Thursday, October 18, 2012

Prajna Capital

Prajna Capital

Laddering Investment Technique in fixed income instruments

Posted: 18 Oct 2012 04:31 AM PDT

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Laddering helps you benefit from changing rates and make the most out of fixed income instruments


   Fixed income investors are having a tough time predicting the movement of interest rates. The Reserve Bank of India has raised rates nine times in the last 14 months. Banks and companies, offering fixed deposits, too, have raised rates several times.


Consider this: you earned 6-7% on a one-year bank deposit a year ago, while, today, you could get about 9% to 10% on the same deposit. However, the trouble is that nobody can predict what will happen to deposit rates in the next one to two years. To tackle such a tricky scenario, financial planners recommend a technique called laddering, which helps investors maximise returns from their fixed income portfolio, including fixed deposit, company deposit, debt mutual fund schemes and so on.

WHAT IS LADDERING

Laddering is an investment technique in which investors purchase multiple financial products with different maturity dates. Laddering helps avoid the risk of reinvesting a big portion of assets if the financial environment is unfavourable.
For example, say you have fixed deposits maturing in 2012 and 2015. Now, even if the interest rate drops in 2012 when one deposit comes up for renewal, half of the income is locked at higher rates until 2015. It is impossible for retail investors to predict the interest rates. That is why laddering helps optimise returns.

HOW LADDERING WORKS

When you invest in fixed income products such as fixed deposits, one of the risk you carry is that of reinvestment. Put simply, you are not sure whether you will be able to reinvest the amount at the same rate or a higher rate when the deposit comes up for renewal. This is a risk investors have to live with in every fixed income product — be it fixed deposits or bonds.


Typically, many fixed-deposit investors try to time the market. They wait for interest rates to peak before locking their deposits. They wish bulk of their money is locked in at the highest interest rates. But they lose out on returns, since, in the interim period, they may see money lying idle in their savings bank account, earning lower returns.


Even if they succeed in this technique, when their deposit matures, they have to accept the prevailing rates at that point of time, whatever they are. If you break your fixed deposit, then you end up paying a penalty and you again land in a tricky situation. Clearly it could be a catch 22 situation!


This is where laddering helps investors. You can use it with products like bank deposits, company deposits, post office schemes, bonds and fixed maturity plans of mutual funds. So you can create a ladder with a single product such as a fixed deposit (FD) or with multiple products. It is a technique of creating a staggered income ladder, one rung at a time. Suppose you want to invest . 3 lakh of your emergency funds for an indefinite time period. You are not sure which way the interest rates are headed in the coming years. If the interest rates go up, you investment will be locked in your current FD and you cannot benefit from the higher rates. On the other hand, if the rates were to go down you would be more than content to have the money locked in at higher FD rates. So the simplest ladder is investing . 1 lakh each in a one-year, two-year and a three-year FDs. While this is the simplest ladder, you can also combine different products based on your risk profile to get a higher return.


So, a good idea could be to invest in a one-year fixed maturity plan (FMP), where you are expected to get about 9% per annum. You can also go for a two-year company fixed deposit of a reputed company like Mahindra Finance (9.5% per annum) and a three-year bank fixed deposit, which could give you about 9.5-10% per annum. The example has been used to create a three-rung ladder, but you can also build a four, five or 10-rung ladder, depending on your risk profile and needs.

BENEFITS OF 'LADDERING


Typically, a ladder is setup to have one product mature at the end of every year, which is reinvested back depending upon the period. The maturing product gives you an opportunity to invest again, depending upon the then existing interest rate scenario.


Laddering is very useful for retired people who depend on interest income to meet their day to day expenses. Laddering can free up capital as and when required. This gives you access to funds in an emergency. A person may purchase a shorter-term deposit to meet any need for capital to fund his children's education and purchase longer-term fixed deposit for retirement spending. If you ladder your fixed income instruments, there will always be some amount of money that will mature every year or after the intervals you have planned, every six or even three months, for instance.


Laddering gives you optimal return with safety of capital and liquidity. By using this process over long periods, you should be able to average out your interest rates and get a good return from your fixed income portfolio.


