Should you go for close ended equity NFO?

Over the last few years and especially in 2017 many of the Fund houses have come up with a slew of close ended NFO’s. These come with a variety of themes and associated terminology. For example ICICI calls them Value Fund series, Sundaram calls them Micro cap series and Axis calls them Equity advantage series. In this post let us look at why these are in vogue now, what are the pros and cons and finally whether it is a good idea to invest in them.

The first issue is relatively simple to answer : new products get developed based on the likelihood of their success. With a lot of retail and institutional buyers pumping in money, there is always a demand for newer types of funds to invest in. For fund houses, it is an opportunity to have a specific charter which may not be possible to fulfil through their regular funds. For example, one of the ICICI value series funds only wanted to invest in Pharma and IT sectors as these were beaten down significantly over the last six months or so. Now this could be done in one of their existing funds too but for a fund manager to churn the portfolio by selling stocks that are doing well is not always an easy decision to take. Using fresh money in taking such calls is relatively simple. The trend started by end 2014 or so with ICICI and has now percolated to several others.

What are the pros and cons of such funds? Well, for one the mandates here have a lot more clarity compared to a vanilla large cap or mid cap fund. The fact that it is close ended, normally for 3 years, means that the fund manager has time at his disposal to take the calls he wants to take. On the flip side you will not have access to your money for 3 years and this is a problem unless you can definitely do without it for this time. A greater problem may be your inability to shift in case you are not happy with the performance. From my viewpoint, I do not see both these issues as a serious one. Firstly, you should be investing in equity for a much longer term than 3 years. Secondly, the Fund manager is way more qualified to deal with short term performance issues.

Let me now give some details of an investment that I made in one such fund. While the experience may not be repeated for all funds, it does offer certain insights:-

  • I purchased ICICI Prudential Value Fund series 2 on 6/12/2013. Invested amount was 2 lacs in the Dividend option.
  • The idea was to get some regular income as I planned to go for my consultancy practice sometime in 2014.
  • Though it was a 3 year fund, it has now been rolled over and will mature on 31/12/2018.
  • So far total dividends have amounted to 1.6 lacs
  • Current value of the fund is nearly 2.5 lacs

I think it can be said quite safely that this worked out quite well. In fact, I have invested in several follow up NFO from ICICI. Apart from ICICI I have also tried out Axis, Birla Sunlife, Sundaram and UTI for close ended funds. From a personal perspective it works well for me as I get tax free income and also growth from it.

You should be investing in these funds under the following situations:-

  • You have some income requirement every year. Instead of doing FD you can go for close ended funds with dividend option. Note that the dividend is not guaranteed.
  • You have a goal after 3-4 years. This is ideal for such situations. However, in such a case choose the Growth option.
  • You have come into some money and do not want to decide on allocation for 2-3 years as you may need the money then. Go for the growth option here too.
  • Make sure you understand the mandate and therefore the associated risk profile. A micro cap series from Sundaram will obviously be more risky as compared to the Value fund series of ICICI. However, the rewards will vary in a similar trend too.

If you are interested ICICI Value fund Series 18 is open for subscription now. 

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MF portfolio realignment – my plan

If you are a regular reader of my blog you will know my 3 portfolio strategy for investment by now. I have portfolios in Debt, Stocks and MF. In the initial part of my working life I invested in mostly debt, the mid part was largely used to build up the stock portfolio and 2008 onward till now it has been largely MF. Of course, once I decided about giving up my regular corporate career in 2012, I boosted my debt portfolio significantly.

Over the years I have bought several MF schemes, initially with one time investments, thereafter with SIP and now back to investing at the right times. I have therefore collected a large number of MF schemes and in several of these the amounts invested are not very significant. The ones where I have done SIP obviously have some decent amounts, but even here there are several funds as my portfolio had changed over my 7 years of SIP.

In the past whenever the markets have gone up significantly, I have thought about cleaning up my MF portfolio. Somehow or the other it has never happened and I am stuck with a multitude of MF schemes, most of which I do not really want to keep. This weekend, I took a look at my MF portfolio after a long time and these were my observations.

