Mutual Funds – Page 6

HSBC Brazil Equity Fund

I recently wrote about the Hang Seng BeEs ETF, which will give Indian investors a chance to invest in Hong Kong equities, and shortly after-wards, I came across the HSBC Brazil Equity Fund, which is an open ended fund of fund schemes that targets Brazil.

Brazil based funds came into focus some time ago, when Brazil won the bid for hosting the 2016 Olympics, and at that time I had compiled a list of Brazil ETFs available for American investors. As far as I know, currently there are no funds in India that target Brazil.

HSBC Brazil Equity Fund

Even HSBC Mutual Fund has just filed the draft prospectus with SEBI and so far they haven’t declared the date that this fund offer will open on. The HSBC Brazil Equity Fund is a fund of funds scheme, which means it will invest in other mutual funds, and in this case – it will primarily invest in the units of HGIF Brazil Equity Fund.

Here is how the indicative allocation of HSBC Brazil Equity Fund looks like:

Instruments	Minimum Allocation %	Maximum Allocation %
Units / Shares of HGIF Brazil Equity Fund or other similar overseas funds	80	100
Money Market Instruments	0	20

As regular readers of this blog will know there is no entry load for the fund, but there is an exit load of 1% if the units are redeemed or switched within 1 year from the date of investment.

There will be growth and dividend option for this fund, and the minimum application amount will be Rs.10,000.

The fund will primarily be invested in equities so you are exposed to market volatility and possible loss of capital like any other equity fund.

Since HSBC Brazil Equity fund is an international fund, you will also be exposed to currency risk in addition to the usual risks associated with equity. This is because the base currency will be the Indian Rupee, while the fund will be denominated in foreign currencies like the US Dollar. So any exchange rate movement between these currencies will impact your returns.

Expenses of the HSBC Brazil Equity Fund

The HSBC Brazil Equity Fund will have an expense ratio of 0.75% of its own, and then it will also indirectly bear the expenses of the HSBC GIF Brazil Equity Fund. Their expenses are classified into Management & Distribution Expenses and Operating Expenses.

The Management & Distribution Expenses for a retail class share is 1.75% and for an institutional class share is 0.875%. In addition to this, they charge 1% for administrative, operating and servicing expenses.

It is not clear to me whether the shares bought will come under the retail category or not, but considering the higher side of the expenses, the total expense ratio comes out to be: 0.75% + 1.75% + 1% = 3.5%.

Insurance Cover with the HSBC Brazil Equity Fund SIP Plus

Now, here is a novel thing. There is a SIP Plus plan that offers insurance cover to the first holder at no additional cost.

Here is what the prospectus says about the Insurance plan:

Eligible transactions
The following transactions during the specified period are eligible for the insurance cover under HSBC SIP Plus. Specified period means the period during which HSBC SIP Plus is open to investors.

Any SIP transaction for a minimum of Rs.2000 per month in eligible schemes and a minimum tenure of 36 months. Other options on tenure are 48 months and 60 months.

Any STP transaction for a minimum of Rs.2000 per month in to eligible schemes and a minimum tenure of 36 months. Other options on tenure are 48 months and 60 months.

Insurance cover
The amount of insurance cover will be computed as follows: –

For each eligible SIP transaction, cover is equal to tenure multiplied by installment

For each eligible STP transaction, cover is equal to tenure multiplied by installment

Details of insurance cover

Under HSBC SIP Plus, the eligible investors will be entitled to Critical Illness Cover provided by ICICI Lombard General Insurance Company Limited (â€˜ILâ€™) subject to the terms & conditions detailed below. The Critical Illness Cover provided by IL will be under the Master Policy for the Group Term Insurance to be entered into between IL and the AMC. A copy of the Master Policy would be available for inspection at the registered office of the AMC. The AMC reserves the right to withdraw / modify HSBC SIP Plus proposition at its discretion.

This is interesting, and it will be interesting to note how many people find the insurance cover attractive enough to go for longer SIP plans.

In summary, I think you need to keep these three things in mind while evaluating the fund:

Equity focused on Brazil (duh)
Relatively high expenses
Insurance cover (that you may or may not need)

Disclaimer: This is just a summary of the features of this mutual fund, and is not a buy or sell recommendation.

