Category: Mutual Funds

As we come close to the end of the year and gold has another great year, it’s only natural to do an update on the best gold funds in India.

In the past I’ve called these posts, best gold ETFs but now there are so many fund of funds that I’ve called this year’s post the best Indian gold fund and will include both gold ETFs and fund of funds. There are no gold mutual funds in India perhaps because it is not easy to run a mutual fund with gold as the underlying asset as you would require physical gold sales and purchases virtually every working day.

I have combined gold ETFs and gold mutual funds mainly because they both invest in gold, and theoretically gold ETFs should return higher than gold fund of funds but I’d like to see if there are any gold fund of funds that are doing better than gold ETFs and if that’s the case then it shouldn’t make any difference whether you buy a gold ETF or a gold fund of fund.

I say that gold ETFs should do better than gold funds because gold funds in India invest in gold ETFs of their fund house and have expenses over and above the gold ETFs own expenses so the expenses are charged twice. However, if a fund has low expenses and the fund house is doing a good job managing its funds it is possible that some funds are doing better than even the ETFs.

That being said, here is a table that shows the returns for all of these funds in the last one year. All data from Value Research.

 

S.No.	Fund	ETF (E) or Fund of Funds (F)	1 Year Return
1	SBI GETS	E	11.62%
2	Religare Gold ETF	E	11.59%
3	Reliance Gold ETF (R*Shares Gold ETF)	E	11.51%
4	UTI Gold ETF	E	11.50%
5	Quantum Gold ETF	E	11.49%
6	HDFC Gold ETF	E	11.48%
7	ICICI Prudential Gold ETF	E	11.48%
8	Kotak Gold ETF	E	11.47%
9	Goldman Sachs Gold ETF	E	11.47%
10	IDBI Gold ETF	E	11.44%
11	Birla Sun Life Gold ETF	E	11.33%
12	Axis Gold ETF	E	11.30%
13	Quantum Gold Savings	F	10.78%
14	Axis Gold	F	10.36%
15	Reliance Gold Savings	F	10.33%
16	SBI Gold	F	10.33%
17	Kotak Gold	F	10.15%
18	ICICI Prudential Regular Gold Savings	F	10.02%
19	HDFC Gold	F	9.89%
20	Religare Gold	F	Less than a year old
21	Birla Sun Life Gold	F	Less than a year old
22	Motilal Oswal Gold ETF	E	Less than a year old
23	IDBI Gold	F	Less than a year old
24	Canara Robeco Gold ETF	E	Less than a year old
25	Canara Robeco Gold Savings	F	Less than a year old

There are two clear trends that you can discern looking at the table above:

1. All ETFs have performed more or less similarly, and there is very little difference in their returns. If you look at some of the earlier posts on the best gold ETFs even there you will notice that as far as returns are concerned, there are no clear winners.

2. Fund of fund returns are lower than ETF returns because they have an additional layer of cost. However, what these figures don’t show is the transaction cost of ETFs and mutual funds, and that can make a difference to your returns because you could be buying mutual funds for free whereas you will always need to pay the broker for buying ETFs.

Fund of funds also make it easier to set up a SIP for a gold ETF. You can very well do that with an ETF as well, but it won’t be automated and simple to the extent of a mutual fund.

Do gold ETF volumes matter?

In the past I’ve said that since performance of gold ETFs is about the same, you can look at volumes and invest in the ones that have the most liquidity but in the past few years gold funds have grown so much that for retail investors this parameter has really become irrelevant.

Now, I would say it is hard to say which is the best gold ETF or fund of fund and it really depends on what you are most comfortable with. If you are okay with the lower return that fund of funds give in lieu of no transaction costs and convenience of a SIP then go for fund of funds.

If your transaction costs are low trading shares because of quantity or because of the broker you use, then buy gold ETFs.

Whatever you do, I think it’s best to spread your money around and use two or more fund houses instead of just one. If there is a big tracking error any year in any of the funds then spreading your money can help with that but other than that I don’t see any reason why gold ETFs should perform any differently in 2013 than they have done this year or the years before this.

