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Arbitrage Funds: What Are They and How Do They Work?

Arbitrage funds are hybrid equity-oriented funds that simultaneously buy and sell assets from different markets to book profit. Meaning, these funds take advantage of the difference in stock price in two different markets. 

These funds are ideal for investors looking for safer avenues to invest in during volatile markets. Read along to find more. 

How Do Arbitrage Funds Work?

Arbitrage funds buy assets from one market at a certain price and sell the same assets at a different market at a higher price. Both ‘Buy’ and ‘Sell’ transactions take place on the same day. 

As per SEBI guidelines, these funds invest at least 65% of total assets into equity and equity-related instruments. 

Let’s take an example:

A stock of an XYZ company is trading at INR 500/unit on the Bombay Stock Exchange. 

The same stock is trading at INR 515/unit on the Bangalore Stock Exchange. 

There’s an opportunity to earn INR 15/unit profit without any risk. Fund houses will buy the units from the Bombay Stock Exchange and sell them at the Bangalore Stock Exchange. 

Arbitrage funds may also operate within the Spot Market and Futures Market. 

Let’s say a stock of an ABC company is trading at INR 1000/unit at the Spot market. Fund houses will buy these stocks and the transaction will settle on the ‘Spot’.

The same stock has a value of INR 1020/unit in the Futures market. Fund houses will lock the ‘Sell’ for that price on the same day, which will settle at a future date (a month later.)

After locking the profit, the stock price in both markets has no impact on the returns. In both scenarios, investors will earn the profit they have locked in the beginning. Therefore, these funds are immune to market volatility. 

Factors to Consider Before Investing in Arbitrage Funds

1. Risk vs Returns

Arbitrage funds carry comparatively lower risk than other equity funds. Since the profit will be locked, market volatility would be of no concern. 

In fact, these funds may deliver superior returns during a volatile market. There is a chance that the future price of the asset to be significantly higher during a volatile market. Investors may lock in more profit when the asset prices are aggressively updating. 

However, when markets are flat, the asset price difference might be negligible. The fund may deliver lower returns.

2. Investment Horizon

Arbitrage funds are ideal for 6 months to 2 years of investment horizon. The arbitrage opportunities can deliver superior returns in 6 or more months.

If you want to park a lumpsum amount for a while at a comparatively safer avenue, go with these funds.

Additionally, staying invested for more than 12 months will also be tax-efficient. Plan your investment horizon accordingly.  

3. Fund Manager Strategy

Fund managers are always on the lookout for arbitrage opportunities. They strategically pick up underlying assets to ensure profit. Additionally, the fund also maintains a small allocation in debt/fixed-income securities to balance the returns. 

Arbitrage opportunities may not be abundant. A fund manager’s strategy makes all the difference in the returns of these funds. 

4. Expense Ratio

The expense ratio is a certain fee you have to pay to the fund house for managing your investments. As Arbitrage funds execute trade transactions every day, the expense ratio is often high. You may also be liable for a higher exit load if you redeem your investment between 30 to 60 days. 

Tax Implications on Arbitrage Funds

Arbitrage Funds follow equity taxation rules based on investment duration. 

You will have to pay a 20% tax on Short-term Capital Gains (Investments redeemed within 12 months.)

Long-term Capital Gains (Investments redeemed after 12 months) are taxed at 12.5% above 1.25 lakhs.

Who Should Invest in Arbitrage Funds?

Arbitrage funds are ideal for investors wanting superior returns than debt funds, but at the same time lower risk compared to equity funds. 

Investors with higher tax brackets can benefit from better post-tax returns.

For aggressive investors, these funds can bring stability during volatile markets. While you are exploring high-risk equity funds, Arbitrage funds can be your safety net.

It is always advisable to take the opinion of your financial planner before investing in any funds. 

Conclusion

Ever since debt funds taxation changed, the demand for Arbitrage funds has increased.  

These funds can hold your portfolio together during market volatility. Investors with a low-risk appetite can invest in this category. However, note that the returns on these funds may not be as superior as other equity funds. 

If you find these funds appealing, financial advisors at VNN Wealth can help you analyze your portfolio. Give us a call to know if these funds fit your risk profile and financial goals.

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Blogs Personal Finance

SWP vs IDCW: Which Plan is Better for Regular Income From Mutual Funds?

Mutual funds are the best way of building wealth and earning a fixed income from it. Be it a lump sum investment or SIP, mutual funds will deliver superior returns in the long term. 

And once you have enough wealth built, you can start earning income from your mutual funds.

There are two ways of earning a fixed income from your investments:

  • Systematic Withdrawal Plan (SWP)
  • Income Distribution Cum Capital Withdrawal Plan (Previously known as Dividend Plan.)

Let’s compare both in detail.

How Does a Systematic Withdrawal Plan Work?

A Systematic Withdrawal Plan (SWP) is an automated way of withdrawing a fixed amount from your mutual funds at regular intervals. Investors can define the amount and frequency at which they want to earn income. 

To put it simply, SWP is the opposite of a Systematic Investment Plan (SIP). In SIP, a predefined amount goes from your savings account to a mutual fund of your choice. SWP plan sells units of your mutual funds and transfers the amount to your bank account. 

Pro Tip- SWP is more effective when you give time to your fund to grow and benefit from the power of compounding. Stay invested for a longer duration. Once you have enough wealth built, you can start a SWP. It is one of the most tax-efficient ways to generate a consistent inflow, especially post-retirement. 

How Does The Income Distribution Cum Capital Withdrawal Plan Work?

In the IDCW (Dividend) plan, investors periodically receive a profit made by the fund. The mutual fund dividend plan works differently than the stock dividend.

