Topic: Mutual Funds

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How does determining your investment objective indicate your risk profile?

May 9, 2022

All investments carry with them a disclaimer that states that returns are subject to market risks. Investing in the market carries with it a certain element of risk, and you must understand these risks before you make any financial decision. While it is important to make investments to fulfil your financial goals, it is crucial that  you understand the risks to avoid any mistakes that may set you back. Your risk profile indicates the kind of investment vehicle you should choose, and your investment objective determines your risk tolerance.

Let us first understand what a risk profile is, followed by how your investment objective can determine the risk profile you’re a part of.

What is a risk profile?

A risk profile can be defined as your willingness or tolerance toward taking risks. Creating a risk profile is an imperative process towards determining the right investment asset allocation in your investment portfolio. It enables you to identify the acceptable amount of risk that you can endure. In this particular case, risk refers to your tolerance to market fluctuations and volatility.

If you’re looking for your principal investment amount to not decline, and are willing to let go of potential capital appreciation in this process, you have a low willingness to take on market risks, and hence have low risk tolerance. On the other hand, if you desire to make the highest possible earnings from capital appreciation, and are willing to take the chance that your principal investment amount may decline if a particular investment may not pan out, you have high risk tolerance.

Your ability to take risks is determined by reviewing your liabilities and assets. If you have more assets than liabilities, you can take more risk, and vice versa. However, your will to take on risks and your ability to sustain them might not always match up. For example, you may have a lot of assets, but are of a conservative nature, and showcase a low desire to take on risks. In this case, the ability and the willingness to take risks are different, which affects the portfolio construction procedure.

Now that we have a fair idea of what a risk profile is, let us understand the factors that determine your risk appetite.

Factors that dictate your risk appetite

Prior Experience: Just like you become better at a sport, or any other task with practice and experience, you gain more experience as you continue investing in the market. Your knowledge of investment products, market trends, your last portfolio, and its performance are all key factors that  are included in your past experience. These experiences make you a veteran investor and can impact your risk appetite.

Present Scenario: Your present age, financial liabilities, income sources, and engagement levels are key determinants of your risk tolerance. If you’re a young investor with no financial liabilities, you can have high risk tolerance. On the other hand, if you are a middle-aged man with a family, you’re unlikely to take heavy risks with hopes of high returns.

Investment objectives: The most important factor that determines your risk appetite is the reason why you started your investment journey and why you’re continuing the same.

How does determining your investment objective indicate your risk profile?

You can begin investing for a plethora of reasons, and every reason has a different mode of investment suitable for fulfilling the objective. From wanting to go on an international vacation, to buying a car, to a retirement plan, everything can be a reason to start investing. Depending on your investment objective, your risk profile can be indicated.

For instance, if you’re starting your investment journey to create a stable retirement plan, it is unlikely that you will undertake huge risks and be an aggressive investor. In this case, you would rather invest in funds that provide consistent market returns despite any fluctuations.

What are the types of risk profiles?

There are three broad brackets in which risk profiles can be categorised into. Based on this categorization, you can identify which profile you come under.

Conservative: A conservative risk profile indicates an investor with a low risk tolerance. If you’re a conservative investor, you will be inclined towards investment methods that are safe and protect your principal corpus. Returns on investments are secondary as long as your investments do not depreciate.

Moderate: If you’re a moderate risk taker, you tend to strike a balance between risk and reward. You would opt for a high returns scheme on an acceptable risk level, but you’d probably skip anything with extremely high risk elements.  

Aggressive: This particular risk profile showcases the most willingness towards withstanding market fluctuations, aiming at high returns on their investments. Usually, this profile constitutes veteran investors who are well versed with the market and investing intricacies. Moreover, these investors also have long-term plans, which is why they are okay with absorbing any short-term market fluctuations.

All being said, fixing your investment objective can help you analyse your risk profile better, and no matter what risk profile you consider yourself to be, you should always consult your financial advisor before making any financial decisions.

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Factors to consider while choosing a mutual fund

April 21, 2022

Money makes money, is an often quoted mantra and investors are willing to do just that, aiming to fulfil their personal financial goals. However, with the number of options available at hand when it comes to mutual funds, it is very important for us, as an investor, to understand the kind of investment we want to make, and the exact mutual fund we want to invest in.