I’m really late writing about UTI Credit Opportunities Fund because the NFO ends today, but I’m hoping that this post will still be useful for people who are interested in investing in the fund after the NFO.

This is a debt fund, and the interesting thing about this debt fund is that they may invest up to 50% of their funds in debt of less than AA rating because debt with a relatively lower rating usually has a higher coupon rate.

This is an actively managed fund which means the fund managers will look for good opportunities and mis-pricings in the market in order to discover money making opportunities.

There are two fund managers, Mr. Amandeep S Chopra who is 41 and manages or co-manages several other funds in UTI and Mr. Arpit Kapoor, who is 28, and the SID says he is the dedicated fund manager for investment in ADRs/GDRs/Foreign securities of all domestic schemes launched or to be launched by the UTI Mutual Fund.

So the idea behind the fund is that these two fund managers actively managing the UTI Credit Opportunities Fund will look for debt offerings with A or lower rating (but still investment grade) and will invest in those to juice up returns.

The only way to find out whether this strategy will work or not is to give the fund time and see it’s performance. I don’t think there is any way to reasonably predict how the fund will do at this point of time.

I’ve often written in the past that there should be a really compelling reason for you to invest in a mutual fund NFO like getting access to an asset class that wasn’t previously there or a really cheap index fund, and I don’t see any such reasons in this fund.

The idea is certainly interesting, and can end up to be a really good scheme but there simply is no way to find that out other than waiting for the fund to list and see it’s performance for a couple of years.

Business Line has some more details on the this Credit Opportunities Fund where they talk about default rate of A rated securities and that’s a good read for anyone considering this fund for investment.

Goldman Sachs is coming out with a new mutual fund called the Goldman Sachs India Equity Fund, and the NFO (New Fund Offer) for this scheme starts on October 17th 2012, and ends on October 31st 2012.

This is an actively managed equity mutual fund which means that this fund will primarily invest in shares, and the fund manager will choose which shares they should invest in to beat the market.

The SID (Scheme Information Document) states that stock picking will not be limited by any sectors or market capitalization, and they will use a bottom up approach to stock picking. So essentially, they can choose from any listed stock if it appeals to them.

From what I understand, the section of expenses doesn’t say how much they will charge; just that they can charge the maximum permissible by SEBI. If anyone has a different interpretation, please leave a comment.

For me, the most interesting thing about this fund is that Goldman Sachs has decided to bring out an actively managed fund after buying Benchmark Assets which was a company that was known for its wide range of low cost index funds. It looks like GS thinks that there is more growth potential in actively managed funds than index funds in India, and this may remind you of the post and discussion around why index funds don’t do well in India that was published here some time ago.

As far as investing in this or any other NFO is concerned, I’ve written several times that there are no benefits of investing in a NFO, and it’s a lot better to wait and see how a fund performs than to jump in from day one. Perhaps, the only exception to this is when you have a fund that offers exposure to an asset that’s not currently available, but that’s clearly not the case with the GS India Equity Fund; there are plenty of good performing active mutual funds that are available to investors already.

This is a guest post by Manikaran Singal is a Certified Financial Planner and runs a personal finance blog goodmoneying.com

Mutual funds are that investment vehicle which helps in investing across various asset classes like equity, debt, and gold through professional management. You are wrong if you say that you invest in mutual funds since you don’t invest in mutual funds, you invest through mutual funds. The type of asset which a particular fund is investing in defines the category like Equity, Debt Mutual fund, Gold Mutual fund etc.

You may invest in any asset class directly if you think you have expertise in it or you may select mutual funds route. Direct investment products include purchasing shares through demat accounts, buying NCDs, investing in Public Provident Fund, Endowment LIC policies, National savings certificate etc. and for short to medium term – bank savings account, bank fixed deposits, Corporate fixed deposit etc., buying gold in the form of jewellery or coins/bricks etc.

Selecting mutual funds for investing has its own advantage like professional management, diversification, economies of scale etc. but besides all this there’s the major advantage it has is of taxation.

