protection of principal. The prices of government securities are influenced by the movement in interest rates in the financial system.

However, one must recognize the potential changes in values of debt securities held by the funds that are caused by changes in the market price of these securities. Generally when interest rates rise, prices of government securities fall and when interest rates drop the prices increase.

Payout plans

Besides structure and investment objective, mutual funds can be further divided into two on the basis of their payout plan. They are two plans available:

the growth option and the dividend option. Dividend is payable only to investors who opt for the dividend option. After the declaration of the dividend, the NAV of the unit comes down to the extent of the dividend declared. Investors under the growth option do not receive any dividends. Instead dividends are reinvested, and hence the NAV shows a higher appriciation.

The gilt edge

For investors who are averse to taking risks in stock market and looking for safety as well as liquidity, gilt funds is just the right option. They may offer lower returns but are liquid and safe. In the last fiscal, gilt funds have delivered superior returns in comparison with debt funds and income funds because of falling interest rates. For instance Templeton Gsec Fund generated 27.19% returns while Birla Gilt Plus Plan C posted 26.94% returns.

So what are gilt funds? Gilt funds predominantly invest in government securities of varying maturity and money market instruments. Government securities or gilts, are issued/guaranteed by the state/central government and guarantee timely payment of interest and principal.

The government securities run price risk like any other fixed income security. Generally when interest rates rise, prices of fixed income securities fall and when interest rates drop the prices increase. The extent of fall or rise in the prices is a function of the prevailing interest rates, days to maturity band the increase or decrease in the level of interest rates. The price risk is not unique to government securities. It exists for all fixed income securities.

Fixed income instruments usually carry three kinds of risk-default risk, interest rate risk and liquidity. Interest rate risk arises on account of changes in interest rate. For e.g. the market value of the fixed income instrument will go down in value if interest rates rise and vice versa. This would be a notional loss if such an instrument is held up to maturity. However, if the holder sells the instruments before maturity then there could be a loss on such investment on account of rise in interest rate.

Default risk is one wherein the issuer of the debt defaults or fails to meet its obligation on the payment of interest or principal or both. However, government securities are unique in the sense that their credit risk always remains zero. Gilts are also very liquid and can be traded with ease. Therefore gilt prices are influenced only by the movement in interest rates in the financial system.

The gilt funds have major portion of their investment in GOI securities and hence on an average have a maturity period of one year or more. However to maintain liquidity funds also invest in the money market. Funds with high maturity period and low money market exposure have high liquidity risk. In case of a fall in the interest rates, the NAVs of gilt funds gain sharply but also fall sharply when the interest rates rise. The longer the maturity period of gilt funds, the higher the loss or gain.

The minimum investment amount in gilt funds is Rs 5,000-10,000. Since gilt funds are open ended, the investor can exit or withdraw anytime subject to an exit load. Typically gilt funds offer investors two options, the growth option and dividend option. Under the dividend plan, the fund would declare dividends from the net income earned by way of interest and capital gains (appreciation in the prices of the government security when the interest rate falls). Under the growth plan, these payouts would be reinvested.

Most of the gilt plans offer two plans to the investor, short-term plan or the treasury plan and long term plan also called as investment plans. Treasury plan usually invests in gilts with a short maturity of 6 months to 2 years or in call money. They have a highly liquid portfolio, carry lower risk and at the same time deliver lower returns. These plans are suitable for investors with a short to medium term time horizon of 6 months to one year. In contrast, investment plans invest in gilts of maturity more than 2 years. Long-term gilt funds invest in papers with a maturity period as high as 25 years. Investment plans generate higher returns and are more susceptible to volatility arising due to interest rates. Such plans are suitable for investors with a longer investment horizon of more than 2 years.

Gilt funds are chargeable to tax from Financial Year 2002 unlike in the past when they were absolutely tax-free in the hands of the investor. The investor will have to pay tax on the dividend income received at the individual rates in case of dividend option. Tax @10% would be deducted at source only if the amount received from the company or the mutual fund exceeds Rs 1,000. An investor can also claim a deduction in respect of this income under section 80 L within the overall ceiling of Rs 9,000. In the case of growth option, the investor will pay long term capital gains tax of 20% if he stays invested in the scheme for more than a year.

Read a mutual fund prospectus before investing

Anyone would agree that the mutual fund prospectus is the best source of information. But understanding the prospectus can be a daunting task. It contains detailed information or too much information with complex and legal terminologies making it confusing for the investor to understand. As a result, though a prospectus is a must read, many investors ignore it.

A prospectus describes the objectives, strategies, and risks of a fund. It also presents statistics on past performance, lists the sales and management fees, details regarding investments required, services provided and explains how to buy and sell units. In short it tells you what information to look for, what it really means, and why it is important to you.

Key elements of a mutual fund prospectus:

Date of issue: First, verify that you have received an up-to-date edition of the prospectus if the scheme is already running. A prospectus must be updated at least annually.

Minimum investments: A mutual fund scheme may differ in the minimum initial investment required, and the minimum amount for subsequent investments.

Investment objectives: The goal of each scheme should be clearly defined. Whether the scheme is going to generate income with preservation of principal, or long-term capital appreciation. Be sure the fund’s objective matches your objective and risk tolerance.

Investment policies: A prospectus will outline the general strategies the fund managers will implement. You’ll learn what types of investments will be included, such as government securities, equities or a combination of both.

Usually all prospectuses carry the investment pattern listing out the minimum or maximum percentage limitations for certain types of securities. For example, the fund's policies may require the manager to invest at least 75% of the fund's assets in government securities. Or if it is an index fund tracking BSE Sensitive Index, it will invest only in the 30 shares constituting the Sensex.

Risk factors: Every investment involves some level of risk. In a prospectus you’ll find descriptions of the risks associated with investments in the fund. Refer to your own objectives and decide if the risk associated with the fund’s investments matches your own risk tolerance.

Performance data: This table displays the return of the scheme over different time periods, say three months, six months, one year or since inception; the latest net assets of the scheme and historical net asset values (NAV) of the fund. Financial highlights also include any distribution of dividends, and expenses incurred.

Though past performance do not guarantee future results, one should always check how the fund has performed historically. When evaluating performance, look at the track record of a fund over a time period that matches your own investment goals.

Fees and expenses: This is one fact, which should not be ignored. Every rupee you pay as fee is a rupee less invested. Sales and management fees associated with a mutual fund must be clearly listed. You will find a break up of the expenses expressed as a percentage of the funds assets, which will be something like this:
Investment management fees 1%
Audit fees: 0.05%
Registrar and transfer agent fees: 0.15%
Other expenses: 0.50%
Total expenses: 1.70%

That means 1.70% of the funds assets will be deducted each year/week for expenses
Second, check for the transaction expenses charged by the fund, i.e., what expenses you will incur while entering and exiting the fund.

Tax matters: A prospectus will include information on the taxation matters, i.e., implications of a fund’s distributions, and whether they will be treated as dividend income or capital gains at the hands of the investor.

Management: This section will provide information about the portfolio manager of the fund, including past experience and how long he or she has worked with the fund. Background of the fund, the management team, the asset management company that manages the fund's investments and business affairs, is included.

Investors rights and services: Unit holders may have access to certain services, such as automatic reinvestment of dividends and systematic withdrawal and systematic investment plans, inter scheme transfers. This section of the prospectus will describe these services and how you can take advantage of them.

After reviewing a few prospectuses, you’ll become accustomed to the language and be able to reduce the time it takes to find the information you need to make a sound investment decision.

You can receive prospectuses free from mutual fund companies, their investor service centres or registrars. Do not hesitate to ask questions on points that you do not understand.

Understanding risks

Every investment entails risk. Mutual funds too are not risk free investments. Even funds investing in government bonds (sovereign paper) are susceptible to some kind of risk. Before investing in mutual funds be sure you completely understand the risk associated with the particular scheme.

So what is risk? Risk is a measure of the possibility that the investor will not receive an expected return on his investment. Generally risk and reward move hand in hand. The greater the risk that an investment may lose money, the greater its potential for providing a substantial return.

Here we discuss in brief the various types of risks inherent in mutual funds and how they can be limited.

Market Risk: Market risk exposes you to a potential loss of principal. In all likelihood the market value of a stock will fluctuate based on factors such as developments affecting the company's financial status, earnings of the company or impact of economic slowdown on the company. Likewise, debt funds too are subject to market risk. Prices of bonds and government securities fluctuate with change in interest rates.

You can minimise market risk by diversifying among a variety of instruments rather than investing your money in one or two stocks. Diversification helps minimise risks. Thus, when one asset class is adversely affected by market or other conditions, another class may be less affected. Because mutual funds invest in a lot of companies, they are the best way to diversify.

Interest Rate Risk: The risk that the value of a fixed income security will drop as interest rates rise. Government security prices are inversely related to interest rates. If interest rates decline then the prices of securities increase and vice versa.

This risk cannot be avoided.

Inflation Risk: the risk that the return on your investments will not keep pace with rising consumer prices. Conservative instruments like debt funds provide less return over time and are more prone to the inflation risk.

Though this risk cannot be avoided you can manage it by investing a small portion in equity mutual funds. Equity funds always provide higher returns over a period of time. In comparison, debt funds give less returns.

