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Advocates of index funds are grinning, and they have a solid reason in the form of the S&P CRISIL SPIVA — Indices Versus Active Funds Scorecard for June. According to the report, 53.62% diversified equity funds tracking S&P CNX 500 equity index failed to beat the benchmark index in the past one year. This underscores that most fund managers fail to beat the relevant indices consistently. Worse, he/she may be sitting on a pile of cash, robbing you of a chance to earn handsome returns from the market revival, they aver.

According to Value Research, a mutual fund tracking agency, the universe of equity funds, which consists 288 schemes, kept an average 6.76% of money in cash as on October 31. Of this, 35 schemes maintained more than 10% of the money in cash.

In such a scenario, if you want to invest in equity with no fund manager risk, index fund makes a good case for investment.

A simple example would drive home the point. We all known that the infrastructure sector has been down and out over the last couple of years. Lack of earnings visibility has marred the future of companies in this sector. However, experts are optimistic about the sector now and say the valuations are extremely attractive at the moment. In such a scenario, an infrastructure fund may be the choice of anyone wanting to invest in the infrastructure space. That is where the fund manager risk (he/she can fail to outperform the index) and wasted opportunity in the form of cash pile (five infrastructure schemes hold more than 10% in cash) come into play. To top it, some fund managers tend to invest in stocks that are not strictly 'infrastructure' stocks. Needless to say, an investor may not hit the jackpot in such a scenario even if there is a revival of fortunes of the infrastructure sector.

This is where sectoral index funds can come to the rescue of investors, according to index scheme enthusiasts. Look at the example of Goldman Sachs Infrastructure Exchange traded scheme, they say. It is an index fund that invests its corpus in infrastructure stocks in the same proportion as the CNX Infrastructure index. Like any other index fund, this fund would be fully invested to mimic the performance of the underlying index. This means the fund won't be investing outside the infrastructure universe, nor would it be sitting on a pile of cash in search of the right time or opportunities. In fact, the fund manager has invested 99.69% of the money in the index as on September 30. The annualised tracking error stood at 0.1% and the expense ratio is 1%. You can apply the same logic when it comes to selecting schemes in the other sectors, too.

Expense Ratio

Doing away with the fund manager risk is just one positive aspect of index funds.
Index fund is a low-cost vehicle to invest in equity and build long term wealth. Since the fund manager only has to mimic an index, there is not much churning of portfolio compared with an average actively managed diversified equity fund. This leads to lower costs. The cost incurred by a mutual fund is captured by the 'expense ratio' of the mutual fund. For example, IDFC Index Nifty Fund has the lowest expense ratio of 0.25%, followed by Reliance Index Nifty Fund with 0.4%.

Tracking Error

If all index funds tracking the same index are expected to offer the same returns, then it is obvious that one should pick the one with the least expense ratio. But don't look at this number in isolation, keep track of the tracking error, too. The returns generated by the index fund may deviate from the returns generated by the underlying index. This deviation from index returns, known as tracking error, should be minimum for a fund to be good.

The Right Index Fund

The next question is: which index fund you should invest in – sectoral, broad based or one that invests overseas? If you are looking for long-term wealth creation, invest in a fund that tracks a broad based index such as the Nifty or Sensex. A diversified equity index is expected to be representative of the economy and is expected to do well in a booming economy. A case in point is the BSE Sensex that has created wealth for investors over the last 20 years when it grew at a compounded rate of 15%.

However, if you think a particular sector has a brighter future, do invest in a sectoral index fund. And advocates of index fund assure that as the market becomes more mature, individual investors in India would have no option but to pick an index fund with lower expenses just like their counterparts abroad.

Needless to say, this claim is fiercely countered by many in the mutual fund industry. They argue that India is still a stock-picker's paradise and funds would continue to outperform their benchmarks. Index funds are less risky than the diversified equity funds and an investor can allocate some of his cash to such funds to reduce portfolio risk.

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Kotak Mutual Fund New Fund - Kotak FMP Series

Some of the Top performing Mutual Funds are

HDFC Top 200 Fund

ICICI Prudential Dynamic Plan

DSP BlackRock Top 100 Fund

Birla Sun Life Front Line Equity Fund

Reliance Equity Opportunities Fund

IDFC Premier Equity Fund

SBI Magnum Contra Fund

Sundaram Select Midcap

UTI Dividend Yield Fund

Posted: 14 Apr 2012 05:23 AM PDT

Kotak Mutual Fund has announced the launch a new close-ended debt scheme Kotak FMP Series 86.

The new fund offer will be open for subscription from April 18.