You can create a ladder as per your needs. Today, a ladder can range from three years to 15 years depending on your needs and wishes, since you have retail bonds from SBI, which have a tenure of as high as 15 years. So if your child is say three years old and you need money regularly for his education, you could create a 15-year ladder.


To optimise your returns it would make sense to use a mixture of instruments. Depending upon your risk-return profile, you can choose from among several products. Today, you have bank fixed deposits, company fixed deposits, retail bonds from firms like SBI, Tata Capital, Shriram Transport Finance and L&T Finance, and even postal products like NSC and Kisan Vikas Patra. You can mix and match various products to create the best ladder. The disadvantage of laddering in a falling interest rate scenario is that it may not give you an interest payout as high as you would have got by investing the entire sum at the higher rate.


But the upside is that if interest rates fall, the overall return on your corpus will still be higher than the prevailing rate of return as there will be tranches invested at higher rates. So, over the longer term, the flow will be more even and predictable.


The constant maturing, however, does present reinvestment risk to investors in a falling interest rate environment.

Happy Investing!!

We can help. Call 0 94 8300 8300 (India)

Leave your comment with mail ID and we will answer them

OR

You can write back to us at PrajnaCapital [at] Gmail [dot] Com

 

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Download Mutual Fund Application Forms from all AMCs

Download Mutual Fund Application Forms

Best Performing Mutual Funds

    1. Largecap Funds Invest Online
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Birla Sun Life Front Line Equity Fund
    2. Large and Midcap Funds Invest Online
      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
    1. Mid and SmallCap Funds Invest Online
      1. Reliance Equity Opportunities Fund
      2. DSP BlackRock Small & Midcap Fund
      3. Sundaram Select Midcap
      4. IDFC Premier Equity Fund
    1. Small and MicroCap Funds Invest Online
      1. DSP BlackRock MicroCap Fund
    1. Sector Funds Invest Online
      1. Reliance Banking Fund
      2. Reliance Banking Fund
    1. Tax Saver Mutual  Funds  Invest Online
      1. ICICI Prudential Tax Plan
      2. HDFC Taxsaver
      3. DSP BlackRock Tax Saver Fund
      4. Reliance Tax Saver (ELSS) Fund
    2. Gold Mutual Funds Invest Online
      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund

 



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UTI Equity Tax Savings Plan

Posted: 18 Oct 2012 01:33 AM PDT

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Tax-saving funds (also referred to as Equity Linked Savings Schemes - ELSS) are well suited for investors willing to take risk. However, at the same time it also provides an opportunity to create wealth in one's tax-saving portfolio. Moreover, the lock-in period of 3 Years encourages long-term investing, which is a pre-requisite for fruitful return on equity investments. A well managed tax-saving fund can serve a dual purpose i.e. provide tax benefits (under Section 80C of the Income Tax Act, 1961) and assist investors' to accumulate wealth over the long-term. But to do so, the key lies in selecting a well-managed tax-saving fund with a long term horizon.

UTI Equity Tax Savings Plan (UETSP) is one such open-ended tax saving fund from the stable of UTI Mutual Fund. UETSP is primarily mandated to invest in equities and equity-related securities along with debt and money market instruments. Launched in December 1999, the fund has been in existence for more than 12 years now. However, the growth option is on offer only since August 2005.

Investment Objective and Proposition

"An open-ended equity fund investing a minimum of 80% in equity and equity related instruments. It aims at enabling members to avail tax rebate under Section 80C of the IT Act and provide them with the benefits of growth."

Over the past one year, UETSP's exposure to large cap stocks has been in the range of 69% - 77%, while its exposure to mid & small cap stocks has ranged from of 19% - 24%. The fund's exposure to debt and cash over the past one year has never been more than 10% which indicates its tilt towards staying invested in equities with occasional cash calls. As per the portfolio disclosed on January 31, 2012, fund has allocated 70.3% to large caps while its investment in mid & small caps stands at 19.9% and exposure to cash has been petite 9.8%.

Equity Portfolio

Holdings

Sep 2011

Oct 2011

Nov 2011

Dec 2011

Jan 2012

ITC Ltd.

