Sindhu wrote in about a month ago inquiring about ICICI Direct’s Target Investment Plan (TIP) scheme and if it’s any better than the systematic investment plans that you normally have at other brokers, and of course ICICI Direct as well.

The way the Target Investment Plan works is that instead of specifying a fixed amount that will be used to buy mutual funds every month – you specify a target, a rate of return, and time frame in which you want to get to that target.

The TIP system will then alter your monthly contributions based on the current value of your portfolio. The example in the PDF that I’ve linked to above explains the mechanics quite nicely, so I’m going to use the same example here.

Suppose, you want to have a sum of Rs. 10 lacs after 7 years, and you decide on an expected rate of return of 12%. If this rate were to be uniform throughout the 7 years – you will have to invest Rs. 7,700 every month.

However, equity investments are inherently volatile and say at the end of the first month – you find that your first installment of Rs. 7,700 is only worth Rs. 7,000 now. The system will recalculate your next installment to find out what amount is needed now to reach your goal. In this case it is Rs. 8,400, so they will deduct that from your account and invest it in your mutual funds.

Similarly, if the portfolio value gains then they will reduce your installment with the newly calculated sum and use only that much money to buy your mutual funds.

This is an interesting concept, and I think you could do one of these in addition to your SIPs but I won’t be in favor of getting rid of SIPs altogether for this.

One reason for that is if the system determines that you are ahead of your target and reduces your mutual fund investments, then what happens to the cash that is spare – are you vigilant enough to invest it yourself in other equities or are you going to invest it in fixed debt instruments or will it just lie there in your savings account?

The second reason is that this system will add a layer of complexity to your investment process because I don’t think it’s possible to correctly ascertain how much money will be needed in the coming month especially with how volatile the stock market can get. So, that’s one more thing you have to keep track of.

The third reason is that while you can cancel the TIP – you can’t modify it so if you find out midway that you want to invest more or reduce your target then you will have to find another avenue to do that.

The fourth reason is that the success of this system is more or less to do with timing the market and as we know that doesn’t work very well most of the time. If it would, then you’d see mutual funds that make buy decisions based on P/E multiples do better than every other class of funds.

The fifth reason is that it’s a relatively new product, and you don’t want to put all your money in this without trying it out for some time and seeing how it works for you.

These were product specific thoughts, but if you look at this at a slightly higher level you’d see that what you want to achieve with this product is to invest more of your money in equities when the market is low (like it is today) and pull back from them when the market is high.

There is nothing that stops you from doing this yourself – if you have a few SIPs going – you can invest additional sums yourself when the markets are low – and the lack of a system is not preventing you from doing it.

It’s the uncertainty that surrounds the market when it’s down that prevents you from doing it, and that’s why you see people stop their SIPs or sell their stocks at a loss in times such as today. To that extent, this product will not be able to help you help yourself, and that’s something that you will have to overcome yourself.

In summary, I think this can be a useful product and can be tried out in addition to SIPs by choosing reasonably small targets over a shorter time frame to start with, but I wouldn’t go as far as to replace SIPs with them.

The first difference between an ETF and a mutual fund is that when you buy an ETF you buy it from someone else in the market, and not the ETF trust – however, when you buy a mutual fund you buy it directly from the fund house. In this respect an ETF is like a share that trades on the stock exchange.

The following picture should make this clear.

Buying an ETF vs Buying a MF

When you buy a Reliance share from the stock market – Reliance Industries doesn’t get the money, and much in the same way when you buy an ETF from the share market – the ETF trust doesn’t get the money.

These units are being bought and sold between people in the secondary market and that’s different from mutual fund units. When you buy a mutual fund  – the fund gets your money, and issues you units based on the NAV on that day.

Now, the question is if you are buying and selling the ETF units from other small investors like you then where are the units coming from in the first place?

These units are being sold to you by what’s known as Authorized Participants who are large dealers / brokers / jewelers or other institutional players.

The Authorized Participants have the ability to buy and sell units directly from the ETF sponsor, and this process is called “Creation” and “Redemption”, and the units that are created like this are called “Creation Units”.

These creation units are very large in size, for example for a gold ETF liked Goldbees – the creation unit is one kilogram of gold, so the Authorized Participants needs to deposit one kilogram of gold with the ETF sponsor, and then the ETF sponsor creates new shares of their ETF and issues them to the Authorized Participant.

