Credibility of Investing in MFs - Side Pocketing in MFs

 The maturity of Indian capital markets is re-established with proper functioning of the Side Pocketing facility instituted for MFs. In 1998-2003, when US 64 scheme of UTI faced depreciation in NAV below face value, GOI pumped in money and paid Rs.10 face value to outstanding unitholders. GOI created SUUTI and over a period of time, the market value of assets managed by SUUTI grew manifold leaving investors to forget what actually, otherwise would have been theirs. Investors had long before settled claims for Rs10 already with GOI, due to  lack of law to deal with such situations.  Subsequently in the debt market, when asset value depreciated due to industry wide factors, side pocketing came to the help of investors unlike GOI or somebody pumping money to pay face value. Here is a write up on different schemes from UTI MF, how it used the side pocketing and segregated folios system.

UTI Mutual Fund on Monday Feb 17, 2020 said it has created a segregated portfolio for debt securities of Vodafone Idea,  after Care Ratings downgraded the telecom major’s debt securities below investment grade. The fund house hold Vodafone Idea’s debt securities -- worth around Rs 186 crore -- in its UTI Credit Risk Fund, UTI Bond Fund, UTI Regular Savings Fund, UTI Dynamic Bond Fund and UTI Medium Term Fund. It said that upon recovery of money from Vodafone Idea in the segregated portfolio, the money recovered will be distributed to investors in proportion to their holdings in the segregated portfolio

The six schemes of Franklin Templeton Mutual Fund (MF), which are under wind-up, received payments of Rs 1,252 crore by 10^th July 2020. Apart from FT MF, UTI MF  received approximately Rs 161 crore of payments and Nippon MF 100 per cent of our outstanding from Vodafone, which is Rs 121 crore also received payments. Some of the fund houses still hold some exposure to debtpapers of Idea that are maturing in 2022.

The impact of the decision taken by Vodafone and Aditya Birla Group to no longer infuse capital in the ailing Indian arm may have a spillover effect on the debt exposure of mutual fund houses to the entity. The company may be on the brink of a collapse if it has to pay $4 bln in statutory dues. It has sparked concerns among investors over the company's inability to service the debt. Any default may also spark rating downgrades and erosion of scheme values. On account of this, mutual fund investors may redeem their investments in schemes that have exposure to Vodafone-Idea debt papers. According to data from Morningstar India, 36 mutual fund schemes had exposure to the corporate bonds of Vodafone Idea to the tune of Rs 3,376crore as on October 31, 2019.

UTI has received maturity payment of Rs.572.61 crores for NCDs of Vodafone Idea Ltd. (along with accrued interest) of ISIN INE669E08284 across schemes as informed by UTI MF on Jan 28, 2022. In case of UTI - Fixed Term Income Fund Series XXX-IX (1266 Days), UTI - Retirement Benefit Pension Fund, UTI - Unit Linked Insurance Plan and UTI - CCF - Saving Plan, the impact on receipt of maturity proceeds is reflected in the NAV of the respective schemes.In case of segregated portfolio of UTI - Bond Fund (Segregated - 17022020), UTI - Regular Saving Fund (Segregated - 17022020), UTI - Dynamic Bond Fund (Segregated - 17022020) and UTI - Medium Term Fund (Segregated - 17022020); the maturity proceeds will be credited to investor’s registered bank account in proportion to their unitholding in segregated portfolio. In case investor has opted for auto switch of maturity proceeds, the same would be switched to the selected scheme.

The government finds itself the owner of a 35.8% stake in Vodafone Idea after the promoters, as widely expected, opted to convert the interest due on spectrum payments and adjusted gross revenue (AGR) into equity at par on Jan 12, 2022. The two promoters - the government is not classified as one and does not plan an active role in management - continue to own 42%. The stock closed down 19.5% as markets reacted negatively to the conversion rate.

Notwithstanding, the move will likely help the company raise funds as its credit outlook will improve. Interested private equity (PE) investors will be comforted by the government's stake as the chances of the company going into liquidation have significantly decreased. Initial commentary from brokerages and bankers is that the company is out of the woods.