  • I am currently investing in 4 MF schemes which are as follows. My plan is to continue investing in these for the future, at least till I have active income to do so:-
    • ICICI Focused Blue chip fund
    • ICICI Value Discovery Fund
    • HDFC Mid cap opportunities Fund
    • DSP BR Mid and small cap Fund
  • There are some other funds where I have significant investments but have dropped now. I will be keeping these for now but may want to sell them off during any annual review that I undertake. Future investments in these are unlikely:-
    • HDFC Top 200 Fund
    • IDFC Premier Equity Fund
    • Birla SunLife Frontline Equity Fund
    • DSP BR Equity Fund
    • Sundaram Select Mid cap Fund
    • Franklin India Blue Chip Fund
    • UTI Dividend yield Fund
  • There are some Close ended funds such as the ICICI Value Series Funds. I had invested in these as they give regular dividends which is useful to me. I will either continue with them or shift to other similar funds. To give readers an idea, ICICI Value Series 2 has given an XIRR of 30 % plus in the 3 year investment period.
  • Everything else, I want to get red of ASAP.

How do I plan to go about it? I have a feeling that next few weeks may be the best chance if Nifty once again goes to 10000 etc. Once the quarterly results  are through and the global geopolitical situation worsens, our markets are very likely to down to 9500 or even below that on the Nifty. Once I sell all my disposable MF, I will just be in cash and wait for the right opportunity.

What will I be buying with the cash I get? Well, one option is to invest in some of the stocks I had outlined in the earlier post. I am sure that if I buy these at Nifty levels of 9500 I will definitely see significant returns over the next 3 years etc. Another option will be to space out the stocks and invest in my 4 MF’s .

Unless the NIfty shows a rising trend due to a strong quarterly results, I am finally ready to pull the trigger on this. Even if it keeps rising, I will still sell when it reaches 10200, as I do not believe that is a value at which the Nifty can sustain itself.

Bet on these MF schemes for now

We are passing through rather interesting times in the Indian economy and markets. The rise in the indices have had investors thinking as to whether it will be a good idea to keep buying as of now. By all conceivable logic, there is a correction round the corner. Is it likely to be momentary or very deep? We can only speculate in an intelligent manner.

In my opinion, it does not really matter much if there is a correction soon. Nifty will probably find support at 9000 plus levels and that is something none of us expected a couple of months back. In the scenario I see unfolding, we are very much in a structural bull run and corrections are going to be price based rather than time based. To that extent you need not really change your investment plans a great deal.

What about people who are starting off building a MF portfolio or ones who want to realign their portfolio to better funds, taking advantage of the current highs? Which funds should we bet on for the next 15 years or more? I gathered some inputs from experts managing HNI money and this is what they had to say:-

  • A good fund manager has generated 4-5 % alpha over the indices in the past 2 decades. For this reason avoid Index ETF in our markets right now.
  • There may well be a structural bull run in our markets over the next 10-15 years.
  • Multi cap funds will be the best suited for this time frame but look at other categories like large cap and mid/small caps too.

So which are the funds to bet on? Here are a few for you to consider:-

  • ICICI Focused Blue chip
  • Kotak Select Focus
  • Reliance Vision
  • SBI Pharma
  • Kotak 50
  • Franklin High growth
  • MOST 25
  • MOST 35
  • ICICI Value Discovery

You will not find many of your known funds here, but then these are futuristic in their likely performance. Go with them if you are willing to take some risks for potential higher returns.

However, if your existing funds are doing well, do not change for the sake of change.

Indices at life time highs – should you sell your MF ?

Over the last few days all indices are either hitting their lifetime highs or coming very close to them. In fact, with the issues in Syria and the impact on crude oil prices, there is a chance of some correction in the immediate future. This is probably the reason why I have got a lot of messages asking me as to whether it will be a good idea to sell the entire MF portfolio, be in cash and again buy the MFs once the markets seem to have finished the correction.

Is it possible that you will make money in the short run through this approach? The answer to that is “yes”. Is it therefore a good idea? The answer to this is clearly a “no”. in order to understand why this is so, you need to understand how MF works in the first place. The fund manager has a certain amount of money available and he is buying stocks with it. These set of stocks for a particular scheme will keep changing. The fund manager is doing these changes and you pay him for that very reason. Now if the markets are going down the fund manager may selectively sell some stocks and buy others. As such the scheme you sell and the one you buy are fundamentally different. If you are in the scheme as part of your long term goals then it makes absolutely no sense to sell off the schemes when the markets are at highs. For all you know your fund manager is taking the appropriate decisions by selling some stocks at their highs and buying others which still have a lot of value in them. Do not try to second guess a person who is professionally trained and does this for a living. Just because you can play around with spreadsheets and calculators does not make you competent to take such decisions.