The Authorized Participant can then take those shares and sell a thousand of them in the stock exchange to thousand different small investors and thereafter these thousand investors can trade these units among themselves on the stock exchange.

Similarly, the Authorized Participant can take their ETF shares and redeem them with the ETF sponsor in exchange for cash.

This process is shown in the picture below.

Authorized Participants - Creation and Redemption of ETF Shares

To create new ETF shares, the authorized participant needs to deposit stocks or gold to the ETF trust and in exchange the ETF trust creates new shares and issues it to them. They in turn sell these shares on the stock exchange to the general public.

In that context, it’s important to keep in mind that when you go to buy a gold ETF or Nifty in the stock market – that has no effect on the gold holding or Nifty stock holding of the ETF trust. That’s only affected by the issue and redemption process of authorized participants.

This process also helps keep the NAV close to the traded value of the ETF because the authorized participants can arbitrage and make money whenever there is a difference between the two.

This is the fundamental difference between the structure of ETFs and mutual funds, and if you figure this out then the rest of the stuff is fairly easy. Here is a table that highlights some of the other differences / similarities between the two.

At the end of the day, both ETFs and mutual funds are investment vehicles that let you take a position on an asset class without exposing yourself to too much of one company’s shares or bonds. There are differences but the goals of both the products are the same.

This post is from the Suggest a Topic page. 

DSP Blackrock has launched a new fund of fund called DSP Blackrock World Agriculture fund, and it has just closed the NFO period on the 14th October 2011.

DSP Blackrock has a few other unique fund of funds, and this adds to that basket by introducing a fund that invests in global agriculture businesses.

Since this is a fund of funds – all of its investments will be made in the units of BGF World Agriculture Fund. The BGF World Agriculture Fund was launched in Feb 2010, and had assets under management of $475 million on September 2011, so it’s much smaller than the other similar funds they have like the World Gold Fund, World Mining Fund, New Energy Fund, and World Energy fund which have assets in excess of a billion dollars.

The big idea behind this fund is that the companies that are engaged in agriculture related businesses will benefit as the world population grows and more and more countries industrialize improving the standard of living of their people and making them demand more food.

Indians can probably easily relate to this theme because of the high inflation experienced over the past couple of years, and the RBI repeatedly saying that a big part of that has been the shift to protein rich foods, and increased demand for those pushing up prices.

The BlackRock Agriculture Fund builds on this theme by investing in global companies involved in agriculture related companies all over the world.

In fact, the fund invests in so many countries that it will have exposure to assets in more than 7 currencies, and a breakup of those is shown below.

As is evident, the USD is the biggie with Singapore Dollar coming in second, and then you have exposure in currencies of other industrialized countries.

BGF Agriculture Fund Currency Composition

The DSP Blackrock Agriculture Fund will of course add one more currency to the equation because that will trade in India, and buy units in the US based mutual fund, and therefore the USD INR exchange rate will also affect the returns of this fund.

Here is a look at the fund’s top ten holdings which show that a lot of the companies they are invested in are primarily US companies. In fact, the top 10 has only three companies outside of the US.

The good thing about this is that the fund is heavily invested in large companies with 62.5% of its assets in companies that have a market capitalization of more than $10 billion, and 32.6% of its assets in companies with market cap of more than $1 billion. Only 4.9% of its assets are in companies smaller than a billion dollars.

The scheme information document shows recurring expenses of 2.50%, and the expenses as on August 31 2011 were 2.10% which are fairly high. You lose about 10% of your money if you just held the fund for 5 years, and that’s not a good thing.

While this fund gives people who are so inclined an opportunity to invest in global agriculture stocks or primarily American agriculture related stocks  – I don’t really see anyone set up a SIP in this fund, and my guess is that most people who do buy the fund will only buy it as a means to diversify and hold an asset that they couldn’t own prior to this launch.

The thing to keep in mind in that case is the current Rupee Dollar Exchange rate, and recognize that a depreciated Rupee isn’t good for foreign investments (the USDINR rate breached 50 last Friday). That’s simply because you will get lesser units for the same amount of money now than if the exchange rate were 40 Rupees to a Dollar.

On October 21st, the NAV of the Blackrock World Agriculture Fund was $10.77 and at the current exchange rate of Rs. 50, you could only buy $200 if you had Rs. 10,000 and about 18.57 units of the fund. But, if the exchange rate were to move to Rs. 40 to a Dollar – the same Rs. 10,000 could buy you $250, and about 23.2 units of the fund if the fund itself didn’t move at all.