Choosing the right mutual fund is a two-step process, and we need to carefully consider multiple factors before we lock in on an option. The two factors that matter the most are our appetite for risk and the reason we’re investing in a mutual fund. Even so, it isn’t a one size fits all solution and the same mutual fund scheme is not perfect for all investors.

Considerations before choosing a mutual fund category

Let’s take a look at some of the more crucial ones now:

Investment Objective: The first, and most important thing to consider before you choose a mutual fund category, is the reason for starting the investment in the first place. The investment can be either short or long-term, depending on our financial aspiration. It can be as short as going on a vacation, or as long as the time it takes for us to retire. The mutual fund category choice we make should depend on the goal we want to achieve with it.

Time Horizon: This is the amount of time we want to keep our money invested in the mutual fund scheme. Some funds invest in shorter-dated debt periods than others. If our investment period is more than 5 years, an equity fund is likely the best option for us. For shorter terms, the market can be extremely volatile, which can be more risky, but there is always the chance of higher earnings as well.

Risk Tolerance: Tolerance or risk appetite is the limit of risk that we are willing to take against the money that is invested in the mutual fund category of our choice. As of 2015, SEBI issued a mandate for all mutual funds to carry a riskometer that indicates the risk level of a fund scheme. There are five levels of risk, namely low, moderately low, moderate, moderately high, and high. It is always best to choose a mutual fund category whose risk category matches our risk tolerance.

Measures to look at when choosing a mutual fund scheme

Now that we have discussed the considerations before choosing a mutual fund category, we should also discuss some of the attributes to look at when choosing the best mutual fund scheme for our purpose:

Performance Against Benchmark: This is a comparison of a mutual fund scheme’s performance against a standard benchmark, which is usually chosen  by the mutual fund house. The investment philosophy of a mutual fund scheme can be said to be guided by its benchmark index. Asset allocations of the benchmark index should ideally be the same as the investment objective of the scheme. For example, the benchmark of a mutual fund with a banking index should be focused on banking stocks. Comparisions against this benchmark will usually reveal whether our fund itself is performing above or below expectations.

Performance Against Category: While choosing a mutual fund scheme, it is important for us to compare the performance of that fund against other mutual fund schemes in the same category. Doing this gives us a broad idea of the fund’s performance, and ensures that we have an understanding of the fund before investing. However, such comparisons should be done only across the same type of mutual fund schemes. For instance, a small-cap mutual fund should only be compared with other small-cap funds.

Performance Consistency: As already stated earlier, the market is a very volatile environment, and it is critical that we know if a fund performs consistently. Consistent returns are important to ensure that our money does not to go waste, and that we get returns during both market ups and downs.

Experience of the Fund Manager: As an investor, we should always be aware of the capabilities of the person who will be handling our finances. It is important to understand how well a mutual fund scheme is being managed by the fund manager.

Company Legacy: Mutual Fund investments should always be made in fund schemes that are brought to us by credible financial institutions. Not only does this remove any chances of fraudulent activities, but it also ensures that the fund is consistent, and that our investments are well researched. A poorly selected stock can cause losses, which is why it is imperative that we check the track record of the asset management company.

Ratio of Expenditure: While our finances are being managed under the mutual fund scheme, there are some charges that are billed to us directly. There are charges for administration, management, as well as promotions and distributions, all of which are expenses incurred during the running and maintainence of the fund, and are included in this figure. The higher the overhead expenditure, the lower our net returns from the mutual fund scheme.

Now that you know what to look for when choosing a mutual fund category or scheme, you should be able to make a more informed decision on your investments. There are a lot of other factors that can influence this decision and it’s outcomes and we always suggest that you consult your financial advisor before making any investment decisions.

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The different types of Mutual Funds

April 12, 2022

You may have heard of the term ‘Mutual Funds’ frequently over the last few years, but do you know exactly what they are? 

Mutual Funds are investment platforms that pool money from different investors, and provide these investors with returns on the collected corpus over a period of time. This accumulated money pool is invested into the equity market by investment professionals, who are known as portfolio managers or fund managers. Fund managers invest your money into various forms of securities, like stocks, gold, bonds and other similar assets, which have the potential to provide satisfactory returns. These returns are then shared amongst the investors proportionate to their investment in the mutual fund. 

