Does portfolio rebalancing means maintaining a balance between debt and equity component according to a person’s goals and risks? How should I evaluate my funds? Should I start investing in another fund, if the ratings of my existing fund drops?
-Satwinder Singh
Yes, your understanding of rebalancing of portfolio is right. It is having an asset allocation based on your goal and risk tolerance and periodic alignment to maintain the allocation between debt and equity.
By evaluation of fund, we mean examining funds based on their performance track record and validating at the time of rebalancing that the funds you own still have the variables for which you chose them. A big slip in rating is a pointer to review your selection. But it should not be the sole basis of your action.
You should keep in mind the cost of switching your investments, like entry load you have incurred and will incur again, on your new investment and tax implications.
I have invested Rs 6 lakh in Franklin Templeton Fixed Tenure Fund Series IX Plan A (Dividend Payout) in May 2008 for three years. Now, the current value has come down to Rs 5.5 lakh. Can a Fixed Maturity Plan (FMP) give so much of a negative return? Can you please advise whether to remain invested or quit this fund?
-T C Bilandani
Franklin Templeton Fixed Tenure Fund Series IX Plan A is not an FMP, but is a three-year, debt-oriented, hybrid fund. As a debt-oriented, hybrid fund, it can invest up to 20 per cent in equity. As on October 31, 2008, the fund's exposure to equity was 16.8 per cent. The NAV of the fund as on November 26, 2008, was Rs 9.23.
The fall in equity values can lead to NAV erosion. The fund, with its low allocation to equity, should prove to be a steady investment with modest downside, but cannot provide complete downside protection. Even a three-year time-frame may not be enough to ensure positive return from such an investment, if equities remain depressed.
How safe are mutual funds? What are the liabilities of an Asset Management Company (AMC)?
-Anil Arora
The key point to understand is that a mutual fund is a pass-through vehicle — that is, you are exposed to all the risks of the underlying investment of a fund. A mutual fund is diversified portfolio, which lends its relative safety compared to direct investment. Being a pass-through vehicle, wherein all gains and losses are passed to an investor, the asset management company cannot be liable for loss on account of market risk.
But mutual funds in India are intensely regulated by the Securities and Exchange Board of India (Sebi), the securities market regulator. Mutual fund regulations are fairly comprehensive to ensure transparent and fair conduct of business by an asset management company. Non-compliance with the regulations can lead to penalty and cancellation of licence to conduct asset management business.
I am investing Rs 3,000 through an Systematic Investment Plan (SIP) in SBI Magnum Global Fund. In the current turmoil, I have lost a lot from this fund. Should I continue?
-Dinesh
Magnum Global was the best equity fund in 2004 and 2005 for its hugely rewarding sector and stock picks ahead of others. Its long-term return history is still compelling. But the free fall it has seen in 2008 is quite unnerving, though compared to the category fall, it has relatively done better, albeit with a thin margin. If you are investing for few years, you should then continue your SIPs.
I am 33 years old and want to invest through an SIP of Rs 1,000 for five years and another Rs 1,000 for retirement after 15 years. Please suggest some good funds for both.
-Rajesh Bhuva
We would suggest you to choose a balanced fund for five years and a diversified equity fund for retirement. The universe of 5- and 4-star funds should be a good starting point for your fund selection.
Our selection of balanced funds will include DSP Black Rock Balanced, Canara Robeco Balanced, FT India Balanced and Kotak Balanced. Our choice of equity funds will be DSP Black Rock Equity, Birla Frontline Equity, DWS Alpha Equity or Kotak-30. Make your choice, invest regularly and review your positions every year.
If I do not take any profit and keep re-investing the amount (both principal and profit) in the same shares, how will I be taxed? Can we show the net result (profit/loss) at the year-end instead of recording transactions daily? Please help me regarding these doubts.
-Shanker Sekar
Let's understand this first, investors have to pay tax when they are selling shares at a profit. In case of equity shares, if they are held for more than 365 days, the gains are tax-free.
If the shares are sold within 365 days from the date of purchase, a short-term capital gains tax is applicable at the rate of 15 per cent. No matter how many times you sell the shares, you have to pay the tax on the net profitable amount. This is calculated at the end of the financial year while filing your income tax return. Based on the holding period, the net capital gain or loss is calculated.
Since January 2008, I am investing Rs 1,000 every month in Reliance Diversified Power, DSP Black Rock Tiger, Magnum Contra, ICICI Infrastructure and Sundaram BNP Paribas Select Focus Fund. Should I continue?
-Chetan Choithani
Sundaram BNP Paribas Select Focus and Magnum Contra are diversified portfolios, whereas the other three funds are thematic or sector funds. These are avoidable bets for a passive, long-term equity portfolio.
Value Research