In the case of mutual funds, the unit price increases with capital appreciation, interest earned on bonds, and dividends. Therefore, the income received is not like the dividend from a stock but your own profit.

Example:

The unit price (NAV) of a mutual fund is INR 100. After capital appreciation, bond interest, and dividends, the price goes up to INR 120. 

Now, if the mutual fund declares a dividend of INR 10 per unit, you will receive the amount (INR. 10 x No. of units) in your account but the NAV will go down to 110. 

Let’s say you have purchased 1000 units of a mutual fund with an NAV of 100/unit. You will end up investing INR 1,00,000 in an IDCW mutual fund.
 

Total Amount Invested

1,00,000

Unit Price

100

Units Assigned

1000

Updated Unit price after capital appreciation, bond interest, and dividends

120

Total Amount in a Fund

1,20,000

Dividend Declared

10 per unit

Dividend Amount Received (Dividend x Number of units)

10 x 1000 = 10000

Updated NAV after Dividend Payout (Previous NAV – Dividend)

120-10= 110

Remaining Invested Amount in a Fund (Updated NAV x Number of Units)

110 x 1000 =  1,10,000

The income investors earn from the IDCW plan is pulled out of the profit from their own investments. 

In the case of stocks, investors receive the dividend as an additional payout over and above the appreciated capital. Therefore, neither the principal amount nor the earned profit is reduced after dividend payouts. 

But with IDCW mutual funds, the appreciated amount goes down after the payout. This created confusion among investors. Therefore, SEBI renamed the Mutual fund dividend plan to Income Distribution Cum Capital Withdrawal Plan for clarity. 

In the IDCW plan, investors do not get to choose the amount or frequency of the payout. Therefore, it’s a less flexible plan compared to SWP.

A quick overview of SWP vs IDCW 👇

SWP vs IDCW Plan: Top 3 Differences

1. Flexibility of Choosing the Fixed Income

A systematic Withdrawal Plan allows investors to select the payout amount, frequency, and date. IDCW, on the other hand, depends on mutual fund performance and the fund house’s decisions. 

Let’s say you start an SIP of 20000 at 12% p.a.

You will accumulate:

  • 26,39,580 in 7 years.
  • 46,46,782 in 10 years.
  • 1,00,91,520 in 15 years.
  • 1,99,82,958 in 20 years

The SIP amount and horizon depend on your financial goals. 

Now, after 20 years you can comfortably withdraw 1L/month as a regular income for the next 20 years via SWP.

The remaining amount will keep compounding.

It is clear that SWP offers more flexibility compared to a dividend plan. It also helps you plan a source of income ahead of time. 

2. Surety of Receiving the Income

Receiving a payment via the IDCW plan depends on decisions made by the fund houses. The frequency and amount may change as per the fund’s performance. 

SWP, on the other hand, offers surety of payouts. You have full control over when you want to start SWP, for what amount, and how often.

You will receive the income irrespective of market conditions. 

3. SWP vs IDCW: Tax Implications

One of the important factors to consider before choosing an income plan is the applicable tax. 

Dividends are a form of income, therefore, will be taxed as per your tax slab. So, if you fall under higher tax brackets, a dividend plan may not be ideal for you.

Systematic Withdrawals are a form of mutual fund redemptions. Taxation on mutual fund redemption depends on the holding period.

  • If you start SWP within 12 months of your investment, you will attract a 20% Short-Term Capital Gain tax on your withdrawals. 
  • Holding your investment for more than 12 months will attract a 12.5% Long-Term capital gain tax on withdrawals above 1.25 Lakhs in a financial year.

Therefore, SWP becomes a more tax-efficient fixed-income avenue than a dividend plan. 

Note- It is always better to hold your mutual fund investments for a longer duration. Not only is it tax efficient, but also helps you accumulate larger wealth by the power of compounding. 

Which Fixed Income Option Should You Choose Between the Two?

Investors who do not rely on income from mutual funds but wouldn’t mind a periodic payout often go for the IDCW plan. It is not their primary mode of generating regular income. 

IDCW plan does not wait for the principal amount to grow by compounding. Therefore, many investors prefer the growth plan. 

SWP is suitable for investors looking to generate regular income on their own terms. It offers more flexibility and tax-efficient withdrawals. It is advisable to let your money grow for years and then start the SWP. 

Choosing a suitable plan entirely depends upon your financial goals and preferences. 

Final Thoughts on SWP vs IDCW

To answer the primary questions- SWP vs IDCW (Dividend): Which one is better for regular income from mutual funds?

SWP is the clear winner because it gives you the freedom to choose the amount and frequency. The income withdrawn via SWP is more tax-efficient than the dividend income. Investors wanting to earn a salary even after retirement should go for SWP. 

It is wise to have clear financial goals to select the right plan. If you have any further queries, feel free to reach out to us. Experts from VNN Wealth would be happy to help you shape your investment portfolio. 

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Blogs Mutual Funds

Overnight Funds: Advantages and Who Should Invest?

Overnight funds are debt funds that invest in securities maturing in a day. These funds were introduced in 2018 after SEBI reclassified mutual funds.

These open-ended funds are safe, highly liquid, and can be an alternative to your current account.

Overnight funds invest the majority of the assets in:

  • Collateralized Borrowing and Lending Obligation (CBLOs)
  • Reverse Repos
  • Debt instruments with a maturity of one day.

Before we understand who should invest in these funds, let’s explore the benefits.

4 Benefits of Investing in Overnight Funds

1. High Liquidity

As the name suggests, these funds have a maturity of a day. Investment and redemption can take place within trading hours. You can park an idle lump sum amount in these funds instead of keeping it in your current account.