In case of segregated portfolio of UTI - Credit Risk Fund (Segregated - 17022020), the maturity proceeds from ISIN INE669E08292 is expected on January 31, 2022, thus we will be combining maturity payouts for both ISINs (ISIN INE669E08284 and ISIN INE669E08292) and the same will be made after January 31, 2022. The net combined maturity proceeds will be credited to investor’s registered bank account in proportion to the unitholding in segregated portfolio. In case investor has opted for auto switch of maturity proceeds, the same would be switched to the selected scheme. In the absence of bank account details, the physical warrant for maturity proceeds will be dispatched to investor’s address registered with us.For scheme specific details of the maturity proceeds, click here.We will be sending a communication to investors regarding the same.

UTI Mutual Fund Product Labelling

 

Fund Name	The product is suitable for investors who are seeking:*	Riskometer#	Potential Risk Class Matrix
UTI - Fixed Term Income Fund Series XXX-IX (1266 Days)- (A close ended debt scheme). Moderate interest rate risk and relatively high credit risk	• Regular income for fixed term • Investment in Debt/Money Market Instrument/Govt. Securities

Potential Risk class matrix w.e.f December 01, 2021.

Fund Name	The product is suitable for investors who are seeking:*	Riskometer#
UTI - Unit Linked Insurance Plan (An open ended tax saving cum insurance scheme)	• Long term capital appreciation • Investment in equity instruments (maximum-40%) and debt instruments
UTI - CCF - Saving Plan (An open ended fund for investment for children having a lock in for at least 5 years or till the child attains age of majority (whichever is earlier))	• Long term capital appreciation • Investment in equity instruments (maximum 40%) and debt instruments
UTI - Retirement Benefit Pension Fund (An open ended retirement solution oriented scheme having a lock-in of 5 years or till retirement age (whichever is earlier))	• Long term capital appreciation • Investment in equity instruments (maximum-40%) and debt instruments

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Retirement Planning - the MF way

 

Who doesn’t look forward to that golden period – free from work and family-related responsibilities? One has all the time to pursue own passions. But to be able to lead a comfortable life post-retirement, one need to have significant retirement corpus as well as a steady source of income (pension).

Significance of Retirement Planning

• Inflation: Inflation reduces the purchasing power of money over time. If inflation is 5%, then Rs 100 can buy only Rs 95 worth of goods after 1 year. After 10 years, it can buy only Rs 60 worth of goods and after 20 years, only Rs 37 worth of goods. Your needs will remain the same but your money will be worth less and less. In order to fight inflation, it is very important that your money also grows over time. You need to plan for inflation.
• Rising medical costs: With advancing age, health related problems are a concern for senior citizens. However, cost of quality private sector healthcare is increasing at a very fast rate in India. Some studies show that inflation in the cost of medical expenses is around 15% per annum. A serious illness can eat a big part of your retirement savings and put you under considerable stress.
• Falling interest rates: Senior citizens traditionally rely on bank fixed deposit and government small savings schemes for their regular cash-flows. Over the last 20 years, interest rates of government small savings schemes have come down significantly. As our economy (GDP) grows, money supply will also grow and interest rates will come down even further. You need to save more and create a larger corpus in order to generate sufficient income to meet your post retirement expenses.
• No pension: India is largely an un-pensioned society. Private sector employees in India, unlike western nations like United States or United Kingdom, do have not have safety net in the form of a national pension programme. They need to create their own post retirement income stream by saving and investing systematically during their working lives. As such, retirement planning should be one of your most important financial goals during your working lives.

Benefits of planning your retirement with mutual funds?

While many of you will be tempted to opt for a pension plan instead of mutual funds for your post-retirement financial requirements, but the fact remains that mutual funds are a safer and a better option. Here are the reasons you need to know while choosing between mutual funds and pension plans.