No entry loads hurting sales of mutual funds

SEBI (the market regulator in India) banned mutual fund entry loads last August, and I read an interesting piece in WSJ about its possible ramifications today.

Mutual Fund entry loads were expressed as a percentage, and were deducted from the money you invested in the mutual fund. It was used to pay commission to the distributor (mutual fund agent, insurance agent, broker, financial planner, bank agents etc.) who sold you the fund.

Example: Entry load of a fund is 2% and you invest 10,000 in it, – 200 bucks were deducted and given to the distributor.

SEBI put an end to it last August stating that if intermediaries want to charge you a commission (which is what this really was) – they should charge it directly to you instead of having that deducted from the amount you invested.

This makes the whole thing a lot more transparent as people understand that they are paying a certain percentage to the guy who is selling them this stuff, as opposed to some load that they were paying to the mutual fund.

This was a significant step as it takes away the big incentive from distributors who were pushing such funds. Now, they had to ask a fee for their advice from the investors, which didn’t go down too well with them. It also makes the investors a lot more aware of where their money is actually going.

The WSJ reports that this had very significant impact on mutual fund sales:

Unwilling to ask for money directly from investors, financial advisers, banks and even the post office have stopped pushing most mutual funds. All told, more than one million advisers have stopped peddling the funds for now. “The distributors are angry” about having to ask for fees, so they are not pushing mutual funds, said A.P. Kurian, chairman of the Association of Mutual Funds in India, an industry group. “This changeover is certainly affecting us.”

While I am not too convinced about the 1 million number; I think there has been a huge impact to the industry in terms of pushing such funds.

The story goes on to state that in a lot of cases the money that was meant to be invested in mutual funds finds its way into insurance schemes and fixed deposit schemes. It’s not that people find insurance more attractive, just that insurance has not made the same switch yet, and probably distributors who were pushing mutual funds earlier are now busy pushing insurance products. I think the regulators should make insurance companies to follow this model as well.

I think this move is good for investors because it makes costs transparent to them, and more importantly takes away a big incentive from agents who weren’t always keeping investor’s best interests in their mind. In fact, if you go around reading forums / comments and asking people about mutual funds they own, – you will be surprised to hear how many of them have in excess of 30 funds! I am sure some serious hard – selling was involved in such cases.

If retail interest is waning in mutual funds, then funds need to come up with lower cost funds, which perform over the long run, not lament about a positive change.

This is a great regulation by SEBI and I hope it doesn’t go away because of lobbying or any other pressure. I’d be interested to hear any reader stories if this change has personally affected you, so please do leave a comment.

Similarities and differences in marketing of mutual funds and credit cards

Today, Mr Credit Card will be exploring the similarities and differences in the marketing of financial products like mutual funds and etfs versus credit cards.

Since it is my business to read everything about credit cards, I am pretty familiar with how credit cards market their cards. But because I also read a lot about mutual funds and ETFs, I find it fascinating how marketing strategies in the mutual fund industry differs from the credit card industry. Today, I would just like to highlight some of their similarities and differences.

Mutual Funds Market Their Performance – Credit Cards do not! – One of the unique features of the mutual fund industry is that funds are marketed solely based on performance and long term track record. Due to investor behavior, mutual funds tend to seek gather lots of fund inflows from retail investors after a year or years of outperformance. Track records are also used frequently by mutual fund companies. The better the long term average, the better obviously.

Unlike mutual fund companies, credit card companies do not even engage in such practices. One example where this might actually work is the the subprime or “new to credit” categories. I’m sure marketers of secured credit cards could make a statement to the effect that “x percent of our applicants managed to improve their credit scores by xyz and managed to get an unsecured credit card within x number of months? But I do not see that. Or how about cash back credit cards? Surely, credit card companies could say something like ” on average, our cardholders managed to earn x % cash back every year from using our credit card”? Wonder why they do not do that at all? Perhaps it’s regulations, but surely this would be a great selling point.

