Being One Step Ahead of the new Mutual Fund Changes

Like it or not, your Mutual Fund holdings, at least some if not all, are already undergoing significant changes. While the changes in some were predictable, there are instances where the proposed changes were never imagined. Now, everyone from advisors and distributors to AMCs and mostly importantly the investors are starting to scramble to make sense out of the commotion!

Since the mutual fund AMCs have started to list out the changes in their schemes, there have been plenty of eyebrows raised with some of their decisions.

For example, one particular AMC had a Liquid Fund and a Money Market Fund prior to re- categorization. As per the new re-categorization rules, there is a Liquid Fund and a separate Money Market Fund Category. The AMC has gone ahead and moved their existing Liquid Fund into the Money Market Fund category and vice versa!

Another major example is that of another AMC, where they have changed the mandate of an existing MultiCap Fund to that of an Aggressive Hybrid Fund (where only up to 80% can be invested into equities ) as per the new rules. In addition, they have decided to merge one of their existing Balanced Fund with this newly formed scheme. The N.A.V. of this newly merged entity would be that of the earlier existing MultiCap Fund.

The same AMC has dealt another googly by changing an existing pure Equity scheme to a Balanced Advantage Category Fund (a fund that manages debt and equity allocation on a dynamic basis). Note that there is no cap on either asset class as per new rules. Furthermore, they have merged another existing Balanced Fund into this new scheme, while keeping the N.A.V. of the prior equity fund. The fund could now theoretically go 100% into debt or the other way as per the discretion of the fund manager.

Another example is that of an AMC that had an Ultra Short Term Fund and separately also ran a debt fund that primarily invested into bonds of Banks and PSUs. Post the introduction of the re- categorization rules, the AMC has merged the above Banking and PSU fund into the Ultra Short Term Debt Fund. It has further gone on to change the mandate of an existing Short Term Debt Fund into a Banking PSU Fund as per new rules. Now imagine the plight of an investor who was anyways confused with the huge universe of schemes. If he/she is not careful, he/she might end up investing into the current Banking and PSU fund expecting to remain in that category when it actually will get merged into an Ultra Short Term Fund. Or he/she may invest into the current Short Term Debt Fund not realizing it will become a Banking and PSU fund shortly. These unintentional errors could have big implications later on the mutual fund portfolio.

There are thousands of mutual funds schemes out there. And if not selected right, which can often be the case, investors end up with a plethora of funds in their portfolio over time. Now imagine looking at your fund list and realizing that a lot of them are going changes and may come out as something new and unintended. In such a context, it is easy to make unintended errors or make ill informed decisions in deciding what to do next with your mutual fund portfolio.

It is with this concern in mind that Plan Ahead Wealth Advisors is conducting a seminar tomorrow at The Regus, Andheri West to enlighten both our clients and their friends and families, on the impact this massive reorganization of mutual fund schemes will have on their portfolios and how they can navigate these changes in an efficient way.

While it may seem a little inconvenient to come out on a Saturday 19^th May 2018 to attend this event, the take away from this event could lead to much better decision making on your current mutual fund holdings in the immediate future!

 

 

Read Full Post »

Are you saving enough for your child’s education?

The cost of education is increasing at a rate faster than normal inflation. Do you have enough for your child’s education? Are you aware of the best options for doing so? Do you have to sacrifice your other goals for achieving your child’s education? Read the article by Vishal and do comment how you are planning your child’s education.

Read Full Post »

Best ways to Invest for your Child’s Education – Vishal Dhawan in TOI

Read Full Post »

History- Don’t forget the learnings from the past.

 

RBI has , last night, once again introduced measures to tighten liquidity, so that the fall of the rupee can be controlled by removing liquidity for possible speculation on the rupee. Whilst this may seem like a localized response to many and unique to India, it is important to note that similar measures have been announced in Turkey, Brazil, Indonesia and China in different forms. Bond markets in India have reacted sharply to these tightening measures and are likely to do so every time these measures are announced. However, it is important to look at this from a historical perspective as the widely held view is that these measures are temporary in nature. If one looks at past measures of currency defence by the RBI, and the resultant measures and periods that it takes to reverse such measures, it provides some interesting insights. Four periods have been considered here:

1. 2011-12, when the rupee depreciated after the emergence of the Euro crisis and the US debt downgrade.

2. 2008, during the period of high oil prices and the global financial crisis.

