9 Shceme Selection
9 Shceme Selection
9 Shceme Selection
Scheme Selection
Structured Approach
Structured Approach :
Active or Passive :
Passive funds (index funds) – expected to offer return in line with
the market, NAV generally moves with index (no guarantee)
Active Funds – higher risk, higher cost of management, should beat
the market, (no guarantee)
Open ended :
Offers liquidity (fund keeps a part of assets in liquid form – dilutes
returns in equity funds)
Risk of large fluctuation in net assets – pressure on fund manager
Exit load : Re-purchase can have exit load [SEBI prescribed
maximum of 7%; in practice it was rarely above 5%, which too was
applicable only if investor exits within a year ]
Close ended :
Provides liquidity through listing – units are not actively traded.
Price tends to be lower than the NAV – only towards maturity price
converges with NAV.
Equity (3)
Diversified, Sector or thematic
Diversified Fund :
Less risky, as it provides multi-sector exposure.
FM ensures higher exposure in better performing sectors.
Should be a part of core portfolio of every investor.
Large Cap:
When industrial scenario is difficult, large cap front line stocks
survive on account of resource strength.
Mid/Small Cap:
Economic turmoil, risky – many fall because of lack of resources.
Recovery in economy - investors starts investing and valuation of
front line stock becomes expensive & mid/small cap funds provides
attractive opportunities.
Long term – some of the mid/small cap companies will become
large cap companies, whose shares get re-rated & healthy returns
on such stocks can boost the returns.
Equity (5)
Growth or Value funds:
Initial phase of bull run - growth funds offer good returns
Over a period of time, growth shares get fully valued & value funds
performs better & value funds yield benefits in longer holdings
Market correction: growth funds decline more than value funds.
Fund Size :
Size is to be seen in the context of proposed investment universe.
Small size will not benefit from economies of scale.
Not meant for equity exposure – but to lock into a better risk-return
relationship than liquid funds and to have tax benefits the equity
scheme offers.
Other Funds:
As per the regulations debt, equity, gold & real estate are only
asset class now permitted for investment.
Selection of Scheme within Scheme Category (1)
Investor buying into a scheme is buying into its portfolio
Investors to be convinced that sectors/companies where scheme has
taken exposure.
Large portion of fully value front line stocks in value funds indicates
that the FM is not true to investment style
Debt investors to ensure that the weighted average maturity is in line
with their view on interest rates
In non-gilt debt schemes, keep an eye on credit quality of portfolio and
watch out for sector concentration
Fund Age :
Fund age is important for equity scheme, because of more options &
divergence in performance of schemes in the same category tends to
be more.
A new fund managed by a portfolio manager with lackluster track
record to be avoided
Selection of Scheme within Scheme Category (2)
Running Expenses :
Cost is a drag on returns
To be more careful about the cost structure of Debt Schemes
(because in the normal course, returns in debt can be lower than
equity)
High cost in passive (Index) funds questionable.
Tracking Error :
Amongst the index schemes & Gold ETFs tracking error is the basis
for selection.
Lower the tracking error, better is the scheme.
Regular Income Yield in portfolio
Schemes income comes from Dividend, interest and capital gains.
Higher regular income yield is positive for the scheme.
Risk, returns and risk adjusted returns are parameters to evaluate
schemes & forms the basis to assign ranking (by research agencies).
Taxation & liquidity needs are the factors in deciding between the
options.
Source data to track performance
Mutual Fund review is data intensive.