Business Risk: the risk that a company issuing a security may not be financially sound due to factors like poor management, low product demand, or huge operating expenses. Such situations can result in a decline in the security's value.

Since mutual funds invest in a variety of companies, the effect of such a risk spreads out.

Credit Risk: the risk that an issuer will default on a fixed income security by failing to pay interest or principal when due. Most of the bond instruments are rated by rating agencies. The higher the rating given to the bond, the higher is the credit quality implying low credit risk and vice versa.
This risk can be limited by investing in mutual funds having a high exposure to quality paper. Rating of AA/AAA denotes high credit quality.

Political Risk: the risk that political events may unfavorably influence the value of a security. Other political risks could include wars, change in government etc.

Political risks cannot be avoided. However, no two companies will be affected in a similar manner when any change in law or a new legislation takes place.

Liquidity Risk: the risk that a mutual fund's underlying securities cannot be sold at a fair price when the need arises. Hence marketability of a security is a very important consideration.

You can minimise liquidity risk by investing in actively traded companies. In mutual funds, invest in an open-ended scheme as you can enter and exit at your own convenience. Close ended funds do not give you an option to exit at your convenience.

Timing risk: the risk of buying or selling a security at the wrong time. For example, there is the chance that a few days after you sell a fund it will go up in value or decline in value of a fund after you buy it.

The best way to counter market timing is to invest systematically. You can actually take advantage of short-term market volatility by investing a fixed amount on a regular basis to build a portfolio over a time period. This approach, called rupee-cost averaging, lets you buy more mutual fund units when NAVs are low and fewer units when NAVs are high.

As mentioned some of the risks stated above can be avoided through strategic planning. Firstly, learn to accept risk as a normal part of investing. Familiarise yourself with the various risks your portfolio could be exposed to. If you are a conservative investor it would make sense if you invest in schemes which are not affected by the swings of the stock market.

Secondly, diversify and invest regularly and systematically. Always invest for a longer term. The shorter your investment time horizon, the more your portfolio is subject to market volatility. Also consider your income needs. If you are nearing retirement or have retired, your investment portfolio should have income-producing investments such as monthly income plans. But you should also include some equity securities in your portfolio to keep the potential for growth.

The power of systematic investments

Rather than making a one-time investment, build up your portfolio systematically
If you are one of those waiting for the right time to invest then chances are you might never get started. For many investors, finding the money to invest is a challenge because of other important needs like buying a house, children’s education etc.

Investing a lump sum of money all at once can put that money at risk unnecessarily. This will not be the case if you follow systematic investing.

With a Systematic Investment Plan, budgeting and investing go hand in hand. One of the easiest ways to get started is to invest a set amount on a regular basis at an early age. In this way, the powers of compounding with time, works wonders for your investments. You can earn income on income earned and your money multiplies at a compounded rate of return. The longer you wait, the more you have to invest and the higher must be the return obtained to make up for lost time.

Before you start investing, first chalk out a sound financial plan that incorporates your investment objectives, time horizon and risk tolerance. Portfolio diversification is very important because it reduces volatility and risk.

Systematic investment plan (SIP) is offered by most of the mutual funds. You do not have to invest a large sum of money at one time. To make the most of an SIP you need to invest regularly every month or every quarter, year in and year out. Your amount of investment remaining the same, you buy more number of units in a falling market and less number of units in a rising market. Because in a falling market, the price you pay for your units will generally be lower. In a rising market, you will get less number of units for the same amount. This concept is called rupee cost averaging.

For example you have opted for systematic investment plan in a scheme, investing Rs 1,000 per month. The NAV of the scheme when you started investing was Rs 10.
Month Investment NAV No of units
1 1000 10 100
2 1000 11 90.91
3 1000 9 111.11
4 1000 7.5 133.33
5 1000 8.5 117.65
Total 5000 553

Average cost per unit= Rs 5000/553 = 9.04 while the average NAV is Rs 9.20 per unit.
As can be seen the average cost per unit is reduced by systematic investing. A factor in the success of any systematic investment plan is your ability to maintain a regular program of investing over a long period of time despite fluctuating market conditions. One must remember that systematic investments do not assure a profit and do not protect against a loss in declining markets.

A systematic investment plan has many benefits. It disciplines you to save regularly rather than arbitrarily. Your investments have a chance to grow because of compounding benefits. It helps reduce the risk of timing the markets and, most importantly, it brings down the average cost of your investment.

Then why invest only in mutual funds. Why not stock market? First, it is very difficult to predict the stock market and the interest rates. Second, to make the maximum gains in stocks, you need to time the market. Mutual funds invest in a number of companies across a cross section of industries and sectors as well as several asset classes of debt. Many mutual funds offer low minimum investments. So you can build a portfolio tailored to you specific investment goals at an affordable level. Include an assortment of different types of schemes to diversify your risk.

Adding diversity to your portfolio

Determining the appropriate mix of assets in your portfolio is an important step in maximising returns and reducing your risk over a long term. The reason is simple. If all of a portfolio's assets are concentrated in one area, such as stocks, it is likely to be more risky than a portfolio whose assets are spread out among diverse investment categories.

Choosing the right mixture of different asset classes such as stocks, bonds and cash investments is called asset allocation, and it is an absolutely critical part of investing.

Different asset classes have different risks and return levels. Cash and equivalents also known as liquid funds are short-term investments with low risk and low return potential. They seek to preserve capital. Their major advantage is that they are absolutely liquid and can be converted into cash at any time. Fixed income instruments or income funds produce regular income with limited risks. Equity funds are long term investments with both high risk and potential returns.

As each asset class generally has different levels of return and risk, it also behaves differently. Different classes of investments move up and down in value at different times. Hence combining these groups in a portfolio can produce more stable returns and enhanced investment results in the long run.

It is important to have a portfolio that reflects your personal risk tolerance and your investment goals. To design a proper portfolio there are several factors which you must take into consideration. Your investment objective, and time horizon, return expectations and risk tolerance.

The younger you are the more stocks or equities you should have to allow your money to grow. As your goals and age change, you may choose to put more funds into income producing investments and less into growth.

In the early working years, the younger you are, the more risk you can afford to take. Your investment objective at this stage would be to accumulate capital. Keeping in mind your investment objective you should allocate around 75% to equity funds, 20% to income funds and the remaining 5% to liquid funds. Equity funds should form a major part of your portfolio since they have the potential of providing higher returns than other asset classes. A small portion should be allocated to bond/income and liquid funds for near-term goals and liquidity.

In late working years, although capital preservation is important, you may also need income producing investments to take care of your needs such as children's college education or purchasing a house etc. Therefore now you should follow a conservative approach to investing. Your investment mix should approximately be 55% in equity funds, 35% in income funds and 10% in liquid funds.

As you grow older and are approaching retirement you need regular income with least risks. Your portfolio mix should now have 30% equity funds, 55% income funds and 15% liquid funds. Income funds should form a major part of your portfolio to take care of your monthly cash flows.

With the right portfolio mix, at any point of time, a portion of the investment will be performing well. The highs and lows of any single investment will be offset by the performance of the other investments in the portfolio.

In developing your asset allocation strategy, you should remember that, as your time horizon shifts, your asset allocation should shift accordingly. Generally, the younger you are, the more risk you can afford to take. As you get older and closer to retirement, you will be more interested in capital preservation rather than growth of capital.

An investor should remember that he has to constantly review his portfolio. Asset allocation needs to be done as often keeping your objectives in mind. At times you may feel the need to rebalance your portfolio to maintain diversification. Over time, of course, long-term goals such as retirement or funding your child's college education will become medium and short-term goals. Before deciding on the appropriate allocation mix you should understand the risk and return relationship of the various asset classes that are being considered.

Investing for your child’s future

Investing for your child’s education is one of the most important things in life just as buying a house or planning your child’s marriage. Of all the reasons for investing, one of the most compelling reasons is to be able to pay for your child’s college. After all, a good education is an invaluable foundation for success in a child’s life.

Investing in mutual funds is a smart way to build savings for your child's education because they allow you to benefit from the long-term growth potential of stocks, bonds and money market investments. You also reduce your risk by spreading money across the number of securities in which the fund is invested.

Before you begin investing in mutual funds for your child’s education, the following points should be kept in mind. 1. Define your goals clearly. You may not know what career your child wants to pursue. But you can roughly work out an approximate figure needed after a particular time frame for a professional degree. The answers to these questions will help ascertain how much you’ll need to save.

2. Determine your time horizon. How old is your child? How long before you will need to use the assets in your education account? Time horizon is an important factor which determines how aggressively you should invest.

3. Choose an investment strategy. Once you know your goals and time horizon, you can evaluate your tolerance for risk. But remember the longer your time horizon, the more aggressive your investment portfolio should be. Equity funds may carry a high degree of risk but they have delivered higher returns over time. For example, if your child is very young or you have at least six-seven years before he begins college, you should invest in equity funds which have the potential to deliver high returns. On the other hand, if your child is to step into college, you will find the need to invest in less risky investments that include bond funds or other short-term funds. A better way would be to divide your investments in different investment vehicles. This strategy known as asset allocation is the best way to balance risk and reward.