Let’s first understand Taxation in Mutual funds

Mutual funds generate 2 types of income – dividends and capital gain.

Capital Gains

When the holding period in a particular mutual fund is one year or less and you book some gain/loss in this period then that would be called as Short term capital gain/loss and if the holding period is more than 1 year than it will be called as Long term capital gain/loss. When there’s loss, no question arises for taxation, besides setting it off.  But gains will be taxed differently with different category of fund.

Tax rates (2012-13)

Long term Capital Gains (units held for more than 12 months)

	Individual/HUF	NRI*
Equity Oriented schemes	NIL	NIL
Other than equity schemes	10% without Indexation or 20% with Indexation whichever is Lower +3% cess	10% without Indexation or 20% with Indexation whichever is Lower +3% cess
Without Indexation	=10.30%	=10.30%
With Indexation	=20.60%	=20.60%

 

Short Term Capital Gain (units held for less than 12 months)

	Individual/HUF	NRI*
Equity Oriented scheme	15%+3% cess	15%+3% cess
	=15.45%	=15.45%
Other than equity scheme	30%#+3% cess	30%#+3% cess
	=30.90%	=30.90%

# assuming Investors falls in highest tax bracket

• NRIs will be subjected to TDS in case of Long/Short term capital gain.

 

Dividends

Unlike interest in debt investments which is completely taxable (with few exceptions), dividend in debt Mutual funds are tax free in the hands of investor. But yes, they are subjected to Dividend distribution tax which fund house pays at their end. Dividends in equity Mutual funds are tax free.

Dividend tax rates

	Individual/HUF	NRI
Equity Mutual funds	NIL	NIL
Other than equity Mutual funds	NIL	NIL

 

Dividend distribution Tax

	Individual/HUF	NRI
Equity Mutual funds	NIL	NIL
Debt Schemes	12.5%+5%surcharge+3%cess	12.5%+5%surcharge+3%cess
	=13.519%	=13.519%
Money market/Liquid schemes	25%+5%Surcharge+3% cess	25%+5%Surcharge+3% cess
	=27.038%	=27.038%

 

You all must know that the interest rates in most of the debt investment options have been deregulated by the government. Gone are the days when you receive fix rate of interest in PPF for complete tenure. Almost all Post office savings rate will be reviewed and announced every year. And even in savings account which used to give 4% fixed rate has been deregulated. The decision is left to the market forces which will decide the interest rate. Now it becomes inevitable for the investor to optimise the overall return to look for other suitable investment options. And you won’t find a better alternative to mutual fund investments. If you understand the various types of mutual funds, it’s working structure and which fund to be used and when you can generate a good tax efficient return.

Understanding How Mutual funds generate returns

Banks and AMCs (Asset management Companies) or as popularly called as Mutual fund houses both are very important elements of Indian Financial services industry. Both are in the business of mobilising the savings and investments of retail and corporate sector and diverting the same into various short and long term investments. Banks are mainly into lending business so you may say that they deal only in Debt Instruments, but Mutual funds are into investments so they deal with all assets like Equity, Debt, and Gold etc.

This is explained to make you understand that difference in return of 2 product of same style is because of management and inherent expenses.

Tax efficiency through Mutual funds

1. Liquid/ Ultra Short term  funds Vs. Saving account:

Returns in Liquid/ultra short term fund will always be more than the saving bank rates. The difference in the management and expenses as explained above can easily be pointed out from the fact that some banks are offering rates of 6-7% while many are still on the old rates. It may also be a business compulsion. But in Mutual funds there’s a CAP on overall expenses. That’s why they generate the same returns from short term debt market and distribute among its investors after deducting the expenses. Besides return the major advantage is also of taxation. If you park your funds in saving account whatever interest you will get (above Rs 10,000/-) in a particular year will be added in in your total income and taxed accordingly, but if you invest in Ultra short term/ Money manager funds then you may opt for dividend reinvestment option and reduce your tax outgo. Current account holders don’t get any interest in their account, so they can also use this to the full.