While the crux of mutual fund investments is market returns, they can be classified into various segments, based on their investment goals, and other forms like structure and asset classes.

Classification on the basis of structure

Close-Ended Funds: Close ended funds are ones which are available for purchase only during an initial offer period. For the purpose of providing liquidity, these schemes are often listed for trade on the stock exchange. Close ended mutual funds need to be sold via the stock market at the prevailing price of the shares.

Open-Ended Funds: Open ended funds are those which can be purchased throughout the year. Open ended funds allow you to keep investing as long as you want, without any limits being imposed on the investment amount. Because of the active management these funds are subjected to, open ended funds charge a higher fee when compared to passively managed funds. Since they are not bound to a particular maturity date, open ended funds are the perfect choice if you are looking for liquidity.

Interval Funds: Interval funds are a combination of both open ended and close ended funds. These can be purchased at different time periods during the tenure of the fund. During this time, if you are a shareholder and wish to sell the shares, you can offload them to a fund management company that offers to repurchase the units from you.

Classification on the basis of asset class

Equity Funds: These are funds which provide high returns, but also come with high risk. Equity funds invest in company shares and are linked to the stock market, which is why returns may fluctuate.

Money Market Funds: Money Market funds invest in liquid instruments like Treasury Bills (T-Bills). They are moderately safe and good for you if you are looking to gain immediate returns. The risks associated with these kinds of funds are credit risks, reinvestment risks and interest risks.

Debt Funds: As implied by the name, Debt funds invest in company debt instruments like debentures, and other fixed income assets. They are safe investment platforms and deliver fixed returns.

Balanced or Hybrid Funds: These funds combine both equities and debts, however, the proportion invested in each varies between funds. Both the risk and returns are balanced out in a similar fashion. Investments are done in a mix of different asset classes.

Classification on the basis of investment goals

Income Funds: These funds are primarily used to invest in instruments providing a fixed income. The main motive of income funds is to provide you with a regular stream of income. 

Growth Funds: Growth Funds primarily invest in the equity market with the aim of gaining revenue from capital appreciation. These are subject to market risks, and are beneficial if you are looking to make high returns on your investments.

Liquid Funds: These are very short term investments that provide you with high liquidity. While they are low risk investments, the returns from liquid funds are moderate, and good for you if you have short timelines.

Capital Protection Funds: Capital protection funds are invested in a split between equity markets and income instruments with a fixed return. The motive of making the split investment is to protect the principal amount invested by you. 

Tax-Saving Funds: With high risk and high returns, these funds primarily invest the capital in equity shares, which qualify for deductions under the Income Tax Act.

Pension Funds: These funds have the aim of providing you with regular returns on your retirement after a long investment period. While they are mostly hybrid funds, they have low but stable future returns.

Fixed Maturity Funds: These funds invest in the debt market instruments which have a similar maturity period as the fund. 

While it is definitely beneficial to be aware of the forms of mutual funds and align these with your financial goals, you should also know about the risks associated with each and consult your financial advisor before making any financial decisions.

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KFintech and CAMS launch new platform ‘MF Central’ for mutual funds investor

December 22, 2021

MFCentral is a collaborative effort of KFintech and CAMS, the Mutual Fund Registrar & Transfer Agents in association with AMFI. MFCentral offers digital access to investor with the entire MF industry under one roof. MFC doesn’t need you to open a new account. By entering your Permanent Account Number and mobile number, you can fetch all your investments – made across Statement of Account format and demat – in a consolidated list.

MFC will be launched in three phases. Phase 1 has been launched. It will allow you to make non-financial transactions on its website, in addition to providing a single view of your portfolio, CAS and unclaimed dividends.

In Phase 2, it will launch a mobile app. You could then do the same things via the app. Phase 3 will allow you to buy and sell MF units. In later phases, it will also allow your distributors to log in and execute your transactions, on your behalf.

“The platform will bring about simplification in mutual funds services and reduce turnaround times, while providing safe access. Leveraging the power of digital, MFCentral provides a unified gateway for friction-less services across all mutual funds,” said Anuj Kumar, Managing Director, CAMS.

In addition to a single portfolio view, the platform offers investors the added convenience of generating reports on unclaimed payments and raising service requests for non-commercial transactions .

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