So, if you were interested in the fund, it might still make sense to wait a bit and let the current uncertainty recede which should help the Rupee get back to stronger footing.

I don’t think people should have a lot of such expensive, and fairly complicated investments in their portfolio – if you own a little for diversification then that’s fine, but if your portfolio has many of these fund of funds then fees are gnawing into your returns, and in many cases you are even uncertain on what needs to go well for these funds to perform well because they are spread out in so many countries with exposure to multiple exchange rates, and can get fairly complicated to get a grasp of.

That was all that I wanted to cover about this fund – what do you make of it and do you have many such other fund of funds in your portfolio?

This post was from the Suggest a Topic page.

It’s raining gold fund of funds these days, and the latest to throw their hat in the ring is HDFC mutual fund.

I recently reviewed the SBI gold fund, and this is exactly like that except that it is from HDFC, and being from HDFC it will own gold ETFs from HDFC.

I wouldn’t have written about the HDFC gold fund had it not appeared in the Suggest a Topic page, and that’s because all these gold fund of funds are exactly same in nature, and if you change the name then there’s nothing more you need to write about.

So, I’d recommend people who haven’t read the SBI gold fund review to go read that and get a perspective on what’s happening here.

In general, I think a big mistake that a lot of people do is ask the wrong question viz. should I buy the HDFC / SBI or Reliance gold fund or not?

That’s the tail wagging the dog.

The right question (at least in my opinion) is do I want to own gold or not? And if the answer to that is yes – then how do I go about it.

Now, here you have the option of buying physical gold, or buying financial gold. If you decide that you want to buy financial gold then what are the options available to you?

For a long time that used to be limited to a gold ETF or trading gold at the COMEX, which is probably not very well suited to a long term investor, then came along NSEL’s gold and silver series, and finally early this year fund houses got this idea to launch gold fund of funds.

Out of these options what do you choose?

Now when evaluating these options you must keep in mind that a gold mutual fund simply owns gold ETFs from its sponsor family.

I think that must have been a brilliant realization for the fund houses because not only does a fund of fund allow them to boost their gold ETF – it also earns them money while doing it!

That’s because all ETFs charge a fee for their upkeep, and the mutual funds charge a fee on top of that – so not only do they promote their ETF – they also charge a fee while doing that – thank you very much.

At this point, any fund house that has a gold ETF and is NOT launching a gold mutual fund is too far behind the curve in my opinion.

For whatever reasons, people are interested in owning a gold ETF indirectly through a gold mutual fund, and there is absolutely no reason for a fund house to not give people this option.

As far as investors are concerned in my mind the only reasons to invest in a gold fund of fund is when you are buying in small quantities and the commission and demat charges make it expensive for you to buy the gold ETF directly.

Otherwise I think it makes more sense to buy the gold ETF directly, and avoid paying the extra fee for the fund of fund.

The HDFC gold ETF itself is a relative newcomer in the ETF space and is not as liquid as some of the other ETFs so that’s definitely a thing to consider while evaluating this fund of fund, and at present I can’t think of a reason that will make me favor HDFC instead of the other funds.

The NFO started at the 7th October and will end on the 21st October 2011, but doesn’t make any difference and you are better off buying a fund after the NFO period than in it.

That’s it for this review, and if you are interested in gold fund of funds then you should definitely read the other posts I referenced earlier.

ICICI Prudential is the latest company to come out with a gold fund of funds, and the fund is similar to other gold funds like the SBI gold fund. 

The fund is right now in the NFO period which will end on October 4th 2011, but that shouldn’t make any difference to you because mutual fund NAV doesn’t impact performance.

Everything I wrote about the SBI gold fund review stands true for this fund also, and I don’t really have anything to add except for one small little thing which I noticed in the last discussion.

At least a couple of people seemed to imply that gold ETFs charge you an expense of about 1% or so, and that makes buying these gold funds better.

I don’t know how widespread that view is but I do know it doesn’t make any sense. When you buy a gold fund of funds, that fund will in turn go and buy an ETF, and you will indirectly still incur the fee of the ETF.

The ETF doesn’t care whether you buy the fund directly or whether you own it through a mutual fund – they will charge you the fee anyway.