2.     Fixed Maturity plans Vs. Bank Fixed deposit:

Interest on bank Fixed deposit is fully taxable , but if you invest in Mutual funds FMPs then the maximum tax that you have to pay on the gain is 10.30%. (Read : Bank deposits Vs debt funds)

3.     Long term debt funds vs. PPF:

Now when PPF has been handed over to market forces, your portfolio requires active management and a combination of PPF and long term debt products. When interest rates starts falling PPF rates will go down but your long term debt investments will help you generate more by playing with duration due to the inverse relation between interest and bond prices. And more returns can be set off with the indexation benefit and thus less tax.

4.     Mutual funds MIP vs. Senior Citizen Plan/ Post Office MIP

You may also reduce considerable on your tax payment by diversifying your regular return fully taxable investments into Mutual funds MIP and taking dividend payment option and advantage of Dividend distribution tax.

5.     Gold ETF Vs.  Physical gold

Besides offering advantage of Liquidity, Authenticity, affordability etc. gold ETF has its tax advantages also. Profits from gold ETFs are taxed as Short /Long term capital gain just like debt mutual funds, whereas profit out of Physical gold comes in long term capital gain only after 3 years of holding. Paper gold also does not attract Wealth Tax.

Mutual funds are very tax efficient products. But it should be used with caution and under some guidance. Wrong product chosen at wrong time and without giving reason to your investment has the potential to destroy your savings and overall returns. So sit with your planner/advisor, decide onto your goals and requirements and design the required portfolio.

Sorabh had posted a fairly lengthy comment a few days ago, and I really don’t know the answer to all his questions or even the primary one which was how you go about reviewing your mutual fund portfolio but I do have some thoughts (which are probably fairly obvious to everyone) on how to identify a mutual fund that you should get out of.

First, here is the comment (edited) for context:

Sorabh September 2, 2012 at 12:06 am [edit]

Hi Manshu,
Can you do a write up or invite someone to do a write up on “How to Review your Mutual Fund Portfolio”, the standard statement that I read and listen to is invest in MFs and review your portfolio in every 6 months. I am not sure how do I go about reviewing it.

For example, it’s now two years that invested in SIPs in certain funds, some of the funds were giving a return of 30% few months back but i didn’t do anything about it. In fact I am not sure what to do, do I just shave off the profit only?

Then do what with that profit, put it in a debt fund? Or put that profit in my worst performing fund? or do I completely sell off that fund, then what do I do with a lump sum?

I don’t want to invest the whole sum in another MF, as I may be getting a bad deal at that time. Do I use SWP? When do I use SWP? When do i kick out a fund?

They say when its performing below its index average…OK in what time? 3 or 6 months? also don’t I lose in getting the fund taxed if i pull the plug before 1 year?
So I am looking for you assistance to basically reveal some “MF juggling strategies” to make money in the long run. Because today after 2 years I see my whole mutual fund portfolio giving me 5% return, some of the funds in it are 30% profit , while some which were 20% profit 6 months back are at  a 5% loss today. I am really banking on these mutual funds to help me retire. I don’t want to be disappointed when I am 60 because when you look in retrospect, investing a lump-sum 10 years ago in a fund is a better deal than a SIP in the same fund (we discussed this a while ago) so I am not sure about the strategy, with my broker taking 1.6% (ICICI Direct) my returns are in fact 3.5% today.

Regards
Sorabh

Can you do a post on this?

The one specific question that I have some thoughts and experience is which mutual fund I want to get out of, so I’ll take that up in this post.

When you invest in a mutual fund or ETF – there are broadly two decisions that you’re taking – first one is that you want to invest in this particular asset class so you could say that I believe that PSUs are going to do well, or I believe that blue chips are going to do well, or just that index stocks are going to do well, and that’s the first decision you take.

The second decision is within this space, which fund should you invest in and that question is a lot harder than the first one.

So let’s take the second question first.