Credit Card Issuers give teaser deals, Mutual Funds do not – Have you noticed that credit card issuers give teaser deals all the time? It could be in the form of a 0% balance transfer offer, bonus miles or annual fee being waived for a year. But you never see such things in mutual funds. You never see a mutual fund offering to reduce your front end load when you invest. Neither do they waive fund expenses for one year. They are probably not allowed to due to SEC regulations. But maybe there isn’t any marketing restrictions. They just do not do it that way.

Credit Cards make claims that mutual funds cannot – Lots of credit card issuers, especially those marketing credit cards for people with bad credit, make promises like “instant approval”, “no credit checks”, “no employment checks” and in certain cases, “guaranteed approval”. Mutual funds by law, cannot make any performance guarantees. Hence, you do not see any guarantee like marketing language from mutual fund companies.

Both mutual funds and credit card issuers do not highlight their fees – If there is one thing both mutual funds and credit cards have in common, that is they do not advertise their fees. For mutual funds, you need to look through their prospectus or their marketing sheets to find their fees. For credit cards, you have to look through their terms and conditions. The fee “lingo” isn’t exactly intuitive either. Most folks do not understand exactly what an APR is. How many folks know what is a 12-b1 fee? Know the difference between an A share, B share or C shares? What is daily percentage rate?

Unfortunately, for most products, fees are one of the murkiest areas. It pays to be educated in what you are buying and make sure you choose a product that does not hit you with hidden fees. Many credit cards for bad credit folks like First Premier Bank have lots of hidden fees like one-time application fee, monthly maintenance fees on top of annual fees. Most consumers are never aware of these fees, just like they are never aware of 12-b1 fees.

Final Observations – It is interesting to note that both mutual funds and credit cards are financial products. But they are marketing differently. But one thing they have in common is that it is tough to look through their terms and conditions. And most people don’t really know what fees they are paying!

Principal Precious Metal Fund NFO

Principal Precious metal fund is a fund of funds scheme, which means this fund will hold units of other mutual funds and ETFs. In the case of this fund, it will hold only other ETFs.

As the name suggests this is focused on metals such as gold and silver. This fund will primarily invest in Indian and foreign Gold ETFs and silver ETFs. I do not know of any Indian silver ETFs, so I think at least the silver ETF part would be composed entirely of foreign silver ETFs.

Exit load and Minimum subscription amount of Principal Precious Metal Fund

If you redeem your units within one year of subscription, then you will be charged a 1% exit load. The minimum subscription amount for the fund during the NFO is Rs.5000.

There will be a dividend and growth option, and the default option will be the growth option. So, if you donâ€™t indicate which scheme you wanted to subscribe to, — you will get the growth option by default.

This fund will also be available for setting up a Systematic Investment Plan (SIP).

Asset allocation of Principal Precious Metal Fund

The indicative asset allocation is as follows:

Type of instrument	Minimum Allocation	Maximum Allocation
Gold ETFs â€“ Indian and / or foreign	65	100
Silver ETFs -Â Indian and / or foreign	0	35
Debt or money market securities and schemes of mutual funds that invest in these	0	10

As you can see, the main focus of the fund will be to invest in gold ETFs, and the next biggest allocation is for silver ETFs.

Some Risks

In addition to the regular risks facing funds, this one faces exchange rate risk too because it plans to buy securities in the overseas markets.

So far, all ETFs that track gold in India actually hold physical gold as their underlying assets. However, some Gold ETFs abroad donâ€™t hold actual gold, but create derivative contracts that are supposed to track the price of gold. Indian investors should keep in mind that even though they are buying a precious metal fund, they face an extra risk because some of these funds may not hold real gold, and be composed of derivatives contracts that track gold or silver.

The total annual recurring expenses of this fund are expected to be 0.75% of weekly average net assets. Since this is a fund of funds, this expense is charged to you over and above the expenses of the underlying funds.

With gold and silver rallying the way they are, it is not surprising to see new funds throwing their hat in the precious metal ring. Iâ€™d personally, much rather buy gold ETFs and silver coins directly if I was interested in this kind of thing, (instead of paying fee for a fund of funds) but thatâ€™s just me.

Disclaimer: This is just a summary of this fund, and my personal preference, not investing advice tailored to your specific situation.

Religare Gold Monthly Income Plan Mutual Fund

Religare Gold Monthly Income Plan is an open ended income scheme which plans to generate income through a portfolio of fixed income securities, Gold ETFs, equity and equity related instruments.