2. Low Risk

The underlying assets in these funds keep maturing every day. Since the interest rate will not change in a day, the risk is negligible.

Additionally, the chances of default for an asset maturing in a day are close to zero. Therefore, these funds are safe to invest in. 

3. Low Cost

Most debt securities charge exit load unless you hold your investment for a longer horizon. Even liquid funds expect you to hold your investment for at least 7 days to avoid exit load.

Overnight funds, on the other hand, do not charge any exit load. You can withdraw funds the next day. 

Moreover, these funds tend to have a low expense ratio of less than 0.5%. 

4. Flexible Investment Horizon

You can keep your money in overnight funds for as long as you want. While being able to redeem in a day is a great advantage, you can keep it longer as an emergency fund.

The redemption process is quick. Therefore, investors have the luxury of a flexible investment horizon. 

3 Things to Consider Before Investing in Overnight Funds

1. Risk vs Returns

Overnight funds are the safest debt funds to invest in. The possibility of default risk is close to zero.

However, investors have to compromise on returns in exchange for low risk. Overnight funds may not deliver superior returns. These funds are an alternative to your current or savings account.

2. Financial Goals

Overnight funds may not be an avenue to boost your portfolio returns. These funds make parking a surplus amount comfortable due to high liquidity.

Take your financial goals into account while investing. Don’t expect high returns. Rely on these funds for security and quick redemption.

3. Tax Implications

Since April 2023, tax implications on debt funds have changed.

Both Long-term Capital Gains (Investment redeemed after 36 months) and Short-term Capital Gains (Investment Redeemed before 36 months) will be taxed as per the investor’s tax slab.

The indexation benefit is only applicable to hybrid funds with at least 35% equity exposure. 

Explore Mutual Funds taxation rules here. 

Who Should Invest in Overnight Funds?

Overnight funds are suitable for investors looking to park surplus money overnight with no risk and high liquidity.

Ideally, these funds align more with the financial requirements of mid to large-size organizations than retail investors. Companies can park a large lump-sum amount overnight before reutilizing it. 

Retail investors can explore other debt funds before making a decision. Make sure the fund objectives align with your financial goals. 

Conclusion

Overnight funds offer several benefits such as daily maturity, low risk, low cost, and quick redemption. 

However, it is essential to note that high liquidity and safety come with comparatively lower returns. Corporations can benefit from these funds. Retail investors can use these funds as an alternative to a savings or current account.

We recommend analyzing your portfolio with your financial planner before making a decision. If you don’t have a financial advisor, VNN Wealth is just a call away.

Explore personal finance insights. 

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Blogs Personal Finance

7 Ways to Talk To Kids About Money Management

Have you started talking to your kids about money? Here’s why you should teach your children about personal finances at an early age. 

Kids are way smarter than you anticipate. In fact, children grasp knowledge faster than adults. Their shaping years are the perfect opportunity to teach them about money management. 

School curriculum may not have finance lessons, but you can take the initiative.

Today’s small money talks are going to help them in the long run. So let’s explore simple steps to teach your kids about money.

How to Teach Your Child The Value of Money Management?

1. Teach Your Child How Money Works

Introducing your child to the currency can be your first step. 

You can try a simple fun activity. Ask your child to separate the coins and notes of up to Rs. 50 to begin with. 

Kids learn basic additions/subtractions very early in their school curriculum. You can ask the child to add the total money. 

That way, your child will understand how to use the money they have.

2. Take Your Kids to The Market with You

Take your child with you for groceries and vegetable shopping. That would be the right place to show your kids how to buy things with money.

Children love it when you ask for their opinions. Maybe, you can make them select a vegetable or a fruit of their choice. Encourage them to talk to the shopkeepers about prices.

Your regular mode of payment could be credit cards or UPI. But, for the sake of your child’s understanding, you can pay with cash.

That way, your child will understand how to pay and get the change back from the shopkeeper. 

This fun supermarket activity can teach your child the real-world usage of money.

3. Give Your Kids a Piggy Bank to Save Money

Money saving is crucial learning that’ll stay with your child forever. 

These days, various banks offer special banking for children to learn the whole experience. Parents can take responsibility for the bank account and set transaction limits. 

But you can start with a piggy bank.

The remaining change from the shopping you did together can go in the child’s piggy bank. Make your child understand the importance of saving money.

You can also set a milestone. For example, if your child is asking for a new toy, make them save for it. That way, they’ll value the money and the new toy. The delayed gratification will give them much more joy. 

4. Don’t Impulse Purchase Toys, Gadgets, or Accessories for Your Children

Kids replicate their parents’ behavior in every possible scenario. It won’t set a good impression if you fulfill their demands every time.

As much as you want your child to have every happiness in the world, you’ll have to be reasonable. 

Not just toys, anything that you buy will attract your child’s attention. It is crucial to make them understand the importance of wants vs needs. 

5. Teach Your Kids How to Effectively Manage Their Allowance

You are giving your child an allowance for their day-to-day needs. Instead of deciding the amount yourself, sit with your child to make a budget.

Together, you can write down what they might need to buy in a month. Create a list and set the appropriate budget.

That way, your child will know how to manage their allowance. The budget list will give them a clear idea of how to carefully spend the money.

6. Plan for Your Children’s School/College Fees

The concept of teenagers earning some money in summer vacations isn’t common in India. That decision depends upon you and your child. 

If your teenager wants to earn some money to save for college, that can be a good idea. Otherwise, you can sit with your child to discuss school/college fees. 

Making them aware of the education cost is important. If your child wants to contribute, you can help them figure out safe and simple ways to earn money.