In my mind, the first reason for dumping a fund is when it doesn’t track its underlying asset correctly. So, if you bought an infrastructure mutual fund which is doing much worse than the infrastructure index because they own a lot of banks, that’s one reason to get rid of the fund. It is not doing what it is expected to do and you want to get into something that is doing what it’s expected to do.

When thinking about this it’s important to understand that the fund should track its underlying index not what you think its underlying index is. I’ve seen a few comments that say something like my real estate funds are bad because they are worse than the index, but the real estate funds aren’t supposed to track the index; index funds are supposed to track the index. You chose real estate funds to track real estate so it’s the first decision that needs reviewing, not the second decision.

The second reason I think is when other cheaper funds come in the market, and you have more options than before. Gold ETFs are a good example of this where for some years GoldBees was the cheapest and had good volumes, but now there are many more with low expenses which had similar performance. So now there is no reason to just stick with GoldBees and you can look at owning other names as well.

If you bought an expensive, under performing fund to begin with then you can think of switching to something else. You may have not known about this factor earlier, but now that you know, you can get into something better.

Another reason is if you find something about the fund manager that changes your opinion of the fund and makes you uncomfortable, that’s a reason to dump the fund.

If I bought into a NFO and find that the fund never gathered much popularity and has low assets under management, I’d like to get out of such funds as it’s not likely that it will get much attention from the fund house and may be merged with another scheme.

I have written about all these factors earlier as well in my post on under performing funds, and my belief from that time hasn’t changed that the gains you will make from your mutual funds will be because the market did well, and that’s an assumption that you are making – that the market will do well over long periods of time. If you weren’t making that assumption then 100% of your money would be in equities (which I assume it’s not) and there’s just no way to get around this fact.

You may look at your mutual funds in despair if they have returned only 3.5% in two years but if the market has also returned only that much then what else could an equity mutual fund do? It’s not the fault of the mutual fund in that case, and I don’t see a lot of point in churning funds.

The time frame also needs to be longer, if you look at time to retirement, that’s probably 30 years, but you want to make a decision on the fund in 3 months – that’s a bit lopsided. You need to see the funds at least for a year to get any sense of what they’re doing.

My own opinion on this is it is neither practical nor possible to zero in on the best fund year after year in a category and if you have something which is close to the underlying index then that’s good. Most of your gains will come in by being in that asset class and not because you own the best fund in that category. Of course, it’d be great to be in the best fund, but then how do you do that?

Now, to the first question – which is should I be in this asset class at all? That’s up to the reason of why you invested in those assets in the first place, and have those reasons changed. If they have changed, then you change, else stick with it.

This post is from the Suggest a Topic page.

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.

 

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.

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.

Feature	Mutual Fund	ETF
Traded on a stock exchange	MFs are not traded on stock exchanges and you have to buy them directly from the fund house.	ETFs are traded on stock exchanges and you can buy and sell them on the exchange.
NAV or Quoted Price	MFs can only be bought and sold at their NAV	ETFs have NAVs and all ETFs show their real time NAVs on their websites. However, since they are listed, you can buy them on the quoted price.
Trading account needed	You don’t need a share trading account to buy a mutual fund.	Since ETFs trade on the market, you need a trading account to transact in them.
Expense Ratio	Expense ratios on mutual funds are generally higher, especially because a lot of them are actively managed.	Expense ratios of ETFs tend to be lower since they are passive in nature.
Brokerage	Since you buy mutual funds directly from the fund house you don’t have to pay any brokerage on it.	You will have to pay the brokerage on ETF transactions since

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.

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.

Company	% of Assets	Country
Monsanto	9.10%	USA
Potash Corp	8.20%	USA
Deere	7.20%	USA
Syngenta	6.70%	Switzerland
Wilmar International Ltd.	6.00%	Singapore
Archer-Daniels-Midland	5.00%	USA
Brazil Foods	4.30%	Brazil
Mosaic	3.90%	USA
Agrium	3.80%	USA
Bunge Ltd	3.40%	USA
Total	57.60%

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.