3. 2000, post the tech bubble bursting

4. 1998, in the aftermath of the Asian financial crisis

PERIOD	DATE OF MEASURE	RBI’s ACTION	BOND YIELD IMPACT	REVERSAL DATE	PERIOD RUN
1998: Asian Financial Crisis	Jan 1998	· Increase in bank rate by 200 bps· Increase in CRR by 50 bps	· Immediate increase in yields· But within 1 month yields decreased though it took a few months to fully normalize	Mar 1998	· Policy: Approx. 2-3 months· Bond Market: 1 month
2000: Tech Bubble	July-Aug 2000	· Increase in bank rate by 100 bps· Increase in CRR by 50 bps, 25 bps immediately reversed	· Immediate rise in yields· Yields peaked by Nov 2000 · But reached a new low within 6 months	Feb-Mar 2001	· Policy: Approx. 6 months· Bond Market: 2-3 months
2008: Global Financial Crisis	Jun-July 2008	· Increase in repo rate by 125 bps· Increase in CRR by 75 bps	· Immediate rise in yields, however rates peaked before the last rate hike· Yields set a new low within 2 months of rate hike	Oct 2008	· Policy & Bond Market:Approx. 1-2 months
2011-12: Aftermath of the US Debt downgrade	Sep-Dec 2011	· Increase in FCNR & NRE rates· Increase in repo rate by 100 bps	· Yields peaked in Nov 2011bu reversed all losses by end Dec 2011· But reversed all losses by end of Dec 2011	· CRR cut in Jan 2012· Repo rate cut in April 2012	· Policy : Approx. 6 months· Bond Market: 2-3 months

Source: Bloomber,RBI, Axis Mutual Fund

As you will see from the data above, whilst bond markets sold off in response to RBI measures, bond yields typically peaked very soon after the policy actions and resumed the downward trend soon after. The total period of the bond market stress was 1-3 months, whilst RBI itself reversed the measures within 2-6 months. Thus, all these measures were temporary and were reversed when it became apparent that the impact on the domestic economy was worse than the marginal impact on the exchange rate.

Therefore, from an investor perspective, it is important to view your holdings in bonds and bond funds keeping this perspective in mind ie if you have a short term holding period, you need to be concerned about the volatility, but if you have a long term horizon, and are using bonds and bond funds as a part of your overall asset allocation strategy, you should look at these opportunities to buy into this volatility over the next few months.

Of course we should not forget what Warren Buffet once remarked “If past history was all there was to the game, the richest people would be librarians.”

Read Full Post »

What does financial freedom mean?

Independence and freedom are amongst the most inspirational words in the English dictionary in my opinion. They evoke a sense of hope, inspiration, choice and joy all at the same time, and could mean very different things to different people.  For example, a very large number of investors whom I work with, when asked about their financial goals, indicate that they would like to achieve financial freedom. When I ask them what financial freedom means to them, their answer is: When I do not have to work for the money and can actively decide how, when, and with whom I choose to associate in my professional life.

Financial freedom can mean different things to different people. Financial planning allows them to be financially free i.e. decide how they wish to lead their lives. Over my years of running a practice, here are two examples of people I work with, who we believe financial planning has helped achieve the freedom to do what matters most to them.

Dr. Kumar (name changed) is a cardiologist and runs a hospital in suburban Mumbai. Irregular and long work hours mean that there is very little time to spend with his two young kids and his wife. What he really looks forward to, is spending time with his family and enjoying the kids’ growing up and continuing to stay connected with his wife. Booking and planning his holidays each year – one long international holiday, another week to ten day long domestic holiday and some weekend breaks are what he absolutely loves. The finances for these holidays are a part of his financial plan. Whilst there are clearly earmarked long term investment strategies for his longer term goals like retirement and education for the children, there are also separately defined strategies for shorter term holiday goals through the use of financial instruments that can give him the most optimal returns for these goals, on a post tax basis. Debt mutual funds of varying maturities can be used very efficiently for shorter term returns.

Sanjay and Rashmi (names changed) are currently 39 and 37 respectively and they have a daughter who is 6 years old. Sanjay runs a small sized family business and Rashmi works with a chartered accountancy firm. When most couples are just about beginning to save for their financial goals, and are looking to save for their retirement and childrens future, both Sanjay and Rashmi have already achieved their financial goals ie even if they do not save any monies from here onwards, and let their existing portfolio grow, they will be achieve their financial goals. This has been possible through a combination of a conservative lifestyle with controlled expenses, a savings rate in excess of 40% of total income, controlled use of leverage on a home loan that has been prepaid aggressively, and a diversified portfolio across equities, fixed income, real estate and gold, that is rebalanced regulary.

So what does financial freedom mean for you? Choose your financial freedom the way you want it.

This article was written by Vishal Dhawan, CFP^CM 

Read Full Post »