In addition to that – the fund of funds will now charge you a fee as well – so not only do you pay the ETF fee – you pay the fund of funds fee in addition to that.

The only people who can benefit from a gold fund of funds are people who want to buy very small quantities of gold periodically, and who feel that the brokerage charges hurt their purchases a lot because of these small quantities.

Outside of this, I don’t see any other reason for owning a gold fund of funds, but of course, this is just my view, and there is a counter view also – you can find that in the comment thread of the SBI gold fund post, and see if it appeals to you.

I’m going to stop here else it’s going to be a repeat of the SBI gold fund post and I don’t want to do that. So please read that post if you are interested in gold fund of funds, and if you’re disappointed that this post is so short then cheer yourself up — at least you’re not on a water slide.

SBI Gold Fund is a fund of funds that will have gold as its underlying asset, and will primarily invest in its own gold ETF – SBI GETS.

It was just a matter of time that SBI came out with a fund of fund that invests in gold since gold has been on fire lately to such an extent that the world’s biggest gold ETF – SPDR Gold Shares owns more than 1,200 tons of gold! That’s not a typo – they really do own 1,284 tons of gold! 

In my last post about gold ETF performance in India – I discussed how 4 new gold ETFs have been launched in the last year, and it’s only natural for players to jump in this market since that’s where the demand is.

Getting back to the SBI Gold Fund – this is a fund of funds targeting gold. In this case it means it will own another fund which then owns the physical gold. The other fund in this case is the ETF – SBI GETS.

Now, this is really important because I see a lot of people who say gold ETFs don’t really own gold and they are fraud, or they say that they don’t understand the way gold ETFs work and it’s not safe and then they go ahead and buy a gold mutual fund which in turn will buy gold ETFs!

Ways of owning gold

If you don’t like gold ETFs – you have no business buying a gold mutual fund that then owns a gold ETF! It makes absolutely no sense at all.

Please understand that there is no gold mutual fund in India that owns physical gold directly. There is only one type of gold mutual fund in India, and those are gold fund of funds. This means that they invest in other funds.

Those other funds are of two types – gold ETFs or mutual funds that own shares in international gold mining companies.

SBI Gold Fund is the type of fund that will  own units of the SBI Gold ETF called SBI GETS.

So, you must understand that when you are buying SBI Gold Fund – you are really owning units of SBI GETS.

Now, let’s talk about some other aspects related to the SBI gold fund.

Expenses of the SBI Gold Fund

Every mutual fund or ETF incurs some expenses in running its fund, and these expenses are recovered from the unit holders by reducing the NAV to the extent of the expenses. These expenses are charged as a percentage of the assets and in case of the SBI Gold Fund – their document says that the expenses will not exceed 1.5% of assets including the charges of the SBI GETS ETF.  Practically, I don’t know how much they are going to charge, but due to the competitive nature of the gold ETF market – fees have remained low and about the same for every fund.

Tracking Error

Another thing about fund of funds is that they are not able to put 100% of the money in the underlying asset because they need some cash or liquid investments to take care of any unit redemption that happens. These are usually in low yielding instruments, and I would expect the returns on the SBI Gold Fund to be slightly lesser than the returns on SBI GETS due to this reason.

Exit Load

Since this is a mutual fund, they have the luxury of charging you a 1% exit load if you exit out before a year. If you just bought SBI GETS directly, you wouldn’t have to bear this load if you exited within a year.

Stock Commissions

There will be no brokerage or commissions since this is a gold mutual fund, however if you do buy  SBI GETS directly – you will have to pay commissions since that is traded like a share. If you are buying in smaller quantities then that can make a lot of difference in your cost, and that’s one thing to keep in mind.

Demat and SIP

You don’t need a Demat account to own the SBI Gold Fund whereas you do need a Demat account to buy shares or units of SBI GETS or any other gold ETF.

Since this is a mutual fund – you can do a SIP as well.

NFO Dates

The SBI Gold Fund NFO is going to start on the 19th August 2011, and closes on September 5th 2011.

This should really not make any difference as you don’t gain anything by buying a mutual fund during its NFO period. The 10 rupee NAV is the most ridiculous myth when it comes to mutual funds, and if you don’t know why I am saying that read my earlier post about why mutual fund NAV doesn’t impact performance. 