6.2

6.4

6.6

6.9

6.4

Reliance Industries Ltd.

5.4

5.6

5.4

5.1

5.5

Infosys Ltd.

6.3

5.4

5.3

6.0

5.4

Sun Pharmaceutical Inds. Ltd.

4.1

4.3

4.8

4.8

4.9

HDFC Bank Ltd.

4.6

4.6

4.5

4.6

4.8

HDFC Ltd.

3.7

3.8

3.9

4.1

4.0

Tata Consultancy Services Ltd.

3.6

3.5

3.8

4.2

3.5

State Bank Of India

3.0

2.9

2.9

2.8

3.2

Asian Paints Ltd.

3.1

3.0

2.9

2.8

2.9

Ultratech Cement Ltd.

3.2

3.1

2.9

3.1

2.9

 

As indicated by the table above, UETSP's top-10 equity portfolio constitutes of all 'A' group stocks. As on January 31, 2012 the fund held in all 47 stocks in portfolio, out of which 'A' group stocks accounted for 72.3% and the rest 27.7% were the 'B' group ones. The fund holds a portfolio which is diversified across sectors and across stocks within the sector. Top-10 stocks account for 43.5% of the portfolio while Top-5 sector concentration stands at 42.6%. UETSP is benchmarked against BSE 100, and its portfolio churning has been very low as revealed by its portfolio turnover ratio of 0.29 times.

UETSP endeavours to invest in leading companies across sectors, with an aim to provide superior risk adjusted return i.e. return with relatively lesser volatility. The Fund normally invests with a long term perspective, in companies that are believed to have growth potential.

 

How UETSP has fared vis-à-vis its peers

Scheme Name

6-Mth (%)

1-Yr (%)

3-Yr (%)

5-Yr (%)

Std. Dev. (%)

Sharpe Ratio

Sahara Tax Gain (G)

4.2

3.1

32.5

13.2

7.81

0.26

Religare Tax Plan (G)

0.4

1.8

31.0

13.1

6.58

0.29

DSPBR Tax Saver (G)

5.2

-1.9

29.2

10.7

7.34

0.24

SBI Magnum TaxGain'93 (D)

6.0

1.0

26.2

6.1

7.47

0.22

HSBC Tax Saver Equity (G)

6.0

0.1

25.2

8.0

6.99

0.22

UTI ETSP(D)

1.7

-2.1

22.6

5.47

6.60

0.20

BSE-100

6.0

-3.4

26.9

6.9

8.13

0.20

 

The table above reveals that UETSP's performance has been dismal when compared to top performers in the category. Moreover, the fund has underperformed the benchmark index BSE 100 across time frames. Over a 3-Yr time frame the fund has clocked a 22.6% CAGR, as against 26.9% CAGR delivered by its benchmark - BSE 100.

When assessed on the volatility front, UETSP has exposed its investor to lower risk (as revealed by its Standard Deviation of 6.60%), and has been partially successful in clocking attractive risk-adjusted returns (as revealed by its Sharpe Ratio of 0.20) as well, which is at par with the Sharpe ratio of its benchmark. However the same looks average when compared with that of some of the top performers in the category. This thus makes UETSP a low risk- low return investment proposition when compared to its peers.

Fund Manager Profile

Name of the Fund Manager

Ms Swati Kulkarni

Total Work Experience

Over 13 years

Managing the fund since

Aug-04

Qualifications

B.com, Masters in Finance, CFA

 

As seen above the performance of UTI Equity Tax Savings Plan has been quite middling. we recommend that, investors would be better-off avoiding UTI Equity Tax Savings Plan and thus may instead invest in an ELSS fund which has a good performance track record and since it comes from the stable of a fund house having strong investment processes and systems.

The investment in ELSS doesn't come without risk and hence requires your attention at the time of selecting a fund. Investment done without proper assessment may prove to be a blunder if your selection goes wrong. Thorough research of available options may help you take a well informed decision. 

Happy Investing!!