4. Start investing now. Whatever investment strategy you choose, the earlier you start the greater your potential rewards. Starting early not only gives you time to invest more, it also gives your investments more time to grow through compounding (whereby you earn income not only on the money you invest, but also on the income you’ve already earned). It is not necessary that you invest big amounts. Investing even a very modest amount on a regular basis can bring big rewards in the long run.

A word of caution here.

Don't just park your money in one or two funds and leave it to grow. Review the performance of the funds at least annually or once in six months. Rebalancing or adjusting your portfolio on a regular basis is a must. When your child is about five years away from starting college, begin to shift your money into balanced and income funds, slowly reducing your exposure to market ups and downs while still aiming for high returns. Two to four years before your child is due to start college, shift to conservative investments like income funds which offer more stability. If your child is just about to start college, shift a part of your investments to even more liquid avenues. Investors who do not rebalance their portfolios with shifting investment objectives and time horizons will rather be forced to withdraw money at a time when the market may be down. In the process they can end up losing some of their earnings.

Apart from investing in the regular schemes, you can also invest in schemes tailor made for children. A few of them are Prudential ICICI's Child Care Plan, SBI Magnum Children's Benefit Plan, LIC MF Children's Fund, UTI Children's Career Plan, HDFC Children Gift Fund, Tata Young Citizen's Fund and IDBI Principal Child Benefit Fund. It is important to know the basic features of every scheme before investing. For eg Pru ICICI Child Care Plan has two options Study and Gift. While the Study Plan is an equity balanced scheme, the Gift Plan is an debt with marginal equity scheme. Tata Young Citizens fund is an equity balanced scheme. Most of these schemes usually come in with a lock in period, which deter people from exiting the scheme. They also offer free personal accident insurance cover. Pru ICICI Child Care plan and HDFC Children’s Fund both offer a cover upto Rs 3 lakh.

An Alternate to Savings Accounts - Liquid funds

Almost all of us have surplus money parked in a bank savings account waiting to be used for some unforeseen expense or the other over an uncertain time frame. It is also one of the safest places to put your money. You are more than happy cause your principal is safe and liquid and it is at least earning 4% interest.

Since the expense is unknown and so is the timeframe need we suggest an option where your money works harder for you and gives you the same benefit, plus a little more yield than what you will earn in a savings account.

Enter liquid funds also known as cash funds. They have more potential than a savings bank account or fixed deposit for that matter. They offer returns slightly higher than fixed deposits apart from offering the same level of security. In short, liquid funds can be used as substitute to your savings bank account.

What makes the cash funds liquid? These funds invest primarily in money market instruments, such as commercial paper, certificate of deposits, treasury bills, and call money market for a shorter duration. They are extremely low-risk and very liquid, meaning that you can change it into cash assets at any time. Their aim is to secure returns that are better than bank savings account and more liquid than term deposits. Hence when the uncertainty over your expense ends i.e. you know when and how much you are going to need all you need to do is redeem the units which will give you the desired funds, Liquid funds are mandated by SEBI to process the redemption proceeds within 24 hours. Investors are advised to do provide for three to four days to receive clear funds in their bank accounts.

Liquid funds differ from debt funds i.e. the income funds and gilt funds. The gilt and income funds have a higher maturity profile and provide superior returns over a long term but are susceptible to interest rate risk. Since income and gilt funds invest in long term and medium term instruments, they are more prone to changes in interest rates. Liquidity in these funds comes at a cost known as exit load. Liquid funds provide returns less than debt funds and have a shorter maturity profile. But they score over income and gilt funds in terms of liquidity, as they are no load funds. Liquid funds are the least risky instruments.

Cash funds are known to provide steady returns with minimal risk and focus on capital preservation. These funds also cash in the interest rate volatility, as short-term funds are less prone to changes in interest rates. Hence such funds are most sought after by the conservative investor who does not want to trade his principal for a risky return.

But isn't bank savings account the least riskiest and safest way of investment? Yes, with minimal returns of 4% p.a., savings bank account offers anytime and easy liquidity, and safety of capital. Fixed deposits of a short-term tenure of 6 months offer 6.00-6.50% p.a. returns. In contrast, cash funds have generated superior returns. Birla Cash Plus has generated annualised returns of 7.36% over 6 months, Tata Liquid Fund has given 7.38% annualised returns over 6 months. In case of fixed deposits, the liquidity may come with a penalty or at the maturity period. Cash funds, on the other hand, provide safety of capital as well as 24 hour liquidity and no loads. Their daily and weekly dividend options make them all the more attractive. The dividends are reinvested back at the ex-dividend NAV. The minimum investment amount in these funds ranges from Rs 5,000 to Rs 1,00,000.

What's more, many mutual funds have tied up with banks allowing direct credit to investors' account implying that the investor need not go to the mutual fund's office for collecting redemption cheques. This means that an investor can submit his redemption request on Monday morning before 10 or 10:30 IST and get a redemption request processed based on the closing NAV of Sunday and get a redemption cheque on the next working day. Almost all liquid funds declare NAVs on Sundays and on public holidays. All this can be done at NAV based prices since liquid funds do not charge any entry or exit loads. Secondly their anywhere cash facility allows an investor to redeem his units from any mutual fund's centre other than the place he invested from.

In terms of taxation, the Budget 2002 has put mutual funds at par with bank deposits. Liquid funds will be chargeable to tax at individual taxation rates. Any income above Rs 1,000 would be subject to tax deduction at source at the rate of 10%. Deduction is also allowed in respect of this income under section 80 L within the overall ceiling of Rs 9,000. Still the short-term losses can be offset with short-term gains from mutual funds. In case of bank deposits, interest income received is eligible for deduction under Section 80L up to Rs 9,000.

Retired people or people nearing retirement should invest in liquid funds. Because at this stage, the last thing you want to do is invest your money in risky propositions. Even if you are an aggressive investor, you should have some portion of your investment portfolios in money market instruments or liquid instruments for stability and liquidity. In case you need some emergency cash, you can redeem your liquid fund with almost no loss to capital. But one should remember that investments in liquid account do not in any way insure against loss.

Build your portfolio with mutual funds

When compared with investing in individual stocks or bonds, mutual funds can provide distinct advantages. Mutual funds invest in a broad portfolio that include stocks, bonds, money market instruments, and other investments. Hence they enable you to create a diversified portfolio much more easily than if you attempted to achieve the same level of diversification by investing in stocks and bonds on your own.

A mutual fund portfolio is the sum of all of your different investments made in mutual funds. Building a portfolio is dependent on a number of factors, but it is important to remember that your portfolio should be designed according to your needs and goals. For that reason, your portfolio may not be the same as another investor's portfolio.

When building a portfolio there are three main considerations: Liquidity, Income and Growth. Stock funds generate higher returns but they also carry the highest risk. Income funds are good for income but they are not risk-free. A well-planned portfolio should include investments to meet these three considerations and the flexibility to move easily between them as circumstances change.

The following points have to be kept in mind in order to ensure a well-built portfolio.

Your investment objectives and your time horizon: First establish your investment objective. Do you want steady income, or an increase in your capital. Income funds provide steady income, whereas equity funds are designed to provide an increase in capital. Choose a mutual fund, which satisfies that objective. A person could be saving for retirement or for an unforeseen expense. Time plays a part as well. You can classify your time horizon as short (one to three years), intermediate (three to ten years), or long-term (over ten years). If your goal is to retire in 25-30 years, you might be more willing to take on risk. Because the longer your money is invested, the more chance you'll have to recover from any market downturns. But if your goal is just 5 years away, taking on risk might not be a good idea.
Risk Tolerance: Everyone has a different tolerance for risk. Your risk tolerance will be influenced by age, income, the amount you are willing to invest, job security, time horizon, goals, and temperament. There is a tradeoff between risk and reward. The higher the investment risk, the higher the potential return and the better suited it is for long-term time horizons.

Generally, risk tolerance decreases with age. If you are approaching retirement, your time horizon is shortened. At this point, it makes sense to switch to more conservative funds such as income funds, as they have a lower volatility than equity funds.

Determine the appropriate asset mix for your portfolio: Your asset allocation refers to the way in which you will divide your investments amongst the three basic asset classes: cash, bonds (fixed-income) and equities. Devising an asset allocation plan is the first step toward diversifying a portfolio. As each asset class generally has different levels of return and risk, it also behaves differently. Different classes of investments move up and down in value at different times. Hence combining these groups in a portfolio can produce more stable returns and enhanced investment results in the long run. For each investor, the key to constructing a portfolio is to find the balance between an acceptable rate of return with an acceptable level of risk.

Choosing the right fund: Once you have determined your appropriate asset mix, you have to choose the right mutual fund. For example, you could decide to invest 60% of your portfolio in equities, and in addition to diversifying across asset classes, you may choose to diversify amongst investment styles. You would like to buy one equity fund with a growth investment focus and another equity fund with a value focus.