Conclusion

Because of what I said earlier about expenses and tracking error – I would expect the performance of the SBI Gold Fund to lag the performance of SBI GETS as long as gold prices are rising.

Personally, I don’t see much merit in buying a fund of funds when you can buy the underlying fund directly.

People who want to buy small amounts like say less than a thousand rupees and don’t have a Demat account may be an exception to what I’m saying, but other than that I would think that investors are better off buying a gold ETF instead.

Now, this doesn’t mean that I’m recommending gold, and to be frank my aversion to it has only increased seeing the rise in the last few days, but what I mean is if you were considering buying a gold fund of fund – give a serious thought to buying a gold ETF instead.

Image Credit: Gold bar image

Nargis posted a very interesting comment on the Suggest a Topic page a few days ago, and that triggered a lot of thoughts in my head which I’m going to share in this post. I think the crash today makes it a bit more relevant than it otherwise would have been.

First, her comment:

I enjoy your informative posts and have learned a lot. I am a MF investor and have done lump sum & SIP in various schemes. I understand that we must track these investments at regular intervals and exit the non-performing funds. I really do not know how to go about it. Please do a post this topic specially covering SIP investments.

I see the question in two parts  – how to track mutual funds; how to identify the ones that you need to exit, and then when should you exit them.

Let’s tackle the easier question of how to track mutual funds first.

Track your investments: First thing you need to do is track your investments. You need to be easily able to pull up how many mutual funds you own, at what price, and when you bought them. If you’ve bought these mutual funds using a portal like ICICI Direct then you have the information right there, and you can easily track it. If you’ve bought these units offline or have bought them in a manner that doesn’t allow you to track them online then you need to use another tool to track them. MoneySights is a great site that I’ve reviewed in the past here. You can create an account there for free, and monitor your mutual funds. There are several other sites like Rediff Money, Moneycontrol or Value Research Online which offer similar tools, and you can check them out too.

What you decide is up to you, but the idea is that after you are done – you should have one place where you can track your investments easily. Without this, you will be stuck and won’t be able to proceed much further.

Now, that you have a place to track your mutual funds, let’s take a look at tracking and exiting. I’ve seen far too many people exit at exactly the wrong time, so first I will address that.

Generally, not a good idea to sell in panic: When the market is up, and things are going fine people generally don’t think about selling. It’s only when the market has crashed, or is low do people think about selling. In general, I’d say this is not a good idea. Stock markets move in cycles, and you will generally be able to get more for your investments if you wait out a year or two for the market to recover and then sell it rather than selling when the market is crashing, and there is panic all around.

The one exception I would make here is to get rid of hot stocks and penny stocks in times of crash. This is not so much applicable to mutual funds, but if you were holding a sector fund, and you see the whole sector implode, then it might be a good idea to cut your losses and say good riddance to the investment.

I feel this is really important and I’ve addressed this in a full post earlier as well, so you might want to read that as well.

Sell too much of the same thing: If you have too many sector funds focused on the same thing like too many mutual funds in the small cap space, or too many infrastructure funds then you can think about getting rid of some of the ones who are not performing well. This is because there is generally a lot of overlap between the stocks these mutual funds own, and by owning too many mutual funds of the same type you are not diversifying or getting any other benefit.

Sell your mistakes: Recently, Greenlight Capital’s famous hedge fund manager – David Einhorn sold all his Yahoo! stock at a loss due to a dispute between Yahoo! and their Chinese subsidiary. Einhorn’s rationale was very clear – he said that they had bought Yahoo! for its considerable Chinese assets, and when they saw that Yahoo! doesn’t control the Chinese assets as tightly as they should – they sold it.

Another famous hedge fund manager John Paulson recently sold all his Sino Forest stock after there were fraud allegations on Sino Forest. It is said that he had a much bigger loss.

If these highly successful money managers make mistakes, then it is very likely that you and I will make mistakes. It’s best to accept our mistakes and cut our losses. Maybe the mutual fund that you chose doesn’t really track the asset like you thought it would, or the sector isn’t as hot as you thought it would. Maybe the fund was sold to you and some things were not clear to you at the time when it was sold which are clear now, and that makes it less appealing.

If your original thesis is getting proved wrong – admit it and move on.

For your reading pleasure – here is one example of my mistake (of which there are far too many).