We can help. Call 0 94 8300 8300 (India)

Leave your comment with mail ID and we will answer them

OR

You can write back to us at PrajnaCapital [at] Gmail [dot] Com

 

---------------------------------------------

Invest Mutual Funds Online

Transact Mutual Fund Online

Download Mutual Fund Application Forms from all AMCs

Download Mutual Fund Application Forms

Best Performing Mutual Funds

    1. Largecap Funds Invest Online
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Birla Sun Life Front Line Equity Fund
    2. Large and Midcap Funds Invest Online

      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
    1. Mid and SmallCap Funds Invest Online

      1. Reliance Equity Opportunities Fund
      2. DSP BlackRock Small & Midcap Fund
      3. Sundaram Select Midcap
      4. IDFC Premier Equity Fund
    1. Small and MicroCap Funds Invest Online

      1. DSP BlackRock MicroCap Fund
    1. Sector Funds Invest Online

      1. Reliance Banking Fund
      2. Reliance Banking Fund
    1. Tax Saver Mutual  Funds  Invest Online
      1. ICICI Prudential Tax Plan
      2. HDFC Taxsaver
      3. DSP BlackRock Tax Saver Fund
      4. Reliance Tax Saver (ELSS) Fund
    2. Gold Mutual Funds Invest Online

      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund

 



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JPMorgan India Smaller Companies Fund

Posted: 18 Oct 2012 12:06 AM PDT

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JPMorgan India Smaller Companies Fund

Mid cap stocks are stocks of companies having high growth potential over longer time frame. To put it simply, they have the potential of being large caps of future. But having said that mid cap stocks are high risk-high return investment proposition as they aim to generate wealth by generating a superior alpha returns (as compared to large caps). However, during turbulent times they tend to plunge more thus making them a risky investment proposition. Hence the funds focusing on the mid cap segment are ideal for investors willing to take high risk for relatively higher gains.

 

JPMorgan India Smaller Companies Fund (JISCF) is an open-ended equity growth fund from JPMorgan Mutual Fund following a blend style of investing. JISCF is mandated to invest primarily in equity and equity related instruments, along with debt and money market instruments. Launched in December 2007, the fund has completed almost 4 years of existence.

 

Investment Objective and Proposition

The fund's primary investment objective is "to seek to generate long term capital appreciation from a portfolio that is substantially constituted of equity and equity related securities focused on smaller companies. Generally, the universe will be the companies constituting the bottom fourth by way of market capitalisation of stocks listed on the National Stock Exchange or the Bombay Stock Exchange. The fund manager may from time to time include other equity and equity related securities outside the universe to achieve optimal portfolio construction."

 

The fund is mandated to invest 65% - 100% of its total assets in equity and equity related securities of smaller companies, upto 35% in equity and equity related securities of companies other than smaller companies and upto 35% in debt and money market instruments.

Over the past one year, the funds exposure to large-cap stocks has been in the range of 8% - 27%, while its exposure to mid and small cap stocks has ranged between 23% - 79% of its total assets. It is noteworthy that JISCF has 47% to 51% of its total assets under unclassified equities, which seem to be from the small cap segment. Despite having high exposure to mid and small cap stocks, JISCF has managed to limit the downside in the last 1 year. However, it has missed out on the midcap rallies of the past.

Allocation to debt & cash has ranged between 4% - 7% over last 1 year indicating the tendency of the fund manager to stay invested in equities and refraining from taking aggressive cash calls.

 

Equity Portfolio

Holdings

Jul 2011

Aug 2011

Sep 2011

Oct 2011

Nov 2011

GSK Consumer Healthcare Ltd.

3.8

4.2

4.3

4.2

4.8

Yes Bank Ltd.

3.8

2.5

4.1

4.9

4.7

Indraprastha Gas Ltd.

-

3.0

3.6

3.6

3.8

DiviS Laboratories Ltd.

3.3

3.2

3.4

3.5

3.7

Shree Cement Ltd.

-

-

1.7

2.9

3.5

Godrej Consumer Products Ltd.

2.7

3.1

3.0

3.3

3.3

Titan Industries Ltd.

3.6

3.4

3.3

2.6

2.8

ACC Ltd.