Apart from this, also ensure that the fund's investment objective is aligned with your own investment objectives. Secondly, examine the fund's past performance, its performance compared to its benchmarks and its ranking against similar funds.
Avoid Portfolio Overlap: When you buy several funds of one type you end up owning roughly the same set of stocks. Make sure you don not end up buying mutual funds investing in the same sectors. One of the problems you may face is having similar investment styles, or sectors over-represented in your portfolio.
Remember that successful investing requires discipline. It requires a plan. Develop yours and then stick with it.

The cost of investing in mutual funds

The charges you pay to buy or sell a fund and the ongoing fund operating expenses impact the rate of return you earn on your investments. This is due to the fact that fees are deducted from your investment returns. All other things being equal, high fees and other charges depress your returns.

Many people wrongly assume that the only expenses they incur are the much talked about loads. Figuring out how much a fund charges each year in fees and expenses can be a real headache, but it is a crucial factor in your investment choice.
Apart from the various advantages offered by mutual funds (liquidity, diversification, and professional management), another advantage of mutual funds is the complete disclosure of all fees. Mutual fund costs can be classified into two broad categories: operation expenses, which are paid out of the fund's earnings, and sales charges, that are directly deducted from your investment.

Expense Ratio/ operating expenses

Every mutual fund is allowed to charge for operating expenses, which are basically the costs of doing business. The costs are deducted from the income earned by the fund, and are called "expense ratios." It is an annual fee that is charged to a mutual fund to pay for such expenses as:
· Investment management and advisory fees
· Sales/agents commissions and ongoing service fees
· legal and audit fees
· registrar and transfer agent fees
· fund administration expenses
· marketing and selling expenses

An annual expense is expressed a percentage of the fund's average daily/weekly net assets. The break-up of these expenses is required to be reported in the scheme's offer document. The expense ratio is calculated by dividing the operating expenses by the average net assets. For instance, a fund with Rs. 100 crore in assets and expenses of Rs. 20 lakh would have an expense ratio of 2%.

Depending on the type of scheme and the net assets, operating expenses are determined by limits mandated by the Securities and Exchange Board of India (SEBI) Mutual Fund Regulations, which are as follows:

Net assets Equity schemes Debt schemes
First Rs. 100 crore 2.50% 2.25%
Next Rs. 300 crore 2.25% 2.00%
Next Rs. 300 crore 2.00% 1.75%
On the balance of assets 1.75% 1.50%

Assuming that an equity scheme generating 15% returns has net assets of Rs 100 crore. With the operating expense ratio at 2.50%, the effective return would be 12.5% (i.e. 15-2.5). Operating expenses are calculated on an annualized basis and are normally accrued on a daily basis. Therefore, you pay expenses pro-rated for the time you are invested in the fund.

Loads: Loads are the most talked about fees that mutual funds charge. These are one-time charges for purchasing or redeeming shares of a mutual fund. They are of two types:

Front-end load: A front-end load is a sales charge you pay when you buy units of a mutual fund. This reduces the amount of your investment in the fund. For instance, if you invest Rs 10,000 in a mutual fund with a 2% front-end load, Rs 200 will be paid as sales charge, and Rs 9,800 will be invested in the fund.

Back-end load: A back-end load is a charge you pay when you sell your units. This reduces the amount you receive when you redeem the units. For instance, you redeem your units at a NAV of Rs 10.5. You have around 1000 units. At the time of redemption, lets say the fund charges an exit load of 1%. Then you will receive Rs 10,395 after deducting Rs 105 as the sales charge.

Contingent deferred sales charge (CDSC): A CDSC is a sales load that investors pay at the time of redeeming the mutual fund units. This charge decreases over time. In order to charge a CDSC, the scheme has to be a no-load scheme as per the regulations laid down by SEBI. The asset management company is entitled to levy a CDSC not exceeding 4% of the redemption proceeds during the first four years after purchase, 3% in the second year, 2% in the third year and 1% in the fourth year.

Trading costs
Still another expense is the cost of trading securities, including charges such as brokerage commissions. These costs aren't included in the fund's expense ratio, but are taken into account while calculating the NAV. Higher costs could impact the NAVs.

The turnover ratio for a mutual fund can provide you with useful information about how expensive a fund is and how it is managed. Turnover ratios measure the amount of trading activity in the fund's portfolio. They are calculated by taking all of the fund's sales for a specified period of time (usually one year) and dividing by the fund's total assets. This number tells you how much the fund's portfolio has changed.

A high turnover means that the fund's manager is buying and selling very often, and, since every sale and every purchase involves a commission, this means that funds with high turnover ratios often have high expenses.

Before deciding on a mutual fund always compare the costs with its peers. All mutual funds are required to publish their costs in the prospectus or in the half-yearly or annual unaudited accounts. Check the fee table to see if any expenses of the fund have been waived off for a temporary period. In case the fund has a temporary waiver on fees, they might crop up once the period ends. Many mutual funds also charge a switchover fee while allowing you to switch to another scheme. Check out if the fund is charging any fees for the same.

Selecting the appropriate fund to meet your investment objectives, of course, involves much more than looking at fees. You also need to consider the fund's investment objective and policies, its risks, and the types of services offered by the fund. Choose a fund because it has solid management and a good track record and meets your investment strategy.

Are you looking for a steady flow of income?

With a myriad of investment options available today, it is important to understand how best to put your money to work, while keeping your financial goals in mind. If you are looking for a steady flow of income, mutual funds that invest primarily in bonds may be the right addition to your portfolio. Adding bond funds to your portfolio can cushion the effects of a volatile market. Stocks and bonds often respond differently to changes in market conditions.

Because bond prices generally do not move in tandem with stock investments, they help to balance in an investor's portfolio, while providing a steady income stream. For this reason, bond funds attract investors nearing retirement or conservative investors.

Bond funds invest in fixed income securities such as corporate debentures and bonds, government bonds and treasury bills. They aim to provide steady and regular income to investors. These funds fall in a low to medium risk category. There are two ways investors can make money from investing in bond funds. The regular coupon or interest accruals from the bonds held in the portfolio and any capital gain or loss that may arise when the bonds are marked to market. Mark to market refers to a process of recording the price or value of a security, portfolio, or account on a daily basis to reflect the current market value.

As said earlier, bond funds invest in corporate bonds and government bonds.

Corporate bonds are issued by companies and can be among the riskiest of all bonds. Government bonds are the safest because they are issued by the government.

Just like other investments bond funds also carry some level of risk. The level of risk depends on the quality of the bonds in which it invests. Bonds are subject to credit risk, market risk and interest rate risk.

Credit risk: Bonds carry the risk of default, or the issuer's inability to pay. Investing in high-quality bonds and relying on the professional management provided by a bond fund will help lower the risk of default. Bond ratings can help in avoiding low-quality instruments with high credit risks.

Market risk: It is the risk that the value of your investment will decrease due to rising interest rates. Short-term bonds have the least market risk, followed by medium- and long-term bonds.

Interest-rate risk: When interest rates rise, bond prices and the NAVs of bond funds fall, reducing the overall value of the investment. All bonds and bond funds are subject to interest-rate risk, but this risk can be minimised by investing in short-term and medium-term bonds.
Usually, the longer a fund's duration or average maturity, the more it will be affected by changing interest rates.

The price of a bond usually moves in the opposite direction of interest rates. When interest rates rise, the price of an existing bond goes down because it becomes less attractive than the higher rates being paid on newly issued bonds of similar quality. Conversely, if interest rates fall, the bond's coupon rate becomes more appealing to investors, driving the price up.

For instance, an investor buys a bond fund at a face value of Rs 100 giving 10% returns and having a maturity value of Rs 110. Now suppose the interest rate falls by 1%. The market rate has to adjust so that all the future investors get the current interest rate of 9%. Hence the bond starts trading at Rs 100.90 to give the return of 9% on that investment.

Again, a bond fund's NAV may fluctuate less than the price of an individual bond, because a bond fund invests in a number of bonds with different maturity dates. And, unlike an individual bond, a bond fund never matures. Instead, its portfolio managers maintain an average maturity period by continuously selling off aging bonds and purchasing new issues.

Investing in bond funds has many advantages. The major advantages being diversification, liquidity, professional management and dividend reinvestment. For investors who do not need a regular cash flow, dividends can be reinvested unlike in the case of an individual bond which cannot be automatically reinvested.

Professional management takes care of all the details from analysing the markets to deciding which bond to buy and sell. Investing in bond funds rather than individual bonds also helps diversify a portfolio. An individual bond investor has the potential of losing all of his money if the issuer defaults.

In contrast, a bond fund holds different bonds from different issuers, reducing the effect if one issuer fails to pay interest or principal.

Index funds: A good way to start investing

Index funds are a very good way to begin investing, particularly when you do not have time to follow the market daily. Many beginners use these funds as a means to offset the risk of picking of right scrips. Index funds eliminate the worry of trying to pick winners and avoid laggards.

An index fund is a passively managed fund. Simply put, it means that the fund manager does not try to outperform the market or a particular industry. His main goal is to mirror the chosen market index. The index fund manager does not try to time the market or outperform the market.

