Buying and Selling:-
You can buy some mutual funds (no-load)
by contacting the fund companies directly. Other funds are sold through
brokers, banks, financial planners, or insurance agents. If you buy
through a third party there is a good chance they'll hit you with a sales
charge (load).
That being said, more and more funds
can be purchased through no-transaction fee programs that offer funds
of many companies. Sometimes referred to as a "fund
supermarket," this service lets you consolidate your holdings and
record keeping, and it still allows you to buy funds without sales
charges from many different companies.
Selling a fund is
as easy as purchasing one. All mutual funds will redeem (buy back) your
shares on any business day. For details about when does selling the
MF read (Here are 6 such things when you should
consider selling your mutual funds)
The
Value of Your Fund:-
Net asset value (NAV),
which is a fund's assets minus liabilities, is the value of a
mutual fund. NAV per share is the value of one share in the mutual
fund, and it is the number that is quoted in newspapers. You can
basically just think of NAV per share as the price of a mutual
fund. It fluctuates everyday as fund holdings and shares outstanding change.
When you buy shares, you pay the current NAV per share plus any
sales front-end load. When you sell your shares, the fund will pay
you NAV less any back-end load.
NAV (NET ASSET VALUE)
What is NET ASSET VALUE?
The Term Net Asset Value
(NAV) is used by investment companies to measure net
assets. It is calculated by subtracting liabilities from the value of a
fund’s securities and other items of value and dividing this by the
number of outstanding shares. Net asset value is popularly
used in newspaper mutual fund tables to designate the price per share for the
fund.
The value of a collective investment
fund based on the market price of securities held in its portfolio. Units in
open ended funds are valued using this measure. Closed ended investment trusts
have a net asset value but have a separate market value. NAV per
share is calculated by dividing this figure by the number of ordinary shares.
Investments trusts can trade at net asset value or their price
can be at a premium or discount to NAV.
Value or purchase price of a share
of stock in a mutual fund. NAV is calculated each day by
taking the closing market value of all securities owned plus all other assets
such as cash, subtracting all liabilities, and then dividing the result (total
net assets) by the total number of shares outstanding.
Calculating NAVs -
Calculating mutual fund net asset values is easy. Simply take
the current market value of the fund’s net assets (securities held by the fund
minus any liabilities) and divide by the number of shares outstanding. So if a
fund had net assets of Rs.50 lakh and there are one lakh shares of the fund,
then the price per share (or NAV) is Rs.50.
NAV
vs Price of an equity share:-
In case of companies, the price of
its share is ‘as quoted on the stock exchange’, which apart from the
fundamentals, is also dependent on the perception of the company’s future
performance and the demand-supply scenario. And hence the market price is
generally different from its book value.
There is no concept as market value
for the MF unit. Therefore, when we buy MF units at NAV, we are buying at book
value. And since we are buying at book value, we are paying the right
price of the assets whether it is Rs 10 or Rs.100. There is no such thing as a
higher or lower price.
NAV
& its impact on the returns:-
We feel that a MF with lower NAV
will give better returns. This again is due to the wrong perception about NAV.
An example will make it clear that returns are independent of the NAV.
Say you have Rs 10,000 to invest.
You have two options, wherein the funds are same as far as the portfolio is
concerned. But say one Fund X has an NAV of Rs 10 and another Fund Y has NAV of
Rs 50. You will get 1000 units of Fund X or 200 units of Fund Y. After one
year, both funds would have grown equally as their portfolio is same, say by
25%. Then NAV after one year would be Rs 12.50 for Fund X and Rs 62.50 for Fund
Y. The value of your investment would be 1000*12.50 = Rs 12,500 for Fund X and
200*62.5 = Rs 12,500 for Fund Y. Thus your returns would be same irrespective
of the NAV.