Flexibility

Mutual funds are more flexible than pension plans. There are no restrictions on making any partial or entire withdrawal at any given point of time. If you feel, you can discontinue your investment and change to another mutual fund as and when you like.

Tax Efficient

Mutual Mutual funds are more tax-efficient as compared to pension plans. Pension income is added to your other incomes for taxation, and there is no exception. While in case of equity mutual funds, long-term capital gains are tax-free up to Rs 1 lakh, and in case of debt funds, it is levied after indexation, which most of the time reduces the tax to nil.

Transparency

Mutual funds are more transparent as compared to pension plans as you can easily access all the information that you want regarding a mutual fund. Post-retirement life requires you to have a stable source of income to be able to continue your lifestyle. With the help of mutual funds, you can easily plan for a secure future and minimise the risks involved.

A SIP FOR EACH GOAL

•         Every individual’s goals are unique - be it a dream vacation, a new car, a bigger house, or retirement planning. When you set out to achieve these goals, the monetary amounts, the time required, and the associated risks are different for different purposes.

•         Different SIPs in suitable mutual funds could be started to match your every need with what you can afford to invest. So, instead of approaching your goals in the conventional linear way, you could work towards achieving various objectives simultaneously by starting multiple SIPs.

•         For example, long-term goals can be achieved through SIPs in equity oriented funds, whereas SIP could be started in suitable debt oriented funds to plan for your short-term goals.

 

Systematic Investment Plans

Mutual fund systematic investment plan (SIP) is one of the best ways to invest for retirement planning. Through SIP, you can invest in a mutual fund scheme of your choice, based on your investment needs and risk appetite, from your regular monthly savings through auto-debit from your savings bank account. SIP can be a disciplined way of investing because it will make you control your spending habits and invest regularly. SIPs in equity mutual fund schemes also average the cost of your purchase (Rupee Cost Averaging) by taking advantage of stock market volatility.

You can start your SIPs with very small monthly (or any other intervals) investments, as low as Rs 1,000. The longer your SIP tenure, the more wealth you may create through the the power of compounding. 

 

How much to invest?

A young person has a long accumulation phase of 20-30 years where you should be regular and disciplined with your investments so that compounding can work for you. You have to be disciplined of not using that money elsewhere. During this phase, one should invest in equity as much as possible. If you go with mutual funds, you can have a 100 per cent equity allocation for the initial 15-20 years. And maybe then you can start with a re-balancing plan and have a 10-25 per cent fixed income allocation or with any other asset allocation that you want. You should be very aggressive during the accumulation phase.

One should be aggressive and invest as much as possible in equity during the accumulation phase and once he retires, he may follow a conservative plan with any of the above-mentioned allocations. But he should ensure that he is investing some part of his corpus, 30-50 per cent in equity and does not make an annual withdrawal of more than five per cent of the corpus.

Mutual Funds for Retirement Planning

 

Mutual funds are ideal for long-term financial planning. Early entrants are UTI and Franklin Templeton, Reliance AMC. After solution oriented MFs were recognized as a separate scheme classification by SEBI, more MFs has entered the field.These plans are designed to make financial planning easier for people who want to save for retirement, but don't have the time or expertise to manage asset allocation and portfolio rebalancing. The fund allows an investor to redeem it as a lump sum payment or a series of recurring withdrawals that operate as a pension once the investor retains the retirement age. This will aid the investor's financial security in retirement. There are a variety of investment alternatives available depending on the sort of solution-oriented fund and its purpose. Unless you choose a conservative or life-stage linked fund option, solution-oriented funds often behave like aggressive hybrid funds.

Comparison of features of different investment options for Retirement Planning

Comparison of MFs with NPS and Insurance plans

Comparison of Rate of Return from different options for Retirement Planning (Nov 2013)

Latest Rates ( Jan 2022)

The latest rates available on past returns for EPF, NPS, Endowment Plans,  and MFs are given below after the future rates for PPF and small savings.