Before moving on to an index fund, let us focus on the index. An index is a group of securities whose aggregate performance is used as a measure of performance of the market as a whole or a specific sector of the market. Thus an index is a subset of the market and is made up of carefully selected stocks that are expected to mirror the performance of the market or the sector. For e.g. BSE Sensex, BSE IT Sector Index, BSE FMCG Index, S&P CNX Nifty.
The Sensex indicates the performance of all the stocks listed at the stock exchange while the BSE IT Index indicates the performance only of the tech sector.

Most of the indices calculated are based on market capitalisation (price * outstanding equity capital) of each stock and the weightage of each stock in the index is determined based on its market capitalisation. An index fund invests in the securities of the index in the same weightage.

An index fund is a mutual fund scheme that invests in the securities of the target index in the same proportion or weightage. Though they are designed to provide returns that closely track the benchmark index. Index funds carry all the risks normally associated with equities, so when the overall stock market falls, you can expect the price of shares in a stock index fund to fall, as well.

In short, an index fund does not mitigate market risk. It merely ensures that your returns will not stray far from the returns on the index that the fund tracks.
Though, the objective of indexing is to ensure that the returns of the fund will not stray far from the returns of the index, there are instances that lead to mismatch of the returns of the index with that of the fund. This mismatch or the difference in the returns of the index to that of the fund is known as tracking error.
It is defined as the annualised standard deviation of the difference in returns between the fund and it’s target index.

Tracking error occurs due to various reasons. Prominent among them are as folllows:

· Cash balance: A fund has to maintain a sufficient cash balance in order to meet its liquidity requirements for redemptions.

· Expenses incurred by the fund such as brokerage costs also impact the funds returns. Higher the expenses incurred, greater will be the tracking error.

· Giving effect to corporate actions like rights, merger, debenture or warrant conversion. During such cases the fund has to rebalance its portfolio. Rebalancing means buying or selling shares in order to match the exact weightage of a company in the index. This rebalancing needs to be in a proper and timely manner otherwise it would lead tracking error.

· Rounding off of quantity of shares underlying the index: while determining the number of shares that needs to be purchased for each security, one would need to round off this number as the minimum number of shares that can be purchased on the exchange is 1.

The smaller the funds size, the higher would be the effects of expenses and delays in investments on tracking error. An index fund manager needs to calculate his tracking error on a daily basis. Lower the tracking error, closer are the returns of the fund to that of the target index.

Despite all this, there are numerous advantages of investing in an index fund. They are as follows: ·

diversification: since index schemes replicate to a large extent the market index, they provide diversification across various sectors and segments.

· Low costs: Index schemes are passively managed, as a result of which costs such as those relating to management fees, trade execution, research etc are kept relatively low.

· Transparency: As indices are pre-defined, investors know the securities and the proportion in which their money will be invested.

Unlike actively managed funds, index funds do not respond to difficult market conditions by selling stock and holding cash. This is because the fund has to stay fully invested. Index funds simply track their respective index, for better or worse.

The appeal of mutual funds

Saving for the future is good. Investing for it is even better. Mutual funds have many benefits that make them one of the most efficient, cost–effective, and easy investments available. They are also ideal vehicles for individual investors who don't have the time, willingness or ability to manage their own portfolio of bonds or stocks.

The advantages offered by mutual funds are:

Diversification: A mutual fund offers diversification to investors because it invests in different securities. By investing in different types of securities, you also minimize the risks inherent in each market. When one market goes down, another may go up. Stocks and bonds often respond differently to changes in market conditions. Therefore, when you have several different securities in your fund and one of them performs poorly, that one will not hurt the whole fund.

Professional management: Instead of keeping track of all your stocks, bonds, and other holdings, you can buy units of a mutual fund and let a professional manager do it for you. The manager of a mutual fund is responsible for researching companies, securities and markets in order to make decisions as to when individual securities are bought and sold. This feature takes the guesswork out of the hands of the investor as few investors have the time or the knowledge to research as extensively as the portfolio manager does.

Liquidity: Liquidity is the ability to readily convert investments into cash. The investor can sell the units at the prevailing net asset value to the Mutual Fund itself. Mutual funds are, therefore, considered very liquid investments.
Choice of funds and risk level: Mutual funds have a broad array of funds for every investing goal and risk tolerance. You can choose from money market, fixed-income, growth, balanced, diversified, and sector funds etc. depending on your financial goals and take on the kinds of risks that you're comfortable with.

Smaller amount of capital required: Mutual funds allow investors to invest small amounts of money on a regular basis. Instead of needing large amounts of capital to diversify a portfolio, investors can gradually add to their investment through automatic investment plans.

Flexible investing/Automatic investment plans: The automatic investment plan or the systematic investment plan offered by mutual funds enables you to invest a pre-set amount of money into the fund of your choice at regular intervals. It could be an amount as low as Rs 500. This means you agree to invest Rs 500 or more at specified periods during the year. The amount and the frequency depend on the options offered by the mutual fund. Once you have decided, this money will be automatically withdrawn from your account on the specified dates.

Switching facility: Mutual funds belong to a larger family of funds. That is, a mutual fund will offer several products, such as a growth fund, a balanced fund, a bond fund, a money market fund, etc. An investor can usually switch his investment from one fund to another, within the same family at little or no charge. This gives the investor the option to switch funds if their objectives change.

Affordability: Unlike many investments with high initial costs, mutual funds are generally very affordable. The average minimum initial investment for most funds is Rs 10,000. There are even some funds that accept initial investments as low as Rs 500 if the investor agrees to invest a fixed amount every month.

Low Cost: Mutual Funds are a relatively less expensive way to invest compared to directly investing in the capital markets because the benefits of scale in brokerage, custodial and other fees translate into lower costs for investors.

Transparency: You get regular information on the value of your investment in addition to disclosure on the specific investments made by your scheme, the proportion invested in each class of assets and the fund manager's investment strategy and outlook.

Well Regulated: All Mutual Funds are registered with Securities and Exchange Board of india (SEBI) and they function within the provisions of strict regulations designed to protect the interests of investors. The operations of Mutual Funds are regularly monitored by SEBI.

Before taking the plunge into mutual funds, remember that mutual funds, like all investments, carry their own unique risks.

Short term plans: bridging the gap between liquid and income funds

Saving for the future is no easy task. An equally daunting task is to park funds for a short term. But knowing where to park your money for maximum growth will help you achieve your financial goals faster.

When investing your intermediate needs, you often have to make a choice between income and liquid schemes of mutual funds. Income schemes have the potential to deliver better returns over the long term, but the longer maturity profile of their portfolio can subject your investment to a higher interest rate risk. On the other hand, liquid schemes offer safety of capital, but then their returns may not be adequate. Enter short-term plans, which are designed to bridge this gap.

A short-term plan is an open-end income scheme investing in shorter maturity fixed income securities. It has an investment horizon of 3-12 months. They are designed to achieve stable returns over the short-term investment horizons. Hence, short-term plans are positioned between liquid funds and income funds.

These funds invest primarily in money market instruments, such as commercial paper, certificate of deposits, and treasury bills, and call money market for a shorter duration. They are low-risk and liquid. Their aim is to secure returns that are better than bank savings account. With a higher allocation to debt instruments it has the potential to deliver superior returns compared to a liquid scheme and have a lower interest rate risk compared to an income and gilt funds on account of the lower maturity profile of securities in its portfolio.

Since income and gilt funds invest in long term and medium term instruments, they are more prone to changes in interest rates. Liquidity in these funds comes at a cost known as exit load. Short Term Plans provide returns less than these funds and have a shorter maturity profile. As such they are less risky compared to income funds.

Investing in short-term plans has various advantages:

· A short-term plan can be redeemed at any point of time i.e. within 1-2-business days.

· It scores in liquidity over the bank deposits. While investing in bank deposits, an investor gets locked in for certain tenure and premature withdrawals attract penalty of 1-2%. But in the case of short-term plans, the investor can withdraw from the fund any time at NAV based prices, which can be subjected to an exit load of 0.25-0.50% if investments are redeemed within 15-30 days.

· The returns of the short-term plans will be more than that of the bank deposits. Fixed deposits of a short-term tenure of 3 months offer 6.00-6.50% p.a. returns. In contrast, short-term plans have generated superior returns. For instance, Pru ICICI Short Term Plan has generated annualised returns of 8.8% over 3 months; Alliance Short Term Fund has given 8.56% annualised returns over 3 months.

In short, the fund can be used to obtain a stream of income, save for shorter-term financial goals that are at least one year away, or as a way to balance more aggressive equity holdings in your portfolio. A short-term plan should be an important part of your overall portfolio strategy.

Benchmarking fund’s performance
Your equity fund portfolio has given 15% absolute returns over one year. Is it doing well? Maybe, maybe not. You cannot get a true measure of the performance of the fund without knowing how your fund matches up against the peerset or a relevant index over the same period. The above mentioned 15% return may look great until you find that the market was up 22% over one year.

Measuring a fund's performance usually entails comparing its returns over a period of time with that of an index. This process, called benchmarking, selects an index that represents the kind of instruments the scheme invests in. When measuring your portfolio's performance, not just any benchmark will do. That is, you cannot compare returns earned on your equity fund with a bank fixed deposit rate. Similarly, you cannot compare returns of a liquid fund with any index. To find out the relevant index or benchmark for your fund, the best place to look for is a fund's portfolio or an annual report, which compare a fund's performance with a broad-based index appropriate for the type of investments the fund owns.