As you may have already guessed, the monthly income is not guaranteed, and will be given only if the fund makes money.

There is a dividend and reinvestment option, and even within the dividend option, — if the dividend amount is less than Rs.500, then it will be compulsorily reinvested in the fund.

The minimum application amount for the growth option is Rs.5000 and for the dividend option is Rs.25000. There is no entry load on the Religare Gold Monthly Income plan, but there is an exit load of 1% if you redeem or switch out of the units within a year.

The asset allocation of this fund is dominated by debt instruments, followed by equity instruments and gold ETFs. Here is the suggested asset allocation:

Instruments	Minimum	Maximum
Debt and money market instruments	65%	90%
Equity	0%	25%
Gold ETFs	10%	35%

I really donâ€™t know what to make of such a hybrid allocation, –Â it is debt + equity + gold, — and is going to be actively managed. I am not sure how you should look at it when considering your overall portfolio because it is predominantly debt, but the equity and gold component is still high enough to bring in volatility.

Personally, when I am not clear about such fundamental things and unable to make up my mind, – I steer clear ofÂ investments (but this is just personal preference, not investing advice).

A final word about its recurring expenses which are expected to be 2.25% of daily average net assets, which is about the range I generally see with funds in India.

Disclaimer: This is just a brief summary and personal opinion on this fund and not investing advice tailored for your individual situation.

Religare PSU Equity Fund NFO

Religare PSU Equity Fund is an open ended equity fund whose NFO begins on 29^th September 2009 and closes on 28^th October 2009.

As the name suggests, Religare PSU Equity Fund will invest in stocks of public sector companies in India. These are companies where the central or state government has the majority stake, or where it has the management control.

Minimum application amount of Religare PSU Equity Fund

The minimum application amount for this NFO is Rs.5,000 and you can invest in multiples of Re. 1 after that. There is a growth and dividend option for this plan.

Entry and Exit Load of Religare PSU NFO

If you apply directly to the NFO, then there is no load. However, if your application goes through a distributor / agent / broker and your application is less than 5 crores, then you need to pay an entry load of 2.25%.

If you redeem within six months of allotment then you have to pay an Exit load of 1%. There is no exit load if you redeem an amount greater than 5 crores, or if you redeem after 6 months.

Recurring expenses of the mutual fund

Here is how expenses will be charged to investors:

First Rs. 100 crores: 2.50%
Next Rs. 300 crores: 2.25%
Next Rs. 100 crores: 2.00%
Over Rs. 700 crores: 1.75%

Asset allocation of Religare PSU Equity Fund

Continue reading “Religare PSU Equity Fund NFO”

The fee ate my performance

Last weekend, the WSJ had a great piece about investors overlooking mutual fund fees. It was a good piece that illustrated how a lot of professional and retail investors donâ€™t take into account fees while making decisions on which mutual funds to buy.

I think fees and expenses are one of the most important factors when it comes to buying a mutual fund or ETF. I feel this not only because of the cost involved, but also because lower fee shows honesty and / or efficiency (at least to me).

I believe that most mutual funds belonging to a particular category should have similar expenses. Therefore they should charge about the same to their investors. If there is a difference, then either one fund is more efficient than the other, more honest and willing to leave more money on the table than the other or both.

Continue reading “The fee ate my performance”

SBI WISE Mutual Fund

The WISE in SBI WISE stands for Winning Investment Strategies in Equities Fund, and this is an open ended equity scheme.

Minimum Investment in the NFO

The initial investment required for this is Rs.10,000 for the non SIP plan, and Rs. 12,000 for the SIP purchase. There is no entry load, but there is an exit load of 1% if you exit within one year of allotment.

Equity Oriented Fund

The SBI WISE mutual fund is an equity oriented fund and will invest 90% â€“ 100% of its assets in equity and 0% â€“ 10% of its assets in debt and money market instruments.

Investment Strategy of SBI WISE Mutual Fund

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Quick notes on ETFs, Mutual Funds and IPOs

I see questions around a few things in comments and emails regularly, and thought Iâ€™d write a quick post addressing some of the simpler ones (who likes complicated stuff anyway).