Note: This subject can be tricky to handle. Kids might spend the money they earn carelessly. On the other hand, it can also teach them the importance of hard-earned money. So you may want to proceed with caution. 

7. Gradually Expand Your Children’s Financial Knowledge

Accompany your children in their financial journey. From teaching them to save money to helping them kickstart their investment portfolio when they grow up. 

Academics may not teach your child real-world finances. So you and your child together can navigate the world of finances by researching or talking to experts.

Talk about finances in your family. Make everyone involved and take everyone’s opinion into consideration.

You can consider hiring a financial advisor for your family who can help you set goals. 

Final Words

When was the first time you started learning about money management? Maybe your relative gave you some money to buy ice cream. Or your grandparents gave you coins to put in your piggy bank.

The small things you do with your money early in your life can set the base. That’s why it is important to talk to kids about money management. 

It’s never too early or too late. You can begin today, even if your child is 18+. 

Gaining financial knowledge and having financial goals define your lifestyle. And you can be your child’s finance friend. 

If you want more guidance on personal finance and investments, give VNN Wealth a call. Our advisors would be happy to help you.

Read More Insights on Personal Finance.

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Blogs Mutual Funds

Value Funds Investment Strategy: Who Should Invest

Value funds are open-ended equity funds that invest in undervalued shares. Meaning, these shares are worth more than their current value and may grow significantly over the years. The reason behind the lower value could be the financial situation, changes in the business model, funding of large in-house projects, or market competition. These factors temporarily affect the value of the company, which gets restored eventually.

So, the underlying shares will be of organizations that have high reputations and established businesses. Read along to find out who should invest in value funds.

How do Value Funds Work?

As per SEBI guidelines, fund managers must invest at least 65% of total assets in undervalued(equity) shares. Fund managers analyze the company’s growth plan before including the stock in the fund portfolio.

For example, ICICI Prudential Value Discovery Direct Growth has invested in shares of companies like Infosys, Reliance Industries, Bharti Airtel, Axis Bank, HDFC Bank, SBI to name a few.

Advantages of Investing in Value Funds

1. Significant Capital Gains

You purchase the stocks of companies at a discounted price with Value funds. Sooner or later, these companies will reach their true potential and beyond. The shares that are undervalued today will grow significantly over the years. You have to wait for the value to restore by staying invested for the long term.

2. Lower Risk

Fund managers strategically bring undervalued stocks into the scheme. You enter the fund when the underlying stocks are underperforming. But, these organizations have a good reputation and great track record. Therefore, the market conditions have a lower impact on these funds. 

3. Lower Volatility Concern

Equity funds can fluctuate frequently over a short duration. However, any equity fund is less volatile when you hold your investment for more than 5 years or so. In the case of value funds, there’s more possibility of value increment over a longer horizon. Holding your investment for at least 5 years can balance the risk of volatility.

Things to Consider Before Investing in Value Funds

1. Investment Horizon

You may have to hold your investment longer than any other equity funds. 4 to 5 years are ideal to beat volatility. However, it may take longer than that to reach the desired value. Be prepared to lock your money for 5+ years to benefit from significant growth. 

2. Underlying Assets

The value investment strategy may have large-cap companies or small/mid-cap companies for diversification. The allocation across the market cap will impact the overall risk of the fund. You may want to consider exploring underlying assets to ensure that the fund objective aligns with your portfolio.

3. Fund Performance

Evaluate the performance of the funds over a longer duration during various market cycles. That’ll give you an idea of the fund manager’s value investment strategy and capability to deliver returns. 

4. Expense Ratio

Fund houses charge investors a fee in the form of an expense ratio to manage funds. As per SEBI regulations, the expense ratio ranges from 0.8% to 2.25% depending on the assets under management of the fund. You may want to be aware of this fee beforehand to calculate the expected returns. 

Taxation on Value Funds

Value funds are equity mutual funds, therefore, follow equity taxation.

Investors have to pay a 20% tax on Short-Term Capital Gains(investments redeemed before 12 months).

Long-Term Capital Gains (investments redeemed after 12 months) will be taxed at 12.5% above 1.25 lakhs.

To lower tax liability, hold your investment for a longer duration. 

Who Should Invest in Value Funds?

Patience is the key while investing in Value funds. You may have to wait for years to gain significant wealth. Investors who are comfortable with a longer horizon, preferably more than 5 years, can invest in value funds. Invest your money and wait for it to steadily grow. 

Investors with moderate to high-risk appetites can take a bet on value funds to explore the potential of the scheme.

Conclusion

Technically speaking, value funds invest in companies having value. Value funds are less vulnerable to market volatility, offering downside protection. Therefore, these funds can significantly contribute to your wealth-building journey. You can start an SIP with a growth value fund for a longer horizon. But before that, talk to your financial advisor.

Make an informed decision with VNN Wealth. Get in touch with us anytime and plan your investments with us. 

Explore other mutual fund categories.

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Thematic Mutual Funds: How They Work and Who Should Invest?

Thematic Mutual Funds are equity funds investing in companies connected to a specific theme. 

For example, rural consumption thematic funds will invest in companies that are likely to contribute to the growth of rural consumption in India. For example, FMCG companies, Retail, Telecom, infrastructure, consumer staples, automobiles, cement, etc. 

These funds allow investors to explore and include a specific theme in their portfolio. Interested in knowing more? Read along.

How Do Thematic Mutual Funds Work?

Thematic Funds are open-ended equity funds following a certain theme, an idea. Infrastructure Thematic Funds will invest in shares of cement, steel, power plant, etc.