Mutual fund performance can be gauged against two types of benchmarks:

market indices and category averages. An index tracks the total return of all the securities in the market or some segment of the market. The most widely used benchmark for equity funds is the BSE Sensex, comprising 30 stocks that are supposed to be representative of all listed stocks. Category average measures the average returns achieved by a group of mutual funds with similar investment objectives.
What benchmarks should I use to evaluate my fund?

Different market indices are used as a basis of comparison for different types of funds. For example you have invested in a tech fund. The benchmark to be used by the person will be either BSE IT Index commonly used by the fund managers or the S&P CNX IT benchmark. Similarly, for measuring the performance of a pharma fund, you can evaluate it against BSE Healthcare Index.

Again, comparison should be made over various time periods. Comparing the funds performance for just over one year or six months, doesn’t give you a true picture unless you see how it has performed historically. Compare the performance of your mutual fund to its benchmark over several periods; 1 year, 3 years, and 5 years.
As per SEBI guidelines mutual funds are required to disclose the performance of schemes during the last six months, 1 year, 3 years, 5 years and since the date of launch of the schemes while publishing their half yearly results. Mutual funds have now to disclose also the performance of the appropriate market indices along with the performance of schemes both in the offer document and in the half-yearly results.

Till recently, equity indices were used to benchmark the performance of equity-oriented schemes. And there was widely accepted BSE Sensex, Nifty etc. But, there were no such appropriate market indices to benchmark the performance of different types of debt schemes such as liquid, income and monthly income and balanced fund schemes. Only two market indices Ibex and JP Morgan Treasury Bill Index were used to benchmark the debt schemes. Recently, eight benchmark indices for debt and balanced funds have been launched by Association of Mutual Funds in India (Amfi).

The following are the indices, the one month returns of which are shown vis-à-vis the category averages over one month ended 31 August 2002.

Name of the index For benchmarking the performance of
Returns of index (%) Category average(%)

Liquid fund Index (Liquifex) Liquid funds 0.56 0.62
Composite bond fund index (Compbex) Income/Bond Funds 1.40 1.10
Balanced Fund Index (Balance EX) Balanced Funds 3.80 2.79
MIP Index (MIPEX) Monthly Income Plan Schemes 1.99 0.73

Short maturity gilt index (Si-BEX) Gilt Schemes of short maturity
Medium Maturity gilt index (Mi-BEX) Gilt schemes of medium maturity
Long maturity gilt index (Li-BEX) Gilt schemes of long maturity
Composite gilt index Composite gilt schemes 1.58 1.23

Apart from these, the commonly used indices by the fund managers are:

Name of the index For benchmarking the performance of
Returns of index (%) Category average(%)
BSE Healthcare Index Pharma schemes 2.13 -0.32
BSE FMCG Index FMCG schemes 7.28 6.42
BSE IT Index, CNX IT Benchmark IT schemes 13.39 10.76

BSE Sensex, BSE 500, S&P CNX Nifty, CNX 500 Balanced, diversified, tax planning schemes

Besides, while measuring returns and comparison with peers and benchmarks is useful, it is equally important to look at your financial goals, tolerance for risk and investment horizon before you invest money in any fund.

The balanced approach

Are you looking for an investment that provides both growth and income along with consistent returns? Are you looking for an investment that gives diversity at one shot by investing across asset classes such as equity, bonds and cash? Then perhaps you should consider a balanced fund.

As their name implies, balanced funds invest in a balanced portfolio of debt and stocks. The goal of this type of fund is to provide growth, income and stability in one investment. A balanced fund is a good starting place for a first-time investor in mutual funds or for one who has only a small amount to invest. Compared to pure equity funds, balanced funds generally offer potentially lower risk. They are the least risky of all the equity funds.

A typical balanced fund's asset mix will be 60% in equity and 40% in debt securities and money market instruments. These amounts will fluctuate depending on market conditions and the investment decisions of the fund manager. A fund's policy might also dictate the minimum and maximum amounts that can be invested in any one market. For example, a fund manager could have the option of placing 0%-20% in cash, 20%-60% in bonds, and 30%-60% in stocks. These ranges depend on the policies of each fund.
Besides, not all balanced funds are built alike. They have the flexibility of varying their allocation in order to take advantage of the favourable trends in the equity or debt markets. While many invest about 55-60% in stocks and 45-40% in bonds, there are both more conservative and more aggressive balanced funds. Hence, you should find one that matches your risk tolerance. It is equally important that you periodically monitor your balanced fund and ensure that it is sticking to the stated investment spread.

The more conservative balanced funds (balanced income funds) place their investment emphasis on bonds for higher income potential, while aggressive balanced funds (balanced growth funds) place greater emphasis on stocks for higher capital gains. If income is your primary investment goal, while still wanting exposure to the stock market, you should pick a balanced income fund rather than a balanced growth fund. For example Templeton India Pension Plan invested around 62% in bonds and cash in September.

Balanced funds are affected by interest-rate changes, stock-market performance, and economic outlook. But by investing in a combination of stocks, bonds, and money-market instruments, balanced funds are considerably less volatile than funds that invest solely in the stock market. The debt component helps cushion the fall of stocks in a volatile market.

Balanced Funds are particularly attractive to first-time mutual fund buyers who can enjoy the relative safety of less volatile fixed income securities, without sacrificing the long term growth potential of an equity fund. Stocks give you higher growth potential while cash and bonds provide greater stability and generate income. Cash is a solid holding during volatile times when interest rates are high.

Monthly Income Plans: Steady stream of income

As the name suggests, Monthly Income Plans (MIP) are mutual fund schemes that seek to provide the investors a regular income. MIPs are one of the most sought after mutual funds by retired people or those who are in need of regular income to meet their expenses.

The objective of a monthly income plan is to provide safety and stability of a debt fund while the small equity component provides above average returns. Investors prefer these schemes as they are providers of a regular stream of income and do not entail too much of risk as in the case of equity schemes.

The Monthly Income Plans invest in fixed income securities like bonds, debentures, government securities and money market instruments and a small portion in shares. The investments, upto 85%, in fixed income securities enables the fund to make dividend distribution while long term capital appreciation is achieved by investing a portion, about 15%, in the share market.

Almost all private sector players have launched monthly income plans. Some good ones who have an uninterrupted track record are Birla MIP, Prudential ICICI MIP, Reliance MIP and Templeton India MIP. All of them have been paying regularly monthly dividend to investors.

Birla MIP has an asset base of Rs 123.54 crore. The fund has maintained a small exposure of 7.39% to equities. Over one year the fund has yielded a return of 14.19%. Similarly, Alliance MIP has a larger asset base of Rs 387.47 crore. The scheme generated 12.61% returns over one year period. The fund has an equity exposure of 8.8%.

The Budget 2002-03 has made dividends taxable in the hands of the investors. However, one can reduce his tax burden by moving to a growth option or going in for an automatic withdrawal plan. The automatic withdrawal plan allows you to earn a sum equivalent to the dividend income without being taxed at source as you will be redeeming units worth the dividend amount.

You can also go in for a systematic withdrawal plan where you fix the sum you want to withdraw. Under the automatic and systematic withdrawal plans you will have to pay capital gains tax on the units redeemed. In the case of monthly dividends received on the investment you made, you will be liable to pay a tax on the entire amount that you received.

Are investors getting a better deal?

Recently there has been an increase in the number of mergers and consolidations taking place in the mutual fund industry. The main reason being since the competition among mutual funds has increased, the industry is witnessing consolidations. Another reason is the global mergers in the mutual fund industry have had an effect on their Indian associates. For instance, Pioneer's exit was largely dictated by its global takeover by Uni-Credito Italiano.

Acquisitions and mergers are one way to expand the scope of operations. So in the past we have seen two funds merged to form one mutual fund as in the case of HB AMC and Credit Capital AMC. There has also been acquisition of one mutual fund by the other as seen in the case of Pioneer ITI and Templeton. Another case has been that some schemes of the mutual fund are being taken over by the other mutual fund. Such was the case of Apple Platinum Share and Apple Midas Goldshare being taken over by Birla Mutual Fund and repositioned as Birla IT Fund and Birla MNC Fund. Another case BOI schemes taken over by Tata TD Mutual Fund.

So whether it is a change in the name of the scheme, or a change in management, one question that arises in the mind of the investor is how to deal with the merger or acquisition of the mutual fund whose scheme he has invested in. Should he stay put in the scheme or should he exit?

In such times, the investor has to tread cautiously. First of all, the investor should look into the following: is the merged or acquired scheme being repositioned and is it still in line with your investment objective. He should also look into the changes in the management style, return of the scheme, the approach to portfolio management, which may be more aggressive or defensive, changes in load and expense structure.

When the scheme is being taken over or merged, the first task should be to watch out for the change in name. It is very important to know the new name of the scheme. For e.g. all the Pioneer ITI schemes have been renamed as Franklin, Templeton or FT India. Similarly Sun F&C renamed the schemes taken over from JF India. JF India Bond Fund is now known as Sun F&C Bond Fund and JF Personal Tax Saver is now called as Sun F&C Personal Tax Saver.