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Invest Mutual Funds Online

Download Mutual Fund Application Forms from all AMCs

Some of the Top performing Mutual Funds are

HDFC Top 200 Fund

ICICI Prudential Dynamic Plan

DSP BlackRock Top 100 Fund

Birla Sun Life Front Line Equity Fund

Reliance Equity Opportunities Fund

IDFC Premier Equity Fund

SBI Magnum Contra Fund

Sundaram Select Midcap

UTI Dividend Yield Fund

Reliance Banking Fund

Posted: 14 Apr 2012 04:32 AM PDT

Banking and financial services are expected to deliver higher growth than the economy in the long term. India's banking sector is fairly regulated, and there is little chance of operational irregularities. Investors with a risk appetite and looking for alpha returns can invest in the fund

Since its launch in May 2003 the fund has performed reasonably well as against its benchmark CNX Bank . The fund has given 837.8% returns since its launch against 522% for CNX Bank. Last year the fund had high exposure to public sector banks. As stocks of these banks reached peak level, the fund trimmed its exspoure. The fund increased its exposure to private sector banks. At present, the fund now has a balanced portfolio of large and mid-size public and private sector banks. It has exposure to two major private sector banks — ICICI and HDFC. What works for the fund is its vast universe of banks and non-banking financial corporations (NBFCs).

Almost all banks and some crucial NBFCs such as Bajaj Finance are a part of its portfolio. This offers the fund a distinct edge in terms new themes developing in different segments of the banking sector.

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Religare Mutual Fund new fund - Religare Fixed Maturity Plan Series

Some of the Top performing Mutual Funds are

HDFC Top 200 Fund

ICICI Prudential Dynamic Plan

DSP BlackRock Top 100 Fund

Birla Sun Life Front Line Equity Fund

Reliance Equity Opportunities Fund

IDFC Premier Equity Fund

SBI Magnum Contra Fund

Sundaram Select Midcap

UTI Dividend Yield Fund

Posted: 14 Apr 2012 04:15 AM PDT

Religare Mutual Fund has launched a new close ended debt scheme Religare Fixed Maturity Plan Series XIV Plan D. The new issue will be open for subscription from April 13.

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Invest Mutual Funds Online

Download Mutual Fund Application Forms from all AMCs

Some of the Top performing Mutual Funds are

HDFC Top 200 Fund

ICICI Prudential Dynamic Plan

DSP BlackRock Top 100 Fund

Birla Sun Life Front Line Equity Fund

Reliance Equity Opportunities Fund

IDFC Premier Equity Fund

SBI Magnum Contra Fund

Sundaram Select Midcap

UTI Dividend Yield Fund

Midcap Mutual Funds

Posted: 13 Apr 2012 08:06 PM PDT

Mid- and small-cap mutual funds are in focus. According to Morningstar India, a mutual fund tracking entity, small- and mid-cap funds have delivered an average three-month return of 19.71%, a little higher than large-cap mutual funds' 14.86%. Sure, comparing the two categories is indeed erroneous because the categories behave totally differently at different point of time. Sometimes mid- and small-caps follow large-caps in a rally. Sometimes the opposite is true. However, what cannot be denied is that many experts believe that small- and mid-cap schemes can boost overall returns of a portfolio.
These funds have outperformed the large-cap funds because of the low base effect. That does not necessarily mean that small- and mid-cap funds can substitute the large-cap funds in your portfolio. Even as these funds are poised to offer promising returns this year, an investor should exercise extreme caution while buying these funds.

Should You Buy ?

The recent upswing in performance of mid- and small-cap funds is due to the extreme low valuations of mid- and small-cap companies in December 2011. The gap between the valuations enjoyed by large-cap indices and mid-cap indices has been reduced after this rally.

Valuations for large-cap stocks are slightly lower than their long-term average. This makes large-cap stocks more attractive when compared to mid- and small-cap stocks, purely from the valuations perspective. But there is always a case for investing in high growth, which is possible in mid and small-cap companies.

After the recent selling in the equity markets in March, the valuations are a bit more sane now. Considering the fact that there is nothing seriously wrong with macroeconomic data and other macro indicators, equity markets may look to be in the positive zone. Because the mid-cap stocks and funds have been undervalued, these funds may outperform the large-cap funds category in the near future. One should invest with a staggered approach and buy into these funds on dips or thought a systematic investment plan. This should help you avoid timing risk while investing for a long time frame – say three to five years.

How To Choose A Mid-Cap Fund ?

Unlike a large cap mutual fund, the performance of a small- and mid-cap fund is largely dependent on the stock picking capability of the fund manager.

A large cap fund may beat the index by x% and another large cap fund by y%, but nothing goes drastically wrong in this category. But a well informed fund manager is a pre-requisite for mid- and small-cap mutual funds. Also, you should do more homework before choosing the fund. Ideally you should check the fund manager's track record, read some of his views on investment strategy, investment philosophy, which sectors he/she is bullish on etc.

What Should The Existing Investors Do ?

If you already have an exposure to mid- and small-cap mutual funds, it is time to review your portfolio. Compare the performance of your mutual funds with the index and other small- and large-cap funds. Ideally, you should have invested in top quartile funds in this category. If you have not invested in the top quartile funds, now is the time to move your existing investments towards such funds.