Sell the bad performers: Sites like Value Research and MoneySights rank mutual funds according to performance, and you can see that several mutual funds have never done well. Keep an eye on the poor performers in any category, and see what kind of history they have. Have they done badly for a long time, do they have too short a history. If they have been duds for too long then you are better off selling the non-performers.

Conclusion

I haven’t mentioned how often you should do this kind of assessment because I don’t think there is any way to say that you should do it every 3 months or 6 months or 1 year. You live and you learn, and every day will bring up something new for you that will shape your ideas and thoughts. I think it’s just better to keep a tab on current events, and as you learn that something is different from what you originally thought it to be – take action on that. Don’t fret over it too frequently, and don’t go to check your portfolio every day, and at the same time don’t let it lie for a year and forget all about it.

Investing through SIPs is a great way to build positions and get in the market, and if your goal is building wealth in the long term and getting equity returns by staying invested in for 15 – 20 years then this is a very good way to do it. These pointers should help you prune your investments, and hopefully get more out of your investments than you otherwise would have had.

About a week ago I exchanged comments with a reader who was comparing returns from a lump-sum investment in a mutual fund with a SIP (Systematic Investment Plan) in the same fund.

Basically, seeing whether Rs. 36,000 invested 3 years ago, amounted to higher or lower than Rs. 1,000 invested every month for 3 years in the same fund.

This is not an accurate way of comparing the two returns because in one case you have this massive capital that compounds for you for 3 years, whereas in the second case, you just have Rs. 1,000 that gets invested for the whole 3 years.

In my opinion, this is like comparing a fixed deposit to a recurring deposit. If you invest Rs. 36,000 in a fixed deposit for 3 years at 10% then at the end of 3 years you will get an amount of Rs. 47,916.

However,  a recurring deposit for Rs. 1,000 for 3 years at 10% will only give you Rs. 41,841.

Use IRR to calculate returns from a SIP

Since returns from a SIP involve outflow of cash at different time periods, and then a large inflow of cash at the end – you can use IRR to calculate the returns percentage from a SIP.

I have a very detailed post on IRR, so you can read that post to understand the intricacies of IRR, and then come back to read the rest of this post.

How to calculate returns from a SIP?

Let’s say I made a SIP in Canara Robeco which features as one of the funds in my post on the best balanced mutual funds.

Suppose I invested Rs. 1,000 every month for the last 3 years  - Moneysights has this calculator that shows me that this investment resulted in Rs. 47,927.79.

I use Excel and type in -1,000 in 36 rows followed by 47,927.79. Then I select this range and use the IRR formula to find the IRR value which I have to multiply by 12 to annualize this number.

This value comes out to be 17.93%.

To cross check this number I go back to the recurring deposit calculator and enter Rs. 1,000 per month enter the interest rate of 17.93% compounded monthly to get a value of Rs. 47,930.

This confirms that my calculation is accurate.

Just for reference – Rs. 36,000 invested in this fund 3 years ago will give you Rs. 48,171.60 today.

This is very close in absolute terms, but if you look at the CAGR then this fund only returned 10.19%.

As a side note – I’ve seen several websites use these type of calculations to tout the benefit of SIP, but they fail to mention that they’re working with the benefit of hindsight.

In general, I’d say SIPs will work better than lump-sum investment for most people but this is not the way to prove it.

Conclusion

Let me conclude by saying that this is a post about what I feel is the right way to calculate returns from a SIP, and not that a SIP is always better than a lump – sum investment. That’s a whole different discussion altogether, and it simply happened that the fund and time period I chose returned a higher rate of return by the SIP mode than the lump – sum mode.

This is another post from the Suggest a Topic page, and today we’re going to take a look at the newly launched Sundaram Equity Plus NFO. This NFO began on May 4th 2011, and will close at May 16th 2011 (not that it matters).

About Sundaram Equity Plus

This is an open ended mutual fund which will hold a minimum of 65% in equity, 15% in gold ETFs, and up to a maximum of 20% in fixed income and money market instruments.

The minimum 65% in equity means that Sundaram Equity Plus will be treated like an equity mutual fund for tax purposes, and under the current rules there will be no long term capital gains. However, these rules are going to change with the DTC taxation rules that will be implemented next financial year.

This is the indicative allocation of the fund:

The gold part will be in gold ETFs – they don’t speak about a specific gold ETF, so I think that they might invest in more than one gold ETF.