According to SEBI, these funds must invest at least 80% of total assets into equities of the determined theme. The underlying assets in these funds are researched and strategically placed by the fund manager. 

How are Thematic Funds Different than Sectoral Funds?

As the name suggests, sectoral funds invest in a specific sector. For example, pharmaceutical sectoral funds will only invest in pharma companies. Thematic funds, on the other hand, diversify your assets among various companies tied to a single idea. These companies may belong to different sectors. 

Advantages of Investing in Thematic Mutual Funds

1. Exposure to a Specific Theme

Thematic funds allow investors to invest money in a particular trend or rising theme. For example, India is now embracing the advancement in healthcare. Therefore, companies directly or indirectly contributing to healthcare progress, such as pharmaceutical, biotech, and medical device manufacturing companies can come under healthcare thematic funds. Investing in funds that distribute your assets to a growing trend can create a huge impact over the years. It’s a unique, non-traditional investment strategy based on the economic growth of a certain theme.

2. Diversified Scheme Compared to Sectoral Funds

Thematic funds bring together various industries that other funds may not. For example, Large Cap funds will majorly invest in large-cap companies. Sectoral funds will only invest in a specific sector. Thematic funds invest in companies belonging to any sector and market cap. The only requirement is, these companies must be contributing to the growth of the theme. Therefore, these funds can bring diversity to your portfolio. 

3. Expert Fund Management

Fund managers put their skills, knowledge, and research together to create a thematic scheme. Investors wanting to invest in a specific idea won’t have to pick individual stocks. An expert will distribute your assets among shares of the right organizations. 

4. Possibility of Beating the Benchmark

Fund managers take economic growth, upcoming advancements, and various other factors to create a scheme. A right strategy backed by thorough research may generate benchmark-beating returns. 

Things to Consider Before Investing in Thematic Mutual Funds

1. Financial Goals and Investment Horizon

It takes a significant amount of time for any industry or theme to reach the highest mark. Therefore, thematic funds may take longer to bring the desired outcomes. You may have to stay invested for 5 or more years to benefit from that peak. We advise you to ensure your financial goals and investment horizon align with the scheme. Otherwise, you can consider investing in other mutual fund categories. 

2. Associated Risk

Thematic funds can be risky. The underlying theme, though trendy, may go through plenty of ups and downs. You may want to consider your risk appetite before investing. Evaluate your existing portfolio with your financial advisor before investing.

If you don’t have a financial advisor, give experts at VNN Wealth a call. We’ll walk you through the realistic possibilities of thematic or any other funds. 

3. Semi-Diversified Scheme Compared to Other Mutual Funds Categories

Thematic funds offer better diversity compared to sectoral funds. However, other categories such as Large-Cap or Flexi-Cap offer better diversity. The underlying assets in other equity funds balance each other. Whereas, in thematic funds, if a theme underperforms, the underlying companies may drop value all at once. Therefore, these funds are semi-diverse and the reward depends on the performance of the theme.

4. Expense Ratio

To get expert fund management, fund houses charge you a small fee in the form of an expense ratio. As per SEBI, the ratio ranges from 0.85% to 2.25% of the total managed assets. You can find the expense ratio associated with the fund in the factsheet. Make sure you are aware of the expense ratio to avoid confusion about your actual returns. 

Taxation on Thematic Mutual Funds

Thematic Mutual Funds follow equity taxation based on the holding period. Short-Term Capital Gains(Investments redeemed before 12 months) will attract a 20% tax. Long-Term Capital Gains(Investment redeemed after 12 months) above 1.25 lakhs will be taxed at 12.5%

Who Should Invest in Thematic Funds?

Thematic funds are suitable for investors with high-risk appetites and longer investment horizons. These funds can be risky, hence aren’t ideal for new investors. Though fund managers will take care of funds, investors must also be well-informed about the growing industries. These funds may go through aggressive volatility before reaching the peak. Investors who panic-sell funds may want to consider another scheme.

Conclusion

Thematic funds can deliver superior rewards with higher risk. Holding your investment for a longer horizon can help generate additional alpha on your portfolio using thematic funds. As mentioned above, these funds are suitable for evolved and experienced investors. Beginners can consider investing in other(slightly safer) equity funds before exploring thematic funds. 

Reach out to know more about equity or debt mutual funds. Make an informed investment decision with us.

Also Read-

Sectoral Funds

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Corporate Bond Funds: Features, Advantages, Taxation & More

Corporate bond funds are the type of debt funds that invest in bonds issued by companies. 

These funds can be of two types. 

  • Funds investing in bonds with the highest possible credit rating, so the default risk is negligible. 
  • Funds investing in bonds with a slightly lower credit rating that may deliver superior returns. 

Ideal for 1 to 4 years of investment horizon, here’s everything you need to know about corporate bond funds.

How do Corporate Bond Funds Work?

Any organization requires funds for smooth business operations. They can either take bank loans or offer equity instruments. 

However, there are several reasons a company would prefer issuing bonds such as exhausted bank limits, banks not funding a sector, or banks slowing down disbursement to name a few. Also, the company may not be ready for equity dilution. 

So instead, companies issue bonds to generate funds for business operations. 

Corporate bond funds open a gateway for investors to explore these debt instruments.

As per SEBI regulations, these funds need to invest at least 80% of the total assets into corporate bonds with an AA+ and above credit rating. The remaining 20% can be allocated to other debt instruments of varying credit ratings, which may or may not be AA+. Fund managers strategically invest the remaining 20% to benefit from the interest rate cycle. 

Underlying bonds can be of variable maturity periods. You may expect between 1 to 4 years of investment horizon with these funds. 