Now what if these funds are not part of your long term portfolio? Well, if you are to sell them anyway then you might as well sell when they are at their highest or near it. In that case my recommendation would be to sell NOW. Yes Nifty can still go to 9500 plus this year and maybe even 10000, but those are fraught with uncertainties. You might as well sell off now and wait for a 5 % drop or more to buy funds that you want to be in for the long term. As I said before with the same fund it does not make sense to change but if you are changing your fund you might as well look at a better entry point.

What if your investments are in Regular schemes and you want to shift to Direct schemes? The same logic will hold – sell NOW and buy after a while.

Over the years I have invested in several schemes and have now reduced it to 5 only. The current market gives me a great chance to clean up my portfolio. How do I intend to do it? Read the next post to find out.

Building an MF portfolio in 2017? Try this one

In my last post I had outlined an MF portfolio that can be quite ideal for people who are willing to take some risks for the prospect of significant growth. However, most investors are really not of the type who can take extra risks. Many have told me that being in equity itself entails a certain amount of risk for their investments and they would rather not take any steps that enhance this further.

This post is about a more well rounded MF portfolio for the long term. The idea will be to invest regularly in these funds over a long period of time. Most of my readers know that I dislike SIP a lot, as it is the quintessential wrong way to buy equity. What you will need to do is fix your annual allocation in these funds and put in the money 3-4 times a year, based on the level of the index corresponding to the fund. There are several posts in my blog where you can get more details of the approach and techniques.

The recommended portfolio is again suggested in one CNBC program, though I have made slight changes to it and I do not agree with the SIP mechanism of buying. The funds are as follows with a brief rationale of their selection:-

  1. BSL Frontline Equity fund : A great large cap fund which has stood the test of time. Provides stability of Blue chip stocks to the portfolio.
  2. ICICI Value Discovery fund : An atypical multi cap fund where the focus is on stock selection. Expect it to do really well in Bull markets.
  3. DSP Small and Mid cap fund : With fresh investments in Micro cap fund stopped, this is possibly the best option in this segment. Expect to see volatility but the stock picks of the Fund Manager are mostly successful and long term returns should be worth it.
  4. ICICI Balanced Advantage fund : This is an interesting Balanced fund due to the asset allocation mechanism it follows. Expect fairly stable returns from it.
  5. Reliance Small cap fund : This has been a stellar performer even though the next couple of years may be volatile. Excellent returns are likely over the next 10-15 years.

What kind of returns can you then expect from such a portfolio? Predictions are really hazardous over the long term in equity and for the purposes of planning I do not ever recommend you work with anything more than 12 % XIRR. However, if things go right with the Indian economy, this one can easily give you an XIRR od 18 % plus.

That will of course mean you keep investing regularly as well as buy your units at the right time. Mindless SIP where you put the same amount of monthly money even when markets are at their peak, can only give you sub optimal returns, even with the best of portfolios.

Mutual Funds – lesser known but vital information

No matter which criteria you choose to deploy, Mutual funds have definitely been a great success in our country. They have also been a boon to people who want to take part in equity investment but do not have the time or inclination for stock investing. However, there are several aspects of MF, especially in terms of how they are operated in terms of expenses, that are unknown to most investors. In this post I will try to give information about some such aspects.

The first thing to understand about MF is that the fund house pretty much operates like a normal company with revenues and expenses. Revenues are really the charges that it is able to levy in terms of what is called the Expense Ratio ( ER ). Expenses are the costs that the fund house incurs in running the fund – this includes Employee costs, infrastructure costs, transaction costs, advertising costs etc. Now, as the fund house has multiple funds, these costs are divided among different funds. For example, the same fund manager can manage multiple MF schemes, the infrastructure used is the same, advertising costs are shared etc. However, each MF scheme needs to be profitable on it’s own, otherwise it does not make sense for the fund house to keep the scheme going.

The important thing to note here is that the ER is not linked to the performance of the fund directly. In fact the opposite can be true – as the fund grows in size the ER actually tends to come down as the expenses are spread over more units. Therefore the expense ratio of a newly launched fund is likely to be higher than that of an established fund. One other thing to notice is that earlier to August 2009, any MF buying had an entry load of 2.25 % which was mainly used by the Fund houses to take care of distributor commissions. After SEBI has banned the entry load, now the commissions must be taken care of through the Expense Ratio itself. As such, if you buy the funds directly from the Fund houses through their Direct plans you will have a lower ER as distributor commissions are absent.