For the equity part, this is the strategy they quote:

As far as equity part of the portfolio is concerned, the strategy will focus on large-cap stocks – defined as stocks with a market captitalisation (stock price multiplied by outstanding number of shares) not below the 50th stock by value on the National Stock Exchange and aim to create a diversified portfolio with a maximum of 30 stocks.

So, you should expect to own gold ETFs and large cap Nifty stocks when you invest in this fund. The stocks part of it will be actively managed, and the allocation between stocks and gold ETF is also actively managed.

The minimum investment for the NFO is Rs. 5,000 and if you want to get a SIP then Rs. 750 for a quarterly, and Rs. 250 for a monthly one. There is an exit load of 1% if you sell this fund within a year. You don’t have to pay any exit load if you hold it for more than a year.

The fund has a Dividend, Dividend Reinvestment, and Growth Options as part of this fund.

Sundaram Equity Plus Expenses

This mutual fund will incur expenses of 2.5%. This fund incurs double expenses for the gold ETF part of it because they will charge you 2.5% for the fund that they manage, and then the underlying gold ETF will charge 1% or more in expenses. The equity part of Sundaram Equity Plus is direct investment in large cap stocks, so at least for that part of the fund there are no additional fees.

Final Words

In my opinion – the primary (and only?) benefit of this fund is that you can own one asset that gives you exposure to both equity and gold.

However, the 2.5% annual fee is much too high a cost for such a thing. You can very easily create a SIP in one of the best balanced mutual funds and buy the best gold ETF or create a gold SIP in it on your own.

That way you can get absolute control on how much money you want to invest in both, and also be able to choose the funds of your liking without incurring any additional fee at all!

FMP (Fixed Maturity Plans) are the biggest category of mutual funds in India, and when this topic was suggested – my first thought was why did it take so long for it to appear here.

FMP: Close Ended Mutual Funds

FMPs are close ended mutual funds and have gained in popularity due to their relatively secure nature and tax advantage when compared with a FD (fixed deposit).

They are close ended so you can only invest in them during the NFO, and redeem them only on maturity.

They are relatively safe but like other mutual funds – their returns are not guaranteed (or even the principal), and unlike a bank fixed deposit where you know how much interest you will earn – you don’t know how much your FMP will return. You can get an idea based on how other funds have performed, but the fund itself doesn’t tell you much you will earn.

FMP Taxation

Fund companies normally issue a lot of FMPs that are slightly over a year – like 368 days, 370 days etc. so that it enjoys the benefit of lower long term capital gain taxation.

Under the current regime – you can even take advantage of double indexation benefit for calculating long term capital gains if a FMP is issued such that it is issued in say March 2011, and redeemed in April 2012: 13 months in all but they are spread over 2 financial years.

I understand that this will be stopped with the DTC (Direct Tax Code), and since we’re already past March – it’s something that you can’t benefit from right now.

However, if you’re in the top tax bracket – FMP taxation still works out better for you when compared with a fixed deposit.

In a FMP you pay long term capital gains gains at either a rate of 10% without indexation or 20% with indexation (whichever is lower) which is better than interest on fixed deposit that’s taxed at your tax bracket which is upwards of 30% if you’re in the top bracket.

Hemant has written a detailed post about FMP vs Fixed Deposits where he’s shown numbers as well, so you can look at his post to see how the calculation works out.

FMP or FDs

It’s the tax advantage that tips the scales in favor of FMP, and people who are in the highest tax bracket can advantage from it. However, there are no free lunches and what you gain in taxes you could end up by way of lower return since a FMP can’t indicate how much return you’re likely to get, and you may end up getting stuck with a lemon.

You could compare past performance and do all that jazz, but there’s still a chance that the one FMP you chose to invest in performed worse than the others – so appreciate that risk while investing in them.

Here are some other differences between FMPs and FDs.

FMP vs FD

 

FMP NAVs and Asset Composition

Fund companies declare the NAV of their respective FMPs, and you can find these NAVs on their website, and they also declare half yearly results which has a list of the assets they own. This may not make much sense to regular investors though because they are usually names of banks with the CDs they own, and unless you’re very well versed with the bank bond market you can’t really tell one from the other.

Bottomline

In my opinion – people in the lower tax brackets are probably better off sticking with safer instruments like high interest rate fixed deposits, or Post Office Monthly Income Schemes that generate a decent return and offer peace of mind as well, but other folks who stand to gain more can definitely explore this option.