Benefits of Investing in Corporate Bond Funds

1. Superior Returns 

Corporate bonds carry higher credit risk compared to government bonds but at the same time, offer higher coupon rates to match the additional risk.

So if you are seeking higher returns than government bond funds or fixed deposits, and have the required risk appetite, you can invest in corporate bond funds. 

2. Safe to Invest in

Corporate bond funds invest 80% of the total assets in AA+ rated bonds.

The highest bond rating indicates that the company will not default on your investment. 

3. Portfolio Diversification

Corporate bond funds can be ideal for portfolio diversification. 

Equity funds may deliver superior returns than debt funds, but they are quite volatile. Debt funds, being comparatively less volatile, balance the risk and rewards. 

Things to Consider Before Investing in Corporate Bond Funds

1. Allocation

As mentioned above, these funds have two types of allocation strategies. Funds with AA+ rated bonds would be safer than funds having bonds with lower credit ratings.

If you have a low to moderate risk appetite, go with funds that invest in AA+ rated bonds. Else, you can explore lower-credit rating bond funds as they may deliver superior returns. 

Be sure to check the allocation before investing in corporate bond funds. 

2. Risk Factor

With the highest-rated bond funds, the credit risk would be lower but returns may also be lower. On the other hand, slightly low-rated bonds might be risky but may deliver better returns.  

The interest rate risk can also affect the overall returns. The bond prices are inversely proportional to the interest rate. When the interest rate rises, the bond prices fall, and vice versa. 

You can lower the interest rate risk by holding your investment until maturity. 

3. Investment Horizon

Corporate bond funds are best suited for 1 to 4 years of the investment horizon. Invest only if the tenure matches your portfolio and your investment goals.

4. Underlying Assets

In these funds, 80% of the total assets would be high-rated corporate bonds. However, fund managers may invest the remaining 20% in slightly low-rated bonds. 

The overall risk of the fund changes with the remaining 20% allocation.

5. Fund Manager’s Track Record

A fund manager’s strategy plays a vital role in managing debt funds. Their analysis and decisions will reflect upon your portfolio. Hence, it is essential to check the track record of the asset management company and the fund managers. 

Tax Implications

The tax rules on debt funds have been updated since April 2023.

Both Long Term Capital Gains (Investment redeemed after 36 months) and Short Term Capital Gains (Investment redeemed before 36 months) will be taxed as per the investor’s tax slab.

The indexation benefit on long-term capital gains is only applicable for hybrid funds with more than 35% and less than 65% exposure to equity. 

Find out tax rules across all mutual fund categories.

Who Should Invest in Corporate Bond Funds?

Corporate bond funds are suitable for investors with 1 to 4 years of investment horizon. 

These funds can be an alternative investment avenue to fixed deposits. With slightly higher risk, investors can benefit from superior rewards.

If you are an aggressive investor, you can consider investing in low-rated bond funds. These funds may offer higher returns, but the risk of default increases. We recommend talking to a professional financial advisor before investing in these funds.

Final Thoughts

Corporate bond funds are ideal for investors looking to park their money for 1-4 years. 

Invest in high-rated bond funds to avoid default risk, unless you are an aggressive investor. In that case, you can explore low-rated bond funds provided it aligns with your risk appetite. 

Holding your investment till maturity can lower the interest rate risk as well. 

If you have any further queries, get in touch with VNN Wealth advisors. You can get your portfolio reviewed and plan your next investment strategy. 

Categories
Blogs Mutual Funds

Sectoral Funds: Features, Benefits, Taxation, & More

Sectoral funds are equity funds that invest in companies in the same sector or industry. The sectors can be banking, pharmaceuticals, information technology, etc. These funds can potentially deliver benchmark-beating returns in a rising market scenario (bull phase). 

However, the associated risk can be high when the sector is going through ups and downs. 

Let’s understand further who should invest in sectoral funds.

How Do Sectoral Funds Work?

As per SEBI guidelines, these funds must invest at least 80% of total assets in the given sector. For example, an IT sectoral fund will invest the majority of the assets in IT companies.

Fund managers distribute the assets in large-cap, mid-cap, and small-cap companies in the specific sector. These companies are selected upon the fund manager’s strategy, analysis, and the trend in the market.

How are Sectoral Funds Different Than Thematic Funds?

Sectoral funds invest only in a specific sector. Whereas thematic funds invest in a theme that ties various sectors together. 

For example, an infrastructure thematic fund may invest in cement, steel, and construction firms. A sectoral fund sticks to the defined sector. 

Benefits of Investing in Sectoral Funds

1. Exposure to a Specific Sector

Sectoral funds allow investors to tap a specific industry that may perform well in coming years. Instead of investing in individual stocks of the sector, investors can park their money in these funds.

Fund managers take care of the allocation depending on the sector’s performance against the benchmark. 

2. Potential of Superior Returns

Sectoral funds invest in equity instruments of the same industry across market capitalization. There’s a good chance the sector may outperform and deliver superior returns. 

With thorough research and analysis, the underlying assets may beat the benchmark. Therefore, investors can earn superior returns when the sector is performing well.

3. Portfolio Diversification

The only diversification sectoral funds offer is the allocation across market capitalization. However, you can introduce diversification to your overall portfolio by introducing a new emerging sector. You can take advice from your financial advisor to choose the sector that aligns with your portfolio. 

Factors to Consider Before Investing in Sectoral Funds

1. Your Risk Appetite

Sectoral funds can be risky at times. You can earn higher returns if the sector grows. However, if the sector underperforms, all the underlying companies may drop values. 

As the diversification within funds is limited, these funds can be more volatile than other schemes. So you may want to consider your risk appetite before investing in sectoral funds. 