Public Provident Fund

The government has decided to keep the interest rates unchanged on small savings schemes or post office schemes for the January-March quarter of FY 2021-22. The Ministry of Finance made this announcement via a circular dated December 31, 2021

According to the circular, for the last quarter of FY 2021-22, the Public Provident Fund (PPF) will continue to earn 7.10 per cent. The Senior Citizens Savings Scheme (SCSS) will continue to earn 7.40 per cent, and post office time deposits will fetch 5.5-6.7 per cent. The interest rates will be applicable for the period January 1, 2021 to March 31, 2022.

Pradhan Mantri Vaya Vandana Yojana

Another product designed specifically for senior citizens, Pradhan Mantri Vaya Vandana Yojana (PMVVY) is offered by the Life Insurance Corporation of India (LIC). Like SCSS, you can invest up to Rs 15 lakh and it also promises a return of 7.4 percent. A government-backed scheme, it comes with no credit risk and a longer tenure of ten years, making it suitable for retirees. The scheme was to end on March 31, 2020, but the central government decided to extend until March 31, 2023 due to its popularity amongst retirees. However, the interest rate was slashed from 8 percent to 7.4 percent. Yet, it remains an attractive proposition for senior citizens, offering returns far higher than those of fixed deposits. For example, the State Bank of India’s (SBI) offers an interest of 6.5 percent to senior citizens for fixed deposits with tenures of 5-10 years.

Employees Provident Fund

The Employees’ Provident Fund (EPF) is a savings scheme for employees who are working for organisations that come under the Employees’ Provident Fund Organisation (EPFO).

·         Employer and employee make contributions

·         Interest rate is 7.1% p.a. for 1 October 2021 to 31 December 2021

·         Wage ceiling is Rs.15,000

·         Mandatory for organisations with over 20 employees

The EPFO decides the rate of interest for the EPF scheme on a yearly basis. The rate of interest is dependent on the market conditions and is vetted by the finance ministry. The interest rate can be calculated either by using the step method or the formula method. The rate of interest for the FY 2021-2022 is yet to be declared.

The 8.5% rate of interest on provident fund deposits for the last financial year was decided by the EPFO's apex decision making body Central Board of Trustees (CBT) headed by Labour Minister in March this year.

The rate of interest on EPF for 2020-21 has been ratified by the Ministry of Finance and now it would be credited into the accounts of over five crore subscribers. In March last year, the EPFO had lowered interest rate on provident fund deposits to a seven-year low of 8.5 % for 2019-20, from 8.65% in 2018-19.

Endowment Policy

Endowment policy are a type of life insurance policy, which provides the combined benefit of insurance coverage and savings. Endowment plan helps the insured to save regularly over a particular time period in order to avail a lump-sum amount at the maturity of the policy. The maturity amount is paid in case the insured survives the entire tenure of the policy. Rateof return is 6%

The National Pension Scheme

National Pension System (NPS) is a voluntary retirement savings scheme laid out to allow the subscribers to make defined contribution towards planned savings thereby securing the future in the form of Pension. It is an attempt towards a sustainable solution to the problem of providing adequate retirement income to every citizen of India.

At the time of normal exit from NPS, the subscribers may use the accumulated pension wealth under the scheme to purchase a life annuity from a PFRDA empaneled life insurance company apart from withdrawing a part of the accumulated pension wealth as lump-sum, if they choose so. PFRDA is the nodal agency for implementation and monitoring of NPS. NPS rate of return vary from category to category. But on an average it may be around 10-11%. More details can be had from https://npstrust.org.in/

Mutual Fund Pension Schemes

Though, there is  mandatory lock-in period of 5 years, main advantage of mutual funds’ solution oriented retirement products is that you don’t have to buy an annuity, as is the case with the National Pension Scheme (NPS) or pension plans from insurer. Instead, you can opt for a systematic withdrawal plan to meet your regular cash flow needs on retirement. The same holds true for children mutual fund products. These products have been offering 10-12% on average in the long term.

