MutualFunds Archives

7 common risks a mutual fund investor should know

We all know that mutual funds are subject to market risks. However, did you know that there are other risks associated with mutual funds as well?

A mutual fund is one of the popular investment options right now. It can help you with your long term and short-term financial goals. However, before investing in mutual funds, it is essential to know the different risks associated with mutual fund investment.

It is to be noted that all mutual funds may not carry the same risks and in the same proportion. It is because the underlying instruments of mutual funds vary. Equity funds invest predominately in equity instruments, while debt funds invest in debt securities such as bonds and treasury bills. As the underlying instruments react differently to different economic and market events, the mutual funds also respond differently.

These are common risks a mutual fund investor know

Market Risks

Market risk, also known as systematic risk, is a risk that your mutual fund investments may face because of the market’s poor performance. Various circumstances, including inflation, recession, interest rate fluctuations, natural disasters, can influence market performance. It is the common risk for debt and equity funds, and it is essential to consider the effect of market risks, as no one can foresee what will happen in the future.

Volatility Risk

Volatility risk is mainly associated with equity-oriented funds. Equity funds typically invest in the stock of publicly traded companies on stock exchanges. As a result, the value of such a fund is directly linked to the performance of those companies, which may be influenced by current economic conditions, such as consumer preferences, government policies, and other factors. These factors directly affect theprice of the company’s stock and can cause an upward or downward movement in its share value.

Interest Rate Risk

Interest rate risk is another crucial risk you need to know, especially if you want to invest in debt funds.

Any upward movement of interest rates heavily affected debt funds that invest predominantly in long-duration bonds. When interest rates or the RBI’s repo rate move up, bond prices decline, resulting in a loss of investment value. As a result, you can invest in accordance with interest rate movements, or better yet, align your investment timeline to the average maturity of debt funds.

Credit Risk

Credit risk is another risk that mainly affects debt funds. Debt funds invest in corporate bonds and commercial papers issued by corporates and receive regular interest and principal repayment at the end of the tenure. If the company cannot pay the interest or principal back to their investors, the credit rating agencies may downgrade the instrument. As the value of the paper takes a hit, it may affect the overall returns of debt mutual funds. When a firm is unable to pay its interest and service its debt, credit risk comes into play.

Liquidity Risk

The difficulty of redeeming an investment without experiencing a loss in its value is referred to as liquidity risk. You may face issues or may not be able to withdraw money when redeeming from closed-ended mutual funds or mutual funds with a lock-in period, such as ELSS funds.

You may face liquidity issues while redeeming a considerable amount from your Exchange Traded Fund with a low trading volume.

Concentration Risk

When you put all of your money into a single investment strategy or sector, they run the risk of concentration. This results in the concentration of a large portion of your assets in a single scheme, which is not a wise strategy because it increases the risk of losses. A diverse portfolio can also help reduce the risks associated with a single investment option.

Inflation Risk

Inflation reduces the purchasing power of our currency. Inflationary risks are linked to an increase in the overall pricing level for the various goods and services we use over time. If inflation is not properly accounted for in the investment plan, the investor may not be able to meet their objectives. As a result, it’s critical to invest in mutual funds that can protect your purchasing power.

So, These are the top 7 common risks a mutual fund investor should know

Conclusion

Risks are inherent in every investment. Therefore, it is imperative for you to know about all types of risks associated with mutual fund investment to understand its impact on your investment portfolio. So, it is indispensable for one to know about the different risks involved in investing in mutual funds.

5 reasons why SIPs are important for millennials

Are you a millennial who is always postponing investments for a later date? If yes, then there is something very simple that you can do to start your investment journey.

We are talking about Systematic Investment Plan or SIP, which is nothing but a facility to invest in mutual funds regularly.

This article will talk about the usefulness of SIPs for millennials.

What is SIP?

SIP lets you invest in a mutual fund at pre-determined periods rather than all at once. You can choose your preferred frequency. After you set up a SIP, the mutual fund will automatically debit the SIP amount from your bank account and buy mutual fund units with the same amount.

SIP is a preferred investment option for individuals with a regular source of income.

Why are SIPs important for millennials?

We know people born between 1981 and 1996 as millennials. Most people are well established in their careers, making it a great time to invest if they haven’t previously. However, many millennials put off investing for various reasons, including a lack of funds. This is when a SIP comes in handy.

Choose the amount you are comfortable with

The beauty of investing in mutual funds through SIP is that you donâ€™t need a lot of money to invest. You can invest Rs. 500 or Rs.50,000 in a month. But, the main important factor is to start, no matter how small the amount is. Also, you do not have to be stuck investing the same amount, as you can quickly increase your SIP amount whenever you want. It is up to you.

You donâ€™t need to look at market levels every day

If you have friends and colleagues who are active traders and think that this is what investment is, you are in the dark. Investing doesnâ€™t have to be convoluted or take all of your energy. SIP makes it possible through rupee cost averaging.

Let us explain. When you invest in mutual funds through SIP, you invest in a specific sum of money every month and, based on that amount, the fund house will allot mutual fund units. So, as the value of a mutual fund unit depends on the value of the underlying instruments, the fund house will allocate you more units when the equity markets are down and fewer units when the market is going up. And in the long run, these units will provide capital appreciation.

In this way, the cost of acquiring the units gets averaged out, and this process is called rupee cost averaging.

This is ideal for millennials, who are perhaps the busiest of the generation. This is especially useful if you are just getting started with investing.