Whenever a change in management arises, the investors are given an exit option to exit at the NAV price without being charged an exit load. It is up to the discretion of the investor whether to exercise this right. If he thinks that the new management is strong and will be able to deliver better performance he should stick to the fund. But when he is not sure about the performance of the fund, he can either take a risk and stay invested in the fund or if he has already made profits then he should exit from the scheme.

If an close ended scheme is being repositioned as an open ended scheme after being taken over, investors get better liquidity, transparent portfolios and the choice to exit anytime if they feel the performance of the scheme is not up to the mark. But when an ELSS scheme is taken over, the investors may not find any escape route as an early redemption before the specified period would result in loss or reversal of tax benefits.

Consolidations in the mutual fund industry can also work to the advantage of the investors. They tend to get better management as in the case of Birla IT Fund and Birla MNC Fund, and also in the schemes of 20th Century Mutual Fund which were taken over by Zurich India Mutual Fund. After the takeover, the performance of these schemes improved significantly.

Fixed Maturity Plan: insulation to interest rate risk
Fixed maturity plans (FMP) are open ended or close ended debt funds with a specific lock in period. They terminate at a pre-determined date.

The fixed maturity plans primarily invest in debt instruments like bonds, debentures, commercial papers, treasury bills, government securities and money market instruments. The fund manager invests in these instruments maturing close to the maturity date of the plan itself such that the average maturity of the plans as well as the average maturity of the underlying instruments is the same. Fixed maturity plans can invest only in debt instruments, as investments in these plans require a maturity date. Since equity investments are ongoing and cannot have a fixed maturity date, investments in equity is not possible.

These plans eliminate the price risk as they hold the instruments till the maturity date. Hence the movement of interest rates does not affect the sale price of these securities thereby eliminating the price risk. Thus an investor who stays invested in the fund till maturity insulates himself from the price or the interest rate risk. He also has a fair idea of his returns when the scheme terminates.

What is the price risk faced by debt funds? Consider a bond with a maturity price of Rs 1000. When interest rates rise, the price of the bond falls, and when interest rates fall, the price of the bond rises. This is the price risk associated with investing in debt. However, if you hold the bond till maturity, you will get back Rs 1000, the face value of the bond, irrespective of the interest rate at that time. This is what a fixed maturity plan aims to achieve.

As opposed to a normal debt fund, where the portfolio is actively churned to generate higher returns, the portfolio turnover is relatively less in fixed maturity plans. Because of its passive nature the management fee of these plans tend to be lower than that of normal debt funds.

These plans are kept open for investors to enter at specified intervals at NAV based price i.e. without an entry load. But you don't have the flexibility of withdrawing money when you want it without being charged a penalty for early withdrawal.
Mutual funds charge an exit load if the investor wants to redeem his units before maturity.

Today almost all mutual funds offer fixed maturity plans. Alliance Capital MF, IDBI Principal, Kotak Mahindra, Sun F&C, Pru ICICI MF, Sundaram MF, Birla Sun Life MF etc. The FMPs launched by these fund houses are in the form of series having different maturity profile. They cater to different time horizons.

For example, both Pru ICICI and Sun F&C offer quarterly, half-yearly, and yearly fixed maturity plans. Fixed maturity plans are a good option for investors seeking the safety of assured returns, and can be considered as an alternative to fixed deposits or bonds.

Exchange traded funds: passive investing

Prudential ICICI Mutual Fund has launched an open-ended exchange traded fund christened as SPIcE, which will track the BSE Sensex. But the main question is what is an exchange traded fund and how is it different from a normal index fund.
An Exchange Traded Fund (ETF) is a mutual fund scheme, which combines the best features of open ended and an exchange listed security. It usually tracks an index and trades like a single stock on the stock exchange. It is priced continually and can be bought or sold throughout the trading day. So while an ETF is managed like a mutual fund, it is traded like a stock. ETFs are passive investment tools. Passive investing is an investment strategy where a portfolio is constructed and maintained as per a predefined strategy or to replicate a benchmark index.

Buying and selling ETFs is as simple as buying and selling any other stock on the exchange allowing investors to take advantage of intra-day price movements.

Thus, with ETFs, one can benefit, both from, the flexibility of a stock as well as the diversification and cost efficiency of an index fund.

ETFs are mainly bought and sold in the secondary market of a stock exchange like any other normal stock. However a limited set of authorised participants and very large institutions create or redeem units directly from the fund in pre-defined lot sizes known as "Creation Units". A Creation Unit is made up of two components: the Portfolio Deposit and the Cash Component. An Authorized Participant can exchange Portfolio Deposit and Cash Component for the Units with the AMC. This results in creation of the ETF units.

Similarly, ETF units are redeemed the same way but in reverse. An Authorized Participant buys enough units from the market to make a creation unit. He then exchanges with the Fund the creation unit for a basket of shares and cash. In such a case, such units are destroyed and the underlying stocks are delivered out of the trust.

While the expense ratios of ETFs are generally low, there are certain costs that are unique to ETFs. Since ETFs, like stocks, are bought as shares through a broker, every time an investor makes a purchase, he/she pays a brokerage commission to the broker. In addition, an investor can suffer the usual costs of trading stocks, including differences in the ask-bid spread etc. Of course, traditional mutual fund investors are also subjected to the same trading costs indirectly, as the fund in turn pays for these costs.

ETFs have many uses like:

1. Efficient asset allocation: ETFs can be used by fund managers to quickly reduce or increase exposure to a particular sector or industry.

2. Equitization and cash flow management: ETFs can be used to gain exposure to the market effectively, thus reducing a fund’s cash drag.

3. Index/portfolio changes: ETFs can be used to manage flows arising from portfolio rebalancing events more effectively.
4. Hedging : ETFs can be used to hedge a portfolio in various sectors and industries.

5. Short term tactical exposure: The convenience and speed of trading ETFs enables fund managers to take advantage of short-term opportunities.

6. Efficient access: Retail investors can gain access to a particular market very efficiently. The low cost and small denomination make them very attractive for retail investors.

7. Arbitrage opportunities: Professional market participants may exploit arbitrage opportunities between the ETF, the underlying market and the futures. (Arbitrage means the simultaneous purchase and selling of a security in order to profit from a differential in the price. This usually takes place on different exchanges or marketplaces.)

SPIcE launched by Pru ICICI Mutual Fund tracks the BSE Sensex. The investment objective of the "SPIcE" is to provide investment returns that, before expenses, closely correspond to the total returns of the securities as represented by the Sensex.

The minimum investment amount is Rs 25,000 and the additional investment amount is Rs 5,000 thereafter. In case of redemption through the Authorised Participant: 25,000 Units. In case, there are no quotes on the BSE for five trading days consecutively, an investor can sell directly to the Fund with an exit load of 2.5% of applicable NAV. Minimum Units to be redeemed in such a case is 1000 Units provided that minimum balance under a particular folio should not fall below Rs. 25,000 .

One unique feature of SPIcE is that it can be bought and sold like any other equity share on Stock Exchange through a stockbroker. The minimum lot size will be one unit of SPIcE. Effectively, a retail investor can buy one SPIcE unit and hold it in his Demat account just like any other security. Thus SPIcE would provide instant exposure to a well-diversified portfolio of 30 quality stocks forming part of Sensex. It will also enable real-time buying and selling of throughout the trading hours just like any other equity share. The price of each unit of SPIcE would move in tandem with the Sensex, making the whole process extremely transparent.

Performance measures for mutual funds
Risk and investing go hand in hand. To know your funds performance, apart from comparing the performance vi-a-vis the benchmarks, an investor should also make use of certain statistical measures that make evaluation of a mutual fund even more precise. Among the most commonly used ratios, there are six ratios, which we come across very often but fail to understand their utility. They are Standard Deviation, Beta, Sharpe, Alpha, Treynor and R-Squared.

Standard deviation: Standard deviation is a statistical measure of the range of a fund's performance, and is reported as an annual number. When a fund has a high standard deviation, its range of performance has been very wide, indicating that there is a greater potential for volatility.

Beta: Another way to assess the Fund’s up and down movement is its Beta measure. Beta measures the volatility of a fund relative to a particular market benchmark i.e. how sensitive the fund is to market movements.

A Beta greater than 1 means that the fund is more volatile than the benchmark. A Beta less than 1 means that the fund is less volatile than the benchmark. For example, a Beta of 1.1 would indicate that if the market goes up 10%, the fund might rise 11% and vice versa in a down market.

Sharpe: The most common measure that combines both risk and reward into a single indicator is the Sharpe Ratio. A Sharpe Ratio is computed by dividing a fund’s return in excess of a risk-free return (usually a 90-day Treasury Bill or SBI fixed deposit rate) by its standard deviation. This measures the amount of return over and above a risk-free rate against the amount of risk taken to achieve the return.

So if a fund produced a 20% return while the SBI fixed deposit rate returned 6.5% and its standard deviation is 10%, its Sharpe Ratio would be
(20 – 6.5) / 10 = 1.35.