Disclaimer 

Mutual fund investments are subject to market risk. Read all scheme-related documents, terms and conditions carefully before investing. The above-mentioned information is purely informational. Consult your investment advisor before investing

Tax Saving Mutual Funds

 From an year end activity, tax saving investments moved to a recurring one parallel to the earning event of the tax payer with availability of Tax Saving Mutual Funds.

An ELSS is an Equity Linked Savings Scheme, that allows an individual or HUF a deduction from total income of up to Rs. 1.5 lacs under Sec 80C of Income Tax Act 1961.

Thus if an investor was to invest Rs. 50,000 in an ELSS, then this amount would be deducted from the total taxable income, thus reducing his/her tax burden.

These schemes have a lock-in period of three years from date of units allotment. After the lock-in period is over, the units are free to be redeemed or switched. ELSS offer both growth and dividend options. Investors can also invest through Systematic Investment Plans (SIP), and investments up to ₹ 1.5 lakhs, made in a financial year are eligible for tax deduction

Advantage of ELSS

     a. ELSS funds are the only tax-saving funds within the Rs 1.5 lakh limit which has the additional advantage of giving equity-linked returns.

      b. Investing into ELSS allows you dual benefits – you get capital appreciation and tax benefits.

    c. ELSS has the shortest lock-in period of three years when compared to other tax-saving instruments like PPF and NSC.

     d.  Since they are equity market linked, ELSS funds can bring in good returns over the long term, especially if retained        after the lock-in period is over.

       e. Good investment funds for those with moderate to high risk-appetite.

       f.  Dividends from ELSS funds are tax-free during the investment period.

     g. Profits from sale of ELSS fund units are considered long-term capital gains and hence, are tax free.

How to invest

·         The best way of investing into ELSS funds is through monthly SIPs (systematic investment plan). The minimum investment through a SIP can be as low as Rs 500 per month.

·         At the start of every year, work out the statutory deductions and calculate what you have left over from the Rs 1.5 lakh limit. Divide this amount by 12 to decide your SIP amount.

 

Previously, ELSS returns were tax-free. However, post Budget 2018, the long-term capital gains tax over Rs.1 lakh are taxable at 10%. The investor would not get the benefit of indexation. Even after the 10% tax cut, ELSS has the potential to deliver superior returns compared to other tax saving instruments. The perks of ELSS investments are not limited to the taxes saved. The power of compounding ensures that your investment is doubled if you invest for, say, five years (tenure of tax-saving FD). Furthermore, the minimum lock-in period is only three years.

Particulars	ELSS	Tax Saving FD
Definition	ELSS is a type of mutual fund that invests predominantly in equities or equity-oriented products.	A traditional investment instrument that you can invest as a lump sum with any bank.
Returns	Not fixed and subject to equity market risks. However, it has delivered 14%-16% returns in the last 5 years.	The bank decides the interest rate – starts from 6% to 7.5%.
Term	3 year lock-in period is compulsory, after which you can redeem or reinvest.	The minimum tenure is 5 years, but you can extend it up to 10 years.
Tax-efficiency	10% LTCG tax on the gains over and above 1 lakhs	As per your tax slab
Lock-in	3 years	5 years
Risks	ELSS due to their equity exposure is risky but has delivered historically good returns.	It assures capital protection and is as safe as any regular FD.
Online option	One can start an ELSS online – as a lump sum or SIP	Not all banks offer an online facility to open an FD.
Liquidity	You may exit or withdraw ELSS after 3 years.	You cannot withdraw tax saving FD before 5 years.

 

Rate of return received in the last 3 years as per moneycontrol.com is given for reference. The difference in rate of return occur among mutual funds due to security selection, management style and seamless processing etc..

ESTIMATE YOUR TAX SAVINGS

However, mutual funds (MFs) are not all about tax savings and market risks, and may suit the financial needs of any person – be a risk taker or a risk averse. There are also different categories of funds to cater to the short-term or long-term needs. Consult your investment advisor before investing.

Statutory warning – “Mutual fund investments are subject to market risks. Please read the offer document carefully before investing.”