SIPs can help build an emergency fund

Even for millennials, an emergency fund is an essential element of a properly planned financial plan. An emergency fund should typically have at least six months’ worth of expenses. However, it may not be possible to build the emergency fund in one go. This is where SIPs come into the picture. Setting up a SIP in a liquid fund can help you build an emergency fund. This emergency fund can come in handy during a job crisis or any other emergency.

Plan and achieve your financial goals

Millennials have a lot of goals. Goal planning is required to achieve these goals. You can tag each of your plans to a SIP to achieve your dreams. SIP helps you determine exactly how much money you need to put in every month using SIP calculators to attain your goal in the time frame you wish.

Planning for a comfortable retirement

Letâ€™s face it. Retirement is real. The time might come when you may not earn a monthly salary. And, there are high chances that you would end up spending almost the same number of years as a retired individual as you would as a salaried individual. It won’t be wise for millennials to delay retirement planning.

Investing in a disciplined way through SIP during the working years can help build a retirement kitty. And the sooner you begin, the higher your chances of amassing a sizable retirement fund. So, if you invest Rs.5000 per month in an equity fund at 30 years till 60 and increase the SIP amount by 10% every year, you will end up with a corpus of Rs. 4.17 crore by investing a total amount of Rs.98.7 Lakhs*.

Conclusion

SIPs are a fantastic investment route, especially for millennials who are putting off their investments. Investing early is critical to growing wealth, and if you’re unsure about investing, SIPs are a great way to get started.

*assumed rate of return – 12%

The new rules for multi-cap funds: How does this impact your funds

The Securities Exchange Board of India (SEBI) released a circular on 11^th September. This circular talked about material changes to the portfolio of all Multicap funds. This change was to make sure that Multicap funds invest across large, mid and small cap stocks to stay true to their name. So, what is this change? Before that, let’s understand what are Multicap funds.

Earlier, Multicap funds had to invest a minimum of 65% of their assets under management (AUM) in equities. So, the fund manager was free to decide how much he/she can invest in large cap, mid cap and small cap stocks. As per SEBI, large cap stocks are those that have a market capitalization rank of 1 to 100 on the India stock exchanges. Mid cap stocks are those ranked between 101 to 250 while small cap stocks are those whose rank is from 251. The fund can choose the amount of money that needs to be invested in each of these categories and the category that can be part of the equity portion of the portfolio. In other words, the proportion of these stocks in Multicap funds was at the discretion of the fund manager.

What are the new rules for Multicap funds?

SEBI has said in the circular that fund houses will now need to invest a minimum of 75% of their AUM in equities. So, that’s an upfront increase of 10% in equity allocation. This will not have any impact on Multicap funds as most of them invest more than 85% of their AUM in equities. For instance, Kotak Standard Multicap Fund invests more than 98% of its AUM in equities.

Now, the game changing rule laid down by SEBI is that there should be a minimum allocation of AUM in each category of market capitalization. This minimum allocation needs to be 25%. So, Multicap funds will now have to invest at least 25% of their AUM in each of large cap stocks, mid cap stocks and small cap stocks. Why has SEBI introduced this change? SEBI has said in the circular that most Multicap funds have more than 80% of their AUM in large cap stocks making them large cap funds. It also said that for most Multicap funds exposure to small cap stocks was in single digits. For instance, Kotak Standard Multicap Fund has 66% of its assets in large cap, 23% in mid cap stocks and only 1.5% in small cap stocks. Let’s consider another fund. The Motilal Oswal Multicap 35 Fund has 68% in large cap stocks, 15% in mid cap stocks and 5% in small cap stocks. So, Multicap funds are not actually Multicap funds. They seem to be mostly large cap funds.

The other point is that there seems to be no diversification across market cap categories for some of the Multicap funds. For instance, HDFC Equity Fund, which is supposed to be a Multicap fund, has almost 83% of its AUM in large cap stocks. This means that there is no diversification provided by the fund manager.

The third most important point that SEBI noted is that the benchmark used by the Multicap funds is not consistent with the portfolio composition of the schemes. Multicap funds seemed to be using benchmarks such as Nifty 200 or Nifty 500 that are more relevant for mid and small cap funds while Multicap funds invested mostly in large cap funds.

SEBI has said that all existing Multicap funds will need to comply with mentioned provisions within one month from the date on which the Association of Mutual Funds in India (AMFI) publishes the next list of large, mid and small cap stocks. So, the timeline will be January 31, 2020 for all the Multicap funds.

Now, what are fund houses doing about this?

Fund houses have requested SEBI to create a category of funds called Flexicap. This is to provide flexibility to the fund manager to invest in any of the market cap categories based on the markets. As you might know, for some years, large cap stocks may do well while in others, mid and small caps do well. Flexicap funds, if introduced, will help fund managers capitalise on the markets. If SEBI accepts the proposal, investors can invest in Flexicap funds.

If SEBI doesn’t agree, fund houses need to merge Multicap funds with other categories such as large cap or mid cap funds. Fund houses may make them thematic funds also.

It is good to take stock of your mutual fund investments to see if you have any Multicap stocks and whether the fund’s portfolio is getting changed.

Team at Wealthzi.com can review your existing portfolio, and suggest a way forward.

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These are common risks a mutual fund investor know

So, These are the top 7 common risks a mutual fund investor should know

What is SIP?

Why are SIPs important for millennials?

Choose the amount you are comfortable with

You donâ€™t need to look at market levels every day

SIPs can help build an emergency fund

Plan and achieve your financial goals

Planning for a comfortable retirement

Conclusion

What are the new rules for Multicap funds?

Now, what are fund houses doing about this?

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360 degree wealth management platform

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