2. Investment Horizon

Equity funds expect you to stay invested for a longer horizon to beat the volatility. A sector also takes time to grow and achieve the desired outcomes.

Therefore, you may have to consider staying invested for a longer duration. Make sure the expected horizon of the sectoral funds is suitable for your portfolio. Otherwise, you can always explore other equity schemes. 

3. The Growth of The Sector

Make an informed decision by researching what’s expected from the sector. Select a sector that truly has the potential to grow in the coming years.

That way, you will be aware of the timeline the funds take to reach the returns you are looking for. However, please note that markets can be uncertain. A few ups and downs along the way are inevitable. 

4. Performance of The Fund Manager

Checking the past performance of the sectoral fund would be of no use. The sector is most likely to perform differently in each economic cycle.

Instead, check the performance of the fund managers. How many times have their analysis delivered superior returns over the years? That’ll give you an idea of the expertise of the fund manager.

5. Expense Ratio

The expense ratio is the small fee that mutual fund houses charge you for managing your assets. As per SEBI, the fee can be between 0.85% to 2.25% of the total assets under management. Make sure you read the factsheet of the fund to understand the expense ratio structure for the fund. 

Tax Implications on Sectoral Funds

Sectoral funds follow equity taxation rules based on the investment horizon. 

Investors have to pay a 20% tax on Short-Term Capital Gains (Investments redeemed before 12 months)

Long-Term Capital Gains (investments redeemed after 12 months) above 1.25 lakhs are taxable at 12.5%.

Who Should Invest in Sectoral Funds?

Sectoral funds are suitable for investors with high-risk appetites and longer investment horizons to beat volatility. Similar to thematic funds, these funds are not ideal for new investors.

Investors who can handle high volatility without panic-selling funds can go for it. However, it is important to make an informed decision.

Make sure you are aware of the sector’s growth potential and fund manager’s history before investing.

Conclusion

Equity mutual funds offer a wide spectrum of investment options. Sectoral funds are one such avenue that allow investors to explore a growing industry. Though the risk can be high, the reward can also skyrocket when the sector expands over the years. 

So if you want to distribute some of your assets to a high-risk-rewards scheme, go for sectoral funds.

Advisors at VNN Wealth can help you choose the right funds as per your risk appetite. Get your portfolio reviewed and sketch an investment strategy to fulfill your financial goals.

Categories
Blogs Mutual Funds

Large and Mid Cap Funds: Stability and Growth

Want the stability of Large-Cap funds and superior returns of Mid Cap funds in a single scheme? The Large and Mid Cap Funds can be your next investment avenue. 

In 2017, SEBI launched this new category to offer Stability and Growth to investors exploring equity funds. Instead of separately investing in large and mid cap funds, you can just select a fund that has exposure to both categories. 

Read along to know more.

How Large and Mid Cap Funds Work?

Large Cap Funds primarily invest in the top 100 companies on market capitalization. And Mid Cap Funds invest in companies ranked from 101 to 250 on market capitalization. Therefore, these funds invest across the first 250 companies from various sectors on the market capitalization. 

As per SEBI regulations, fund houses must invest at least 35% each in large cap and mid cap companies. The remaining 30% can be distributed among equity, cash, or debt depending on the fund manager’s strategy, 

Why Invest in Large and Mid Cap Funds?

1. Growth and Stability 

Large Cap companies are thriving organizations with comparatively low volatility, hence lower risk. These companies generate significant returns over a long duration. Mid Cap funds, on the other hand, can be slightly volatile. However, there’s a good chance these funds will deliver superior returns compared to pure large cap funds. 

2. Portfolio Diversification

A single scheme can give you exposure to large and mid cap companies. Depending on the Fund manager’s strategy, you may also get exposure to Small Cap or Debt securities. Distributing your assets across various categories of equity and debt can encourage superior returns with lower risk. 

3. Ideal For Long Term Investments

These funds can be ideal for children’s higher education, planning a wedding, or buying a house in the next few years. Equity funds perform well over a longer horizon, more than 4 to 5 years.

You can rely on Debt Funds for short-term financial goals. And park your money in these funds to fulfill long-term financial goals.

Things to Consider Before Investing

1. Your Risk Appetite

These funds are less riskier than pure mid cap or small cap funds. Investors wanting to explore equity funds with lower risk can go with these funds. If you are an aggressive investor willing to take more risk, you can consider pure mid cap or small cap funds. However, we recommend discussing this with your financial advisor before taking a call. 

2. Investment Horizon

Align your investment horizon and financial goals with the scheme that you choose. Equity funds are volatile in short-horizon. Holding these funds for more than 5 years can lower the risk and generate a handsome outcome.

3. Fund Performance

Check the rolling returns of the funds to evaluate the performance. You can compare the performance of the funds from the same category with the benchmark. That’ll give you an idea of the kind of returns the fund has generated over the years. Remember, evaluating past performance isn’t the only criteria to choose the fund. 

4. Expense Ratio

Fund managers manage your investment by distributing it across stocks of various companies. To actively manage your funds, fund houses charge you a fee in the form of an expense ratio. Active funds have a slightly higher expense ratio than passive ones. You can compare the expense ratio of funds from similar categories before investing. 

Tax Implications

The taxation on these funds is the same as any other equity mutual fund.

You have to pay a 20% tax on Short Term Capital Gains (Investments held for less than a year).

Long-term Capital Gains(investments held for more than a year) above 1.25 Lakhs are taxed at 12.5%.

Who Should Invest in These Funds?