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How much Gold be in your Portfolio?

Gold,  Real Estate, Fixed Deposits from banks/Post Office/NBFC/Company etc.. form part of portfolio of investments of average malayalee. Gold is handed over as gift at any social occasion depending on the strength of relationship and heavyness of purse. Mostly, it is a intergenerational wealth transfer medium historically for almost every Indian. 

Today gold is available as  gold bonds, gold ETF, gold at commodity exchanges like NCDEX or MCX , gold mixed portfolio of Mutual Funds in addition to physical gold coins/bars from banks, ornaments from gold traders and may be more forms of gold may evolve with digital platforms grow exponentially.

The 2021 gold import bill easily doubled the $22 billion spent in 2020, and surpassed the previous high, set in 2011, of $53.9 billion, according to the official, who tracks broad import trends. In volume terms, India imported 1,050 tonnes of gold in 2021, the most in a decade, and far more than 430 tonnes imported in 2020

India’s gold imports have surged over the last few months, driven by marriage and festival-related demands aswell as people stocking up on the metal, anticipating future hardships and price surges

As on March 24, 2020, notwithstanding the recent price volatility, gold has delivered an average return of about 8.87 per cent over the last 10 years, comparable to stocks and a tad more than bonds and commodities. Over the past decade, Indian equities have given a return of 11 per cent while bonds gave 8.81 per cent. However, commodities gave a negative return of (-)2 per cent. 

The rate of return on gold  are affected by liquidity, diversification, storage cost among others. The different forms of gold are discussed below:

Sovereign Gold Bond (SGB)

SGBs are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The Bond is issued by Reserve Bank on behalf of Government of India.

The Bonds are issued in denominations of one gram of gold and in multiples thereof. Minimum investment in the Bond shall be one gram with a maximum limit of subscription of 4 kg for individuals, 4 kg for Hindu Undivided Family (HUF) and 20 kg for trusts and similar entities notified by the government from time to time per fiscal year (April – March). In case of joint holding, the limit applies to the first applicant. The annual ceiling will include bonds subscribed under different tranches during initial issuance by Government and those purchased from the secondary market. The ceiling on investment will not include the holdings as collateral by banks and other Financial Institutions

 Gold @ Commodity Derivative

Commodities that are traded are typically sorted into four categories broad categories: metal, energy, livestock and meat, and agricultural. Metals commodities include gold, silver, platinum, and copper. During periods of market volatility or bear markets, some investors may decide to invest in precious metals–particularly gold–because of its status as a reliable, dependable metal with real, conveyable value. Investors may also decide to invest in precious metals as a hedge against periods of high inflation or currency devaluation.

In the most basic sense, commodities are known to be risky investment propositions because their market (supply and demand) is impacted by uncertainties that are difficult or impossible to predict, such as unusual weather patterns, epidemics, and disasters both natural and human-made.

There are a number of ways to invest in commodities, such as futures contracts, options, and exchange traded funds (ETFs).

Gold ETF

A Gold ETF is an exchange-traded fund (ETF) that aims to track the domestic physical gold price. They are passive investment instruments that are based on gold prices and invest in gold bullion. In short, Gold ETFs are units representing physical gold which may be in paper or dematerialised form.

Gold ETFs are listed and traded on the National Stock Exchange of India (NSE) and Bombay Stock Exchange Ltd. (BSE) like a stock of any company. Gold ETFs trade on the cash segment of BSE & NSE, like any other company stock, and can be bought and sold continuously at market prices.

Gold ETFs are essentially open-ended mutual fund schemes which are based on ever-fluctuating gold prices. Gold ETFs have proved to be worthier than physical gold, since gold ETFs not only ensure your investment in the yellow metal, but also provide the flexibility, liquidity and tax efficiency that come with stock investments.

Suggested Portfolio proportion of gold  for Individuals

Experts advise one to allocate 10%-15% of your portfolio towards gold. It is inversely correlated with the stock market and could do well during an economic slump.

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