Risk

A look at the yearly returns reveals that small- and mid-cap funds tend to outperform their large-cap peers in a rising market, for example, the bull market years of 2007 and 2009. However, in those years when the market fell or corrected significantly, small- and mid-cap funds tend to underperform. While making a decision, you should also look at volatility. The adjoining table makes it clear that mid-cap funds are more volatile than large-cap funds, as implied by their higher standard deviations over various time periods. So these funds are more suited to investors with slightly higher risk profile, who are able to digest losses and volatility.

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Employee Provident Fund ( EPF ) and Tax

Some of the Top performing Mutual Funds are

HDFC Top 200 Fund

ICICI Prudential Dynamic Plan

DSP BlackRock Top 100 Fund

Birla Sun Life Front Line Equity Fund

Reliance Equity Opportunities Fund

IDFC Premier Equity Fund

SBI Magnum Contra Fund

Sundaram Select Midcap

UTI Dividend Yield Fund

Posted: 13 Apr 2012 10:30 AM PDT

Keep your EPF money for at least 5 years to avoid tax

THERE is a bit of a concern for salaried individuals as their long-term planning has taken a severe hit recently. When it comes to the area of retirement planning, the employees provident fund (EPF) occupies a significant place in the overall scheme of things.

Over a long working life, a large amount of funds are accumulated in this account and, hence, this becomes important as far as the overall position is concerned. Now, with some changes that have been witnessed here, it is important to look at how things will play out over the future.

Interest rate: One of the important factors in EPF is the interest rate earned by the investment. This rate determines what the individual will take home at the end of the day and the news on this front is not very good.

The interest rate for the financial year 2011-12 has been slashed to 8.25 per cent, compared with 9.5 per cent offered in the year earlier. This is a significant change and, hence, the earnings that have been accumulated till now would earn at this lower rate for the specified year.
Changing rate: A factor that is very important when it comes to the EPF is that the interest rate offered on the instrument is not fixed, in the sense that, at the time of making the investment, the investor will not know what they will end up earning over the life of the instrument.

This is not surprising as this investment will be present for the entire working life and can even stretch to more than a couple of decades. The rate for this instrument is declared during the financial year and, hence, this will be applicable for that particular year.

The situation can change for the next year and will be determined according to the earning that is possible on the investment.

Permanence important: It is very important to look at the trend of the interest rate movement because a situation that was witnessed last time around could actually lead to a lot of disappointment some time down the line.

The interest rate that has been declared has to be permanent or the joy could be short-lived, which means, the investment of the fund should be such that this is able to justify and maintain a higher rate of earnings for the scheme. This is exactly what happened last year as the interest rate climbed to 9.5 per cent.

However, if there are some one-time profits or accounting effects that have led to this kind of situation, then the position can differ and the impact would be reflected in the future. This is precisely what has happened, as the fund has now had to cut the rate since the earnings did not support a high interest rate.

Tax free earnings: It is important to know that the earnings from the fund can be tax-free in the hands of the investor if they are able to ensure that the investment remains with the fund for a period of five years.

In this case, the entire amount of interest earned would not be taxed and, hence, this would become something that has to be maintained in the portfolio.

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ING Global Real Estate Retail Fund

Some of the Top performing Mutual Funds are

HDFC Top 200 Fund

ICICI Prudential Dynamic Plan

DSP BlackRock Top 100 Fund

Birla Sun Life Front Line Equity Fund

Reliance Equity Opportunities Fund

IDFC Premier Equity Fund

SBI Magnum Contra Fund

Sundaram Select Midcap

UTI Dividend Yield Fund

Posted: 13 Apr 2012 09:37 AM PDT

According to Knight Frank Citi 2011 global real estate survey, Moscow, Sao Paulo and Munich are good cities though New York and London remain the top spots in terms of real estate investment. But honestly, who can afford it? Even if you can, there are hordes of practical and legal issues that make it virtually impossible to buy property abroad. That's when a real estate mutual fund makes sense.

ING Global Real Estate Retail offers a unique diversification. Not equity, bonds, money market instruments or gilts - we are talking about a different asset class altogether. To add to it, it is diverse across geographies and sectors and invested in around 100 stocks across minimum 10 countries.

You can make money by investing in real estate in India. But the added diversification across markets and a broader exposure to a larger opportunity set presents more access to alpha. A home market bias could limit the efficiency and alpha generation of an investor's real estate portfolio.

Take 2011, for instance. According to a report by Cohen & Steers, a New York based manager of portfolios specializing in US and international real estate securities, US REITs advanced 8.3 per cent, as measured by the FTSE NAREIT Equity REIT Index. The report went on to say that self storage REITs led all property sectors, followed by regional malls. Cyclical property sectors - industrial and hotels, underperformed, although apartment landlords gained on improving employment trends among college-educated workers.

However, performance diverged sharply across regions. Europe and Asia Pacific endured losses but Canada had the best return among developed markets. This proves our point - diversification effectively distributes risk among multiple markets (and sectors) to optimize potential for return. This is all the more relevant in the real estate market which is cyclical.

This fund has consistently delivered positive annual returns over the past three years - the only equity fund in India to do so. Its 3-year trailing returns are 23 per cent per annum!

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