Generally, there is no right or wrong Sharpe Ratio. The measure is best used to compare one fund’s ratio with another, or to its peer group average. For similar funds, the higher the Sharpe Ratio, the better a fund’s historical risk-adjusted performance.

Sharpe ratio = (Fund Average Return - Risk Free Return) / Standard Deviation Of The Fund

R-Squared (R2) : The R-Squared measure reveals what percentage of a fund’s movements can be related to movements in its benchmark index. An R-Squared of 100 would mean that all of the fund’s movements are perfectly explained by its benchmark; Index funds normally achieve this ideal. A high R-squared means the beta on a fund is actually a useful measurement. A low R-squared means ignore the beta.
Alpha: The Alpha measure is less about risk than it is about "value added." Alpha represents the difference between the performance you would expect from a fund, given its Beta, and the actual returns it generates. A high alpha (more than 1) means that the fund has performed well. A negative alpha means the fund under performed.

Mathematically, Alpha= fund return - [Risk free rate + Beta of fund (Benchmark return - Risk free return)]

Treynor: the Treynor ratio is similar to the Sharpe ratio. Instead of comparing the fund’s risk adjusted performance to the risk free return, it compares the fund’s risk adjusted performance of the relative index.

Tax-planning: Research is the key!
It’s time for you to start planning your taxes for the current year. Why so early, you might ask? Well, for one it will lighten your “investment load” towards the end of the year. And two, given the time that is available, you can actually plan out what is best for you.

One investment avenue which saves you tax is tax-saving funds (also termed ELSS), offered by various mutual funds. Although comparable with regular equity mutual fund schemes out there, one fundamental difference sets these schemes apart – a mandatory lock in for three years. Another key differentiator is that tax-saving funds invest all their monies in the stock markets and therefore can be very volatile in terms of generating a return. Indeed, a poorly thought out decision could saddle you with a loss.

It is therefore very pertinent that you study the options available in the tax-saving funds segment before committing monies to any one or more schemes. In a recent article we discussed the 5 tips for investing in an ELSS.

Well, this may seem odd as most of us tend to associate the word research with just companies and stock markets. But then just like you go about researching a company or a stock market, we do research on mutual funds. We study the track record of promoters and fund managers, the performance with respect to the benchmark indices and peers and also certain factors like volatility and risk adjusted return. However, the research is not just about number crunching; there is a lot more to it.

MY most recent report in the FundSelect, my mutual fund research service, is on HDFC Tax Saver, an ELSS. You can read the report, with compliments from us. FundSelect is our premium research offering and the reports are only made available to subscribers.

Now that you have read the report you probably have a fair idea that selecting a tax-saving fund requires in-depth study. If you do not have the spare time to do it on your own, you have two options –

a. Subscribe to research, like the FundSelect
b. Opt for an investment advisor who will furnish you research backed independent advice

Either ways, be sure to do your homework. Since it is your money that is involved, you should explore all options in as great a detail as possible. Question your advisor on his/her recommendations. The fact that a lot of advice these days is driven by commissions should not surprise you. Instead, it should lead you to take responsibility for what is anyways your own – your money.

5 steps for investing in a tax-saving fund

Investments of upto Rs 100,000 in tax-saving funds are eligible for deduction under Section 80C of the Income Tax Act. This has opened up a new spectrum for investors while conducting their annual tax-planning exercise. In the earlier tax regime (under Section 88) the ‘eligible’ limit for investments in the tax-saving funds segment was set at Rs 10,000. In view of the renewed interest in the segment, we present a 5-step strategy for investing in tax-saving funds.

1. Assess your risk profile
Tax-saving funds (also termed equity-linked savings schemes) are high risk investment propositions which are ideally suited for investors with a commensurate risk profile. Investors would do well to conduct an honest appraisal of their risk appetite before investing in a tax-saving fund.

Investors should resist the temptation of going overboard in tax-saving funds with the view to clock higher returns. The principles of asset allocation and diversification are equally applicable while conducting the tax-planning exercise. Hence conventional assured return investment avenues like Public Provident Fund (PPF) and National Savings Certificate (NSC) among others should also find place in investors’ portfolios along with tax-saving funds in the appropriate proportion.

2. Compare returns over a 3-Yr period
Investments in tax-saving funds are subject to a mandatory 3-Yr lock-in period; hence the latter should be treated as a minimum time frame for evaluating performances. While some funds might ‘ride the wave’ and deliver impressive performances over shorter time periods, it is the ability to consistently deliver over longer time frames which needs to be acknowledged. Also investors can get an insight into the tax-saving fund by studying performances of other equity-oriented funds managed by the same fund manager.

3. Compare performance on other parameters
Investors must look beyond just net asset value (NAV) appreciation while assessing a tax-saving fund. The fund’s performance on parameters like Standard Deviation and Sharpe Ratio needs to be considered. Standard Deviation measures the degree of volatility which a fund exposes its investors to; similarly Sharpe Ratio is used to measure the returns delivered per unit of risk borne. Find out how the fund measures up on these parameters vis-à-vis its peers from the tax-saving funds segment.

4. Evaluate the fund house
The fund house will play a vital role in determining how the tax-saving fund is managed. Process-driven fund houses are known to lay down policies and guidelines which encompass the entire fund management activity, for example upper limits can be set on the holdings in each sector and/or stock. Hence the likelihood of an individual’s bias influencing the fund management process is reduced.

Conversely there are fund houses which are fund manager-driven i.e. the fund manager has a free hand in fund management activities. Investors’ interests are likely to be best served in a process-driven fund house. Find out what kind of a fund house your chosen tax-saving fund belongs to; your investment advisor should be able to aid you in better understanding the same.

5. Select the dividend option
Although the choice between the growth and dividend option should be determined by the investor’s need for liquidity, tax-saving funds present a slightly different proposition. The dividend option enables investors to capture any growth in the scheme during the lock-in period; also it takes care of investor’s liquidity needs which are otherwise constrained by the growth option.

Your Asset Allocation Review: yaar
Welcome to yaar, your asset allocation review.

Yaar is a tool designed to guide you on which kind of assets you should invest in. Although yaar will be a guide and a friend and will try to help you with the process, please remember that investing is a very personal business.

Status/Age <30 years 30-45 years 45-55 years >55 years
Single CAREFREE BUILDINGWEALTH (ADDING TO WEALTH) CAREFREE RETIREMENT
Married-no kids PROPERTYT or PRIORITY BUILDINGWEALTH PLANNING RETIREMENT CAREFREE RETIREMENT
Married - 2 kids PROPERTYTOR PRIORITY PLANNING CHILDRENS FUTURE PROPERTY FOR CHILDREN RETIRED /CHILDREN ON OWN

The paths taken to financial independence vary depending on the risk profile of the investors, the amount of capital they begin with, and the targeted capital that they wish to end up with.

There is also a factor of luck and timing that many investment advisors do not like to acknowledge but is a fact of investing and planning. The most carefully laid out plans can be challenged by special, unforseen circumstances. And sometimes those who did not have a plan end up reaching financial nirvana by good luck and fortune.
But though we respect the power of luck and timing, we still believe that most people who plan their financial future will have a better understanding of what they need to do to achieve their targets.

Tax-saving funds: Where to invest?

In our view, investing in an instrument like a tax-saving fund with the sole purpose of saving tax is not a smart move. In the long term, it could be these very investments (to which most people give little thought) that make a significant difference to your finances. So, this year, before you start the annual ritual of tax-saving, be sure what you are setting out to achieve and then invest accordingly.

Some of these aspects, have been discussed by us in our recent research note –
Tax-saving funds are a key part of any portfolio that is designed for the Rs 100,000 investible limit as defined under Section 80C. These funds are basically equity schemes and therefore carry high risk; unlike a PPF or a NSC where your investment grows at a steady pace, with equity funds you risk losing your capital, let alone not earning a return.

Leading tax-saving funds
NAV (Rs) Net Assets(Rs)1-Yr(%)3-Yr(%) 5-Yr(%) Std.Dev.(%)Sharpe Ratio (%)
MAGNUM TAX GAIN 45.33 2,379 124.8 86.9 30.3 8.96 0.62
PRU ICICI TAX PLAN 65.51 1,553 94.2 77.6 41.7 10.06 0.43
HDFC TAX SAVER 95.62 1,306 97.8 76.2 42.4 8.12 0.55
HDFC LT ADVANTAGE 64.66 2,210 66.6 73.1 - 8.29 0.51
BIRLA EQUITY PLAN 46.88 629 62.8 69.7 29.5 8.03 0.40
TATA TAX SAVING 42.25 846 65.0 64.3 32.5 7.98 0.43
SUNDARAM TAX SAVER 17.27 239 70.9 61.3 32.7 8.63 0.41
FRANKLIN INDIA TaxS 85.03 1,729 55.0 55.8 29.5 6.91 0.45
PRINCIPAL TAX SAVINGS 47.96 1,133 55.5 54.6 30.4 6.99 0.43

(Source: Credence Analytics. NAV data as on Oct 17, 2005. Growth over 1-Yr is compounded annualised)
(The Sharpe Ratio is a measure of the returns offered by the fund vis-à-vis those offered by a risk-free instrument) (Standard deviation highlights the element of risk associated with the fund.)