Mutual Fund and ETF Expenses: All ETFs and mutual funds incur expenses, which are usually expressed as a percentage of their assets. The higher the expense ratio, the more expensive the fund is. So, you should compare expense ratios and go for one that has a lower ratio (other things being equal).

Underlying assets: It is not necessary that all Gold ETFs have gold as their underlying asset also. Some funds may have stocks of gold mining companies, others may just hold future contracts that track a gold index, and some others may own physical gold. You need to find out what is the underlying asset of a particular fund, so that you know it matches what you had in mind. Here is a post I wrote some time ago about different type of commodity funds.

Fund of funds may charge double fees: Fund of funds own other mutual funds. If a fund of funds charges you fees, then that means you end up paying double fees. Once for the fund of funds, and then for the mutual funds that such a fund owns.

No notification on allotment of IPOs: This one is specific to Indian IPOs and causes a lot of grief to investors. You donâ€™t get emails or any other notifications when an IPO allotment is done. You need to keep a tab on the allotment and listing dates yourself. A good way to do this is by setting Google alerts.

These were a few things that I have recently seen, and if you can think of anything else, letâ€™s hear them, and try and find an explanation to them.

HDFC Mutual Fund

Here are the various HDFC mutual funds in the equity space:

HDFC Mutual Fund: Close Ended Fund

HDFC Mid â€“ Cap Opportunities Fund: This is a close ended mutual fund which invests in small and mid cap stocks.
HDFC Infrastructure Fund: This is a close ended equity mutual fund which invests in stocks of infrastructure related companies.
HDFC Long Term Equity Fund: This is another close ended equity mutual fund with a maturity period of five years, and will invest in a diversified set of stocks bought for the long run.

HDFC Mutual Fund: Index Fund

HDCF Index Fund â€“ Nifty Plan: This is an index fund by HDFC mutual funds, which tracks the Nifty. This is an open ended scheme with the current expense ratio of 1%.
HDFC Index Fund â€“ Sensex Plus Plan: This is not exactly a passive index fund tracking the Sensex because only 80 â€“ 90% of its assets will be invested in stocks of Sensex and the rest in stocks outside the Sensex. It is a passive fund close to tracking the Sensex, but not exactly.
HDFC Index Fund â€“ Sensex Plan: If you are looking for the HDFC mutual fund that passively tracks the Sensex; this is your plan.

HDFC Mutual Fund: Other Plans

HDFC Tax Saver (ELSS): This is an open ended scheme with a three year lock in and tax saving benefits. The fund will primarily be invested in stocks with up to a maximum of 20% in debt.
HDFC Prudence Fund: This is an open ended fund that is a balanced fund. This means that this is not primarily invested in stocks, and the allocation will be changed by the fund manager between debt and equity based on the market condition.
HDFC Arbitrage Fund: This is an arbitrage fund aims to generate returns by exploiting the arbitrage opportunities between the spot and derivatives market
HDFC Premier Multi Cap Fund: This is an open ended growth oriented mutual fund that invests in mid and large cap blue chip companies.
HDFC Capital Builder Fund: This is an actively managed fund that aims to invest in strong companies which are below their fair value. Strong companies and fair value are of subjective terms of course, and will be decided by the fund manager.
HDCF Equity Fund: It is an open ended mutual fund that invests in companies that are expected to experience growth higher than their industry peers. The top three holdings as on 31^st July are ICICI Bank, SBI and ONGC.
HDFC Long Term Advantage Fund (ELSS): This is an open ended mutual fund from HDFC with a three year lock in period and one that invests in equity and equity related instruments.
HDFC Balanced Fund: This is an open ended mutual fund that will invest in debt and equity. It is positioned for people who donâ€™t want to get too much exposure to equity and the accompanying risk.
HDFC Core and Satellite Fund: This is an open ended equity fund that aims to invest in stocks that are trading below their true value. This is a subjective term and depends on the analysis of the fund manager.
HDFC Top 200 Fund: This mutual fund looks to invest in equity and equity linked instruments primarily drawn from the companies in BSE 200 Index.
HDFC Growth Fund: This is an open ended mutual fund which predominantly invests in equity and equity related instruments.