Cut-off time is most important

FUND QUERIES

I want to invest in mutual funds. But before investing I want to know whether I will get the NAV of the time I invest at or at a later time? - Kavita Sinha

Your question indicates that you are influenced by direct equity investing, where you get the price of the share as it is at that particular point in time.

Unlike stocks, mutual funds don't declare NAVs through the day. Instead, NAVs of all funds, not just equity, are disclosed at the end of the trading day after the markets are closed.

But what is important here is the cut-off time. If you invest by the cut-off time, you will get the NAV of that particular day. Let's say the cut-off time is 3:30pm. This means that if you have invested before 3:30pm on a particular day, you will get that day's NAV. A fund may accept applications after this time but will use the NAV of the next day. This cut-off time applies to redemptions too.

Generally, equity funds have a cut-off time of 3:30pm. Short-term and ultra-short term funds usually have a cut off time between 10am and 12 pm. As these funds are of a shorter duration and every day counts, the AMCs would like to receive investor applications as soon as possible so that the cheques can be processed and the money invested. Similarly, investors would also like to receive their redemption proceeds as early as possible and an early cut-off time facilitates this.

Mutual funds do not declare their NAV throughout the day. It could be a matter of technology. If funds had access to their assets and liabilities on a real-time basis, then it might have been possible for funds to declare NAVs on a real-time basis. There is, however, one class of funds which gives you an as-close-as-possible idea about your real-time NAV. These are exchange-traded funds. The NAV of these funds is a fraction (usually one-tenth or one-hundredth) of the value of the underlying index at any given moment. As this is bought and sold at a small premium or discount to the value of the underlying instruments, it is the closest one gets to the concept of real-time NAV in the mutual fund world.

Can you explain how exactly floating rate bond funds work? Are they safer than income funds and how? - Hiren Trivedi

Floating rate funds usually invest 65-100 per cent of their assets in floating rate instruments and the rest in fixed-income instruments. On the other hand, income funds generally have a 100 per cent portfolio of fixed-income instruments.

Generally, the price of fixed-income instrument changes in accordance to changes in the interest rate "" bond price falls, when interest rates rise and vice-versa. But in floating rate instruments, the interest rate is re-adjusted periodically in keeping with prevailing market interest rates. Thus, the impact of change in interest rate on price of floating rate bond is minimal as compared to fixed-income instruments. This makes floating rate funds less volatile vis-à-vis income funds. And this reflects in their historic performance as well. Floating rate funds have been much more consistent than the income funds in these volatile times. This has led to the image of floating rate funds being one of the most stable debt products around.

For example, in the past six funds, floating rate funds have delivered a return of around 3.6 per cent as compared to 2.12 per cent return delivered by the income funds (as on May 18, 2007).

Franklin Templeton mutual fund was the first fund house to launch Floating Rate funds in India in February 2002. But with increasing volatility in the debt market, the number of such funds has gone up phenomenally since then.

I have heard that mutual funds can invest abroad. Can you tell me about such funds, through which I can invest in foreign stocks? - Eshaan Singh

Currently, there are three funds investing in stocks of foreign companies. The oldest of the lot is Principal Global Opportunities Fund which was launched in March 2004. Earlier, the fund used to primarily invest in developed markets like US and Japan, but after the regulations permitting foreign investments became more liberal, the fund completely over-hauled its portfolio. In its current avatar, it acts as a feeder fund, i.e., it invests all its assets in a fund called PGIF Emerging Markets Equity Fund, one of Principal's global offerings. Therefore, the fund now focuses upon emerging markets like South Korea, Brazil, Russia, China and Taiwan among others. Rather than direct stock investment, it invests through a fund which already possesses the expertise to invest in these markets. The fund has returned 16.67 per cent over the last one year (as on May 17, 2007).

Templeton India Equity Income was launched last year. But unlike Principal Global Opportunities, this one invests in domestic as well as foreign markets. In fact, as per its last declared portfolio, just 26 per cent of its assets were invested in foreign markets. This one also invests primarily in emerging markets.

The latest one to be launched is Fidelity International Opportunities, which recently concluded its NFO.