If you are having a long term SIP which started before August 2009, you are paying the Entry load even today !! At 20000 Rs per month, this works out to be 5400 Rs annually and over a period of 10 years the amount of money lost is significant. So, stop all such SIP at once and you can start SIP in Direct schemes for the same funds if you want. Similarly, if you have SIP in Regular schemes of MF, stop these and start in Direct schemes of the same funds to avail the lower ER.

There is another reason why you should not let your schemes run for long, especially if these funds are not the ones you are investing in currently. Most earlier funds were bought through some Distributor or the other as there were no Direct funds then. Now for such schemes you continue to pay a Trail commission to the Distributor based on your period of holding. Let us say you Purchased a SIP in HDFC Top 200 from 2012 through 2015 and then stopped it. Even though you are not investing in it now, every year your Distributor gets a Trail commission and will continue to do so as long as you hold the Fund. Now, if you are not particularly happy with the Fund redeem it and put money again in Direct schemes.

Finally, many of us have bought MF for a long time and may not really be organized to remember each investment, especially the smaller ones. You can register yourself for your NSDL or CDSL statements and check out your consolidated holdings in one place. As long as your email id or PAN is linked to our investment it will figure there. Just in case, this is very old and you do not have these linked, you can still do a name search in the repository data to check out the possible schemes. Yes, there will be some duplication of names but it is not difficult to check the right ones belonging to you.

I hope the information here is useful to the readers in sorting out their MF investments. In short, shift to Direct funds and make sure you have information on all your invested schemes. This will help you to work your money in a productive fashion.

Restructuring my MF portfolio in 2017 – why and how

If you are a regular reader of my blog you will know my 3 portfolio strategy for investment by now. I have portfolios in Debt, Stocks and MF. In the initial part of my working life I invested in mostly debt, the mid part was largely used to build up the stock portfolio and 2008 onward till now it has been largely MF. Of course, once I decided about giving up my regular corporate career in 2012, I boosted my debt portfolio significantly.

Over the years I have bought several MF schemes, initially with one time investments, thereafter with SIP and now back to investing at the right times. I have therefore collected a large number of MF schemes and in several of these the amounts invested are not very significant. The ones where I have done SIP obviously have some decent amounts, but even here there are several funds as my portfolio had changed over my 7 years of SIP.

In the past whenever the markets have gone up significantly, I have thought about cleaning up my MF portfolio. Somehow or the other it has never happened and I am stuck with a multitude of MF schemes, most of which I do not really want to keep. This weekend, I took a look at my MF portfolio after a long time and these were my observations.

  • I am currently investing in 4 MF schemes which are as follows. My plan is to continue investing in these for the future, at least till I have active income to do so:-
    • ICICI Focused Blue chip fund
    • ICICI Value Discovery Fund
    • HDFC Mid cap opportunities Fund
    • DSP BR Micro cap Fund
  • There are some other funds where I have significant investments but have dropped now. I will be keeping these for now but may want to sell them off during any annual review that I undertake. Future investments in these are unlikely:-
    • HDFC Top 200 Fund
    • IDFC Premier Equity Fund
    • Birla SunLife Frontline Equity Fund
    • DSP BR Equity Fund
    • Sundaram Select Mid cap Fund
    • Franklin India Blue Chip Fund
    • UTI Dividend yield Fund
  • There are some Close ended funds such as the ICICI Value Series Funds. I had invested in these as they give regular dividends which is useful to me. I will either continue with them or shift to other similar funds. To give readers an idea, ICICI Value Series 2 has given an XIRR of 30 % plus in the 3 year investment period.
  • Everything else, I want to get red of ASAP.

How do I plan to go about it? I have a feeling that next few weeks may be the best chance if Nifty goes to 8750 etc. Once the quarterly results and budget are through and the state elections happen, our markets are very likely to down to 8000 or even below that on the Nifty. Once I sell all my disposable MF, I will just be in cash and wait for the right opportunity.

What will I be buying with the cash I get? Well, one option is to invest in some of the stocks I had outlined in the last post. I am sure that if I buy these at Nifty levels of 8000 I will definitely see significant returns over the next 3 years etc. Another option will be to space out the stocks and invest in my 4 MF’s .

Unless the NIfty shows a rising trend due to a strong budget, I am finally ready to pull the trigger on this. Even if it keeps rising, I will still sell when it reaches 9000, as I do not believe that is a value at which the Nifty can sustain itself.