I have two active SIPs in DSPBR T I G E R and Tata Infrastructure. I have been advised by a lot of people to stop these SIPs as the infrastructure sector is not doing too well. Should I continue or invest in large-cap diversified equity funds?
- Atul Dhakappa
It is better if you exit these infrastructure investments and go for large-cap diversified equity funds. Infrastructure sector is witnessing a slowdown. The liquidity crunch in the money markets too adds to its bleak future.
I have found that Sahara Growth Fund, which was 5-star rated, has suddenly disappeared from the list of 5-star rated diversified equity funds. What's the reason? Have I made a mistake by investing in this fund?
- Jaspal Singh
Funds need to fulfil certain criteria in order to enter the Value Research Fund Ratings Family. Out of these, one criterion is that funds need to have average assets of over Rs 5 crore in the last six months to get rated.
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Sahara Growth has not been able to fulfil this criteria and, hence, became unrated since March 2009. That's the reason for its disappearance from the list of rated funds.
Sahara Growth was a 5-star rated fund since November 2008. Last year, when the markets tanked, it shed just 43 per cent as against its category's 55 per cent fall. It is a good large-cap pick. You have not made any mistake by investing in this fund. You can stay put.
I have been investing in Kotak Opportunities for the past two years through SIPs. The fund's rating has fallen from 5-star to 3-star. Should I continue with it or switch to Kotak 30? My investment horizon is ten years.
- Shailendra Dwivedi
Kotak Opportunities has fallen on hard times. It is an aggressive fund and capitalises on opportunities in the market. The fund has proved its merit in the past and can deliver impressively when its picks work.
The fund can yield better than a diversified equity fund, especially for a longer time horizon of 10 years. But you must be prepared to bear the volatility it comes with.
If you are cautious and cannot take risk, then you can switch to Kotak 30, which is a good, diversified large-cap fund.
I want to invest in the recently-launched gold ETF, State Bank of India (SBI) Gold Exchange Traded Scheme. Can you advise me on its likely future performance?
- H K Das
There are five other gold ETFs apart from the one recently launched by the SBI. The structure of gold ETFs is mandated in such a manner that they all generate exactly the same returns.
The difference in returns may be on the second decimal point and that is immaterial. So one can invest in any gold ETF as they will all yield the same returns.
The future returns of all gold ETFs depend on how the price of physical gold moves. Gold is currently trading at high levels. It may not be a good time to invest in them.
What makes up a fund's expense ratio? Are the reported returns of various mutual funds inclusive of their expenses?
- Anuj Gupta
The expense ratio is also known as Annual Recurring Expenses. This basket of charges comprises the fund management fee, agent commission, registrar fees and the selling and promotion expenses.
A fund's expense ratio states how much you pay to a fund in percentage terms to manage your money.
The net asset value (NAV), which you see daily, is calculated after deducting these expenses. Since this is charged regularly, a high expense ratio over the long-term may eat into your returns substantially.
The fact that funds' net asset values (NAV) are reported net of such expenses, it doesn't mean that we should become indifferent to their expense ratios.
Please bear in mind that an expense ratio is charged even when the fund's returns are negative. Costs do matter and one should take the expense ratio into account, especially in case of debt funds.
If you are stuck between two similar funds, the expense ratio is all the more important as it can be a good differentiator. But remember that a low expense ratio doesn't necessarily mean that the fund is good. A good fund is one that delivers good returns with minimal expenses.
I had invested in an Monthly Income Plan (MIP) eight months ago. The fund's value was down by Rs 45,000 at the time of redemption. How do I treat this short-term loss? Can I set it off against the short-term gains from my equity funds?
- Suresh Shah
Yes, you can. Short-term capital losses can be set off against both short-term and long-term capital gains. But it is not allowed to set a long-term capital gain from equity against long-term capital losses, as the former is exempt from tax.
I have been investing in diversified equity mutual funds (including equity linked savings scheme (ELSS)) through SIPs for the last four years and plan to keep this up for 20 years. Only then will I redeem these funds in parts. Since long-term capital gains from equity are exempt as of now, would that mean that, theoretically, gains on a 20-year SIP started now would be exempt on redemption after 20 years?
- Ritesh Menon
For an equity investment to be tax-free, the period of holding must be more than 12 months. Since you are investing through SIPs, each monthly installment needs to be held for more than 12 months so that it qualifies as a long-term capital asset.
Considering the fact that you plan to redeem your investment in parts, you must note that redemptions are made on FIFO (first-in, first-out) basis. So, by this method, the units bought first will be redeemed first. If you want your gains to be tax free, you must withdraw only those units that have been held for more than a year.
Regarding your SIPs in ELSS funds, you need not worry about their tax implication as they have a compulsory lock-in period of three years.
So, your capital gains from ELSS become tax-free automatically. This is in addition to the deduction of up to Rs 1 lakh under Section 80C.