I have parked my funds in bank fixed deposits (FD) during the last few months. Now, with FD rates falling, I wish to explore mutual funds. Which category would you recommend for an investment horizon of around five years? Will these investments provide a better post-tax return than a bank FD with negligible credit risks? Is there a merit to opting for Systematic Investment Plan (SIP) in debt funds rather than lump sum investments? What is the entry load in debt funds?
-Ankur
For a time horizon of around five years, you can consider investing in a medium-term debt fund. Choose a well-rated income fund with a good track record. Debt funds (long-term) offer higher tax efficiency and liquidity as compared to fixed deposits. However, debt funds are not risk-free like bank fixed deposits. They invest in bonds and hence carry the credit and the liquidity risk specific to each instrument. They are also affected by interest rate movements. Depending on your risk profile, you can choose whether to invest in a bank FD or a debt fund.
SIP is a suitable method of investing in equity funds because equity is a volatile asset class. For debt, one-time investment is recommended.
Debt funds usually do not charge an entry load. In case a fund does, you can directly invest in the scheme without an intermediary to save it.
I am planning my marriage one year from now and I plan to save a fixed amount every month for it. Rather than keeping the amount in my savings bank account, I would like to invest it in 'risk-free' debt investments for this period. Please advise? -Raj Abhishek
For an investment aimed at a short time span of one year, you should consider a bank recurring deposit. It is preferable as you want your investment to be risk-free. One can expect similar returns from a recurring deposit as well as a short-term debt fund. The former gives safety of capital along with guaranteed returns (interest). The latter carries no such guarantee.
I have invested Rs 7.5 lakh in Birla Income Growth fund and Rs 2.5 lakh in HDFC Income Fund. My adviser said that I could get 10-15 per cent returns in the next three months, with hardly any risk to my capital. But with recent decline in the interest rates, I am alarmed. Are there chances that I may lose capital? Would you advise me to withdraw?
-Vishal Gupta
The Reserve Bank of India (RBI) has taken slew of measures to combat the credit squeeze. This has resulted in a rally in prices of the government bonds. The sharp rise is attracting everybody towards gilt funds. This is not a time when the fixed-income market is operating normally. Debt market could be heading towards volatile times in the near future.
The above mentioned two funds have given returns in excess of 10 per cent in the last three months. Softening interest rates has helped these funds to give such yields. Interest rates have been falling for quite some time now and they may or may not continue to fall. In such a scenario, the principal is not protected from losses. The value of the underlying instruments in a debt fund change with fluctuating interest rate. Hence, whether to remain invested in the funds or not would rest upon your willingness to cope with the volatility.
What are P/E and P/B ratios? How do you rate a fund’s performance on the basis of these ratios?
-Satyamurty
P/E (price-to-earnings) ratio of a stock tells us how much the investors will pay for one rupee of a company’s earnings. High P/E indicates higher expectations of investors from a particular stock. But the P/E ratio of a fund is the weighted average of the P/E of all stocks in its portfolio.
P/B (price-to-book value) ratio compares the market value of a stock to its book value. A high P/B value indicates an overvalued stock and a low P/B indicates an undervalued stock. A low P/B of a stock could also mean that something is fundamentally wrong with the company. For a fund, the P/B ratio is calculated like the P/E ratio, by taking the weighted average P/B of all stocks in a fund’s portfolio.
A fund’s P/E and P/B ratios do not take the cash component into account. So, they are not as relevant for funds as they are for stocks. Yet they can be used to understand the broad nature of a fund’s portfolio within a category. The growth funds in a category will have a relatively higher P/E and P/B than the value funds.
I have incurred a short-term capital loss from equity MFs and direct equity investments in the current financial year. I also have short-term capital gains from my debt MFs. Am I allowed to set-off short-term capital loss from equity investments with the short-term capital gains from debt investments?
-Maheswaran
Short-term capital loss can be set off against any capital gains (whether long-term or short-term) while long-term capital loss can be set off only against long-term capital gain. Also, if the capital loss cannot be set off against the capital gains of that particular year, then it can be carried forward for the next eight years.
So, you can set off your short-term capital loss from equity against the short-term capital gain of both your equity and debt investments as well as long-term capital gains of only debt (as long-term capital gains on equity is exempt from tax).