It is quality of fund, which would
make a difference to your returns. In fact for equity shares also broadly
this logic would apply. An IT company share at say Rs 1000 may give a better
return than say a jute company share at Rs 50, since IT sector would show a
much higher growth rate than jute industry (of course Rs 1000 may
‘fundamentally’ be over or under priced, which will not be the case with MF
NAV).
Here are 6 such things when you should consider
selling your mutual funds.
1. Poor
Performance:-
The first and
foremost reason for quitting any investment is that the fund has demonstrated
poor performance. Infact this should be the last reason to
consider quitting a scheme. First analyze the reasons for poor
performance and the period over which the fund has demonstrated poor
performance. Is it that the fund manager has taken some stock specific or
sectoral calls that have gone wrong? Are some of the stocks out of favor
currently? After all the reason that you have opted for a scheme is the track
record of the fund manager in managing the scheme in good and bad times. So as
long as there is no change in the fund manager you need to take stock whether
underperformance for a few months warrants exit from the investment.
There are times
when a star manager /fund management team will falter. You should not penalize
the fund manager for sticking to the investment mandate of the fund. After all,
this is what you would expect from him. However if he does not stick to the
investment mandate of the fund but takes calls that he should not be taking,
then one can look at moving out. For example someone who is mandated to be
invested in equities at all times moves out when he takes the view that the
markets are overvalued at 12,600. Since then the markets have delivered 20% and
investors have lost on this opportunity. Well you can argue both ways that
being in cash is a better strategy or not, a scheme that is mandated to be
invested at all points should just do that.
Keep an eye on the scheme whether it under performing
continuously for a couple of quarters. If the fund doesn’t recover after
several quarters of underperformance you can look at exiting the fund.
2. Follow
the Manager:-
Fund houses often
promote schemes that have done exceptionally well and the fund manager is
accorded godly status. The scheme is then aggressively marketed and
subsequently new schemes are launched using the star manager’s name. Then
suddenly when the fund manager departs, the fund house is quick to do a
volte-face and retort that we are a process oriented fund house. The fund house
cannot have it both ways. So one needs to be careful of the statements a fund
house makes.
Take the example
of SBI Mutual Fund. There was a lot of noise created around his Midas touch
during the launch of SBI Blue-chip Fund. But as soon as the NFO was over,
there was not even a murmur about his departure and exit. Such steps can prove
to be harmful for investors. Luckily for SBI, the incoming Head of Equity
proved to be as competent as his predecessor and was able to maintain the sheen
of most of the SBI funds. Needless to say SBI Blue-chip bombed. Similarly Lotus Mutual Fund was purely marketing their schemes and track record. However when
he quit the fund house just before the launch of their maiden equity offerings,
Lotus seemed to have lost its trump card. There is no strong evidence that a
fund’s performance will suffer for sure after a star fund manager’s departure
but yes it’s a very important factor.
When a fund
manager departs, check whether a competent fund manager with a consistent track
record has stepped in. Also check if the fund manager sticks to the investment
strategy of the fund or deviates from it. Reading and a finer analysis of the
fact sheet will give you a sense whether there has been a churn in the
portfolio in terms of stocks, sectors, asset allocation or strategy.
If a team of fund
managers manages the scheme, one exit will not disrupt the fund and hence you
should stay put and evaluate the investment for two quarters. However if there
is an experienced fund manager who comes in the picture, you can look at opting
for better options.
3. Size
of the Fund:-
Size of the fund
could have impact on a scheme’s returns. Funds such as Reliance Growth, HDFC
Equity continue to shine even with a corpus of 3900 and 4400 crore
respectively just as they did when they were much smaller in size. However
funds such as SBI Magnum Global and Sundaram BNP Paribas Select
Midcap seem to have tapered down under the pressure of too much money. This is
particularly true for small and mid cap funds as it is difficult to move in and
out of such stocks quickly. Reliance Growth had shut shop at 1700 crore but is
open for subscription at almost 2.5 times of its previous closure. When closing
the fund becomes a fashion nobody wants fresh subscriptions