-

-

-

-

2.7

Torrent Power Ltd.

2.6

2.7

2.7

2.8

2.7

CRISIL Ltd.

2.8

3.0

2.9

2.4

2.7

 

As indicated in the table above, JISCF's top-10 equity portfolio constitutes of all 'A' group stocks. JISCF is benchmarked against the S&P CNX Midcap index and follows the bottom up approach of investing. The fund endeavours to invest in companies with:

 

·         Strong growth potential

·         Special products which have a particular market niche and therefore good earnings potential

·         Undertaking corporate restructuring.

 

As on November 30, 2011, top-10 stocks comprised of 34.7%, while top-5 sectors accounted for 23.2% of its total portfolio. The fund manager has the tendency to churn the portfolio moderately as revealed by the portfolio turnover ratio of 1.14 times.

 

How LOF has fared vis-à-vis its peers

Scheme Name

6-Mth (%)

1-Yr (%)

3-Yr (%)

5-Yr (%)

Std. Dev. (%)

Sharpe Ratio

HDFC Mid-Cap Oppor (G)

-16.2

-15.5

27.2

-

7.26

0.27

Sundaram Select Midcap (G)

-18.7

-21.4

23.4

6.2

10.23

0.19

Principal Emerging Bluechip (G)

-21.9

-33.3

23.3

-

9.48

0.19

JPMorgan India Smaller Cos (G)

-19.4

-23.0

20.0

-

8.56

0.18

SBI Magnum MidCap (G)

-17.5

-24.5

18.3

-3.9

11.15

0.15

HSBC Midcap Equity (G)

-28.2

-42.1

8.1

-6.6

9.67

0.08

CNX Midcap

-22.4

-28.7

16.6

3.7

8.83

0.15

 

The table above reveals that JISCF has been an average performer in the category, as over a 3-Yr time frame it has clocked a return of 20.0% CAGR. However, it has managed to outperform its benchmark- CNX Midcap which has generated returns at 16.6% CAGR over the similar timeframe.

. When assessed on the volatility front, JISCF has exposed its investor to moderate risk (as revealed by its Standard Deviation of 8.56%), but has been unsuccessful in clocking a luring risk-adjusted returns (as revealed by its Sharpe Ratio of 0.18 which looks average after considering the risk undertaken.); thus making it a moderate risk-average return investment proposition when compared to its peers.

 

Fund Manager Profile

Name of the Fund Manager

Mr. Harshad Patwardhan

Mr. Amit Gadgil

Total Work Experience

Over 16 years

Over 8 years

Managing the fund since

Nov-07

Feb-08

Qualifications

B.Tech (IIT), MBA (IIM) and CFA

M.Com., ACA and PGDM (IIM-A)


As seen above JPMorgan India Smaller Companies Fund`s performance is not very luring and thus nothing to vie for. The fund is middling on returns and has been unable to adequately compensate its investors. In terms of risk-adjusted returns, the fund is a moderate risk-average performer in the category.

Hence in our opinion, investors would be better-off avoiding JPMorgan India Smaller Companies Fund. It is noteworthy that decision of investing in a particular fund should not be taken only based on its 1 or 3 year performance. One should instead prefer the fund which shows consistency across market phases and qualifies based on other performance parameters too.

-------------------------------------------

Invest Mutual Funds Online

Transact Mutual Fund Online

 

Download Mutual Fund Application Forms from all AMCs

Download Mutual Fund Application Forms

 

Best Performing Mutual Funds

    1. Largecap Funds:
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Birla Sun Life Front Line Equity Fund
    2. Large and Midcap Funds
      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
    3. Mid and SmallCap Funds
      1. Reliance Equity Opportunities Fund
      2. DSP BlackRock Small & Midcap Fund
      3. Sundaram Select Midcap
      4. IDFC Premier Equity Fund
    4. Small and MicroCap Funds
      1. DSP BlackRock MicroCap Fund
    5. Sector Funds
      1. Reliance Banking Fund
      2. Reliance Banking Fund
    6. Gold Mutual Funds
      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund

 



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