These funds are riskier compared to pure Large Cap, but less risky than pure Mid Cap or Small Cap funds. Investors with low to moderate risk appetite and longer investment horizons can invest in these funds. 

These funds are also suitable for diversifying the portfolio across market capitalization. Investors wanting to invest in Mid Cap with lower risk can rely on the stability of Large Cap exposure. 

To align your risk appetite with the fund, you may want to consider the asset allocation. After investing 35% each in large and mid cap, fund managers may invest a small chunk in small cap or increase the exposure to mid-cap. This can change the overall risk of the fund.

To Sum Up

Large and Mid Cap Funds distribute your asset across companies ranking from 1 to 250 on the market capitalization. As these companies belong to various domains, you get an opportunity to diversify your investment. As Large Cap maintains stability, Mid Cap encourages growth. If your risk appetite doesn’t align with pure Mid Cap or Small Cap, these funds can be your entryway. 

Got more queries regarding equity funds? Get in touch with our experts.

Categories
Blogs Personal Finance

7 Things to Discuss With Your Financial Advisor

Financial freedom isn’t far when you have an expert handling your investments. A Financial Advisor can speed up your journey to achieve your dreams faster. 

In the era of Robo-Advisory, the majority of investors are still seeking advice from financial planners. 

In fact, 53 Lakh demat accounts became inactive between 2022 and 2023. The reason is quite simple. DIY investment apps and FinFluencers aren’t qualified enough to guide you in the right direction. They cannot help you beyond a certain limit. 

Tomorrow when you are stuck, only an experienced advisor can guide you. But that is only possible when you are transparent with them.

Your advisor can provide calculated advice only when they know you better. So here are some things you need to tell your advisor without hesitation. 

Things You Should Tell Your Financial Advisor

1. Your Financial Assets

Your financial advisor would want to know about your financial assets. This includes your investments across various instruments like Mutual funds, FDs, Bank accounts, Gold/Silver, Real estate, and everything else.

Better not to hide anything. Otherwise, your portfolio analysis may show different outcomes. 

Your financial planner will review your portfolio to understand risk tolerance or duplicate investments. This will help them provide a custom investment plan. 

2. Your Liabilities, Debt, and Existing EMIs

Aren’t EMI deductions annoying right after your salary lands in your account? Welcome to adulthood. 

Fortunately, there are multiple ways to ease up EMIs and liabilities. 

Tell the exact numbers to your financial advisor. They’ll outline a sustainable strategy to comfortably transact EMIs, clear debt, and save funds for emergencies. 

3. Major Expenses and Your Financial Goals

A wedding, purchasing a property, or children’s education abroad can be major expenses. You may have to take a loan and figure out the repayment installments.

But, you can invest in various funds/schemes to comfortably handle these expenses. That’s something you may not be able to figure out on your own. 

A financial advisor will align your investment horizon depending on your planned expenses and goals. 

A quick example: If you want to buy a car in the next 6 months, then Ultra Short Duration Debt funds would be helpful. But if you are planning for retirement, then you need a combination of long-term Equity Funds, Debt Funds, and other schemes. 

4. Your Family

It’s understandable to not want to share personal details with anyone. However, your family is a part of you. 

Being able to provide the best life for them is a dream for all. And you can fulfill that dream by aligning your finances accordingly.

Talk about your family and their potential expenses with your advisor. They’ll help you afford the best life for your loved ones.

Don’t forget to include your children’s education, healthcare, and overall lifestyle. They are going to be your successors someday. It is wise to inform about them to your advisor. 

If you have a special child, the advisor will assist you with setting up a trust with specific instructions to take care of them even in your absence.

Knowing everything about your family will ensure a thorough financial plan.

5. You and Your Family’s Health

Hospital bills can put a solid dent in your savings. All your hard work can wash away because of poor healthcare planning.

Don’t worry! You can create a healthcare plan and emergency funds with the help of your financial advisor. For that, you should inform them about existing health conditions. 

Maternity planning can also be discussed with your advisors. Having a child can be expensive. Might as well be financially ready before bringing a new life into the world. 

A well-outlined healthcare plan can save you headaches. 

6. Your Spending Habits

What’s your monthly expense? Where do you spend the most?

Spending habits can make or break your savings. But that doesn’t mean you have to cut down on spending on things you love.

You can spend comfortably by strengthening your financial plan. Discuss your spending habits with your advisor. Have a chat with them about how you can spend without burdening your savings. 

Be open to cutting down some expenses that do not cater to your growth. Your advisor will analyze your spending and guide you with sustainable budget planning. 

7. Ask Questions

Financial Advisors essentially design an investment plan suitable to YOU. They’ll encourage you to ask as many questions as you want.

If they don’t, then there’s a problem. A good financial advisor will always give you their time. They’ll avoid conflict of interest and prioritize your expectations. 

Note down all the concerns you may have. Sit down with your advisor to explore possibilities. 

You may like to read:

What to look for in a financial advisor.

5 reasons to break up with your financial advisor.

How Much Fee Does A Financial Advisor Charge?

Financial Advisors at VNN Wealth DO NOT charge any fees from investors. We make our money from Mutual Fund houses and not from our clients.

Final Thoughts

Would you hide your symptoms from a doctor? No, right? Because that will change the diagnosis. And you won’t get the right treatment. 

Similar is the case with your finances. The more transparency you create with the financial advisor, the better outcomes you’ll receive.

Of course, the first step is to choose the right financial advisor. Look for an advisor with the right knowledge and licenses. Make sure they are focusing on YOUR goals and not their benefits. 

Keep an active communication with your advisors. Ask them to show the results on a regular basis. 

Today is the day you declutter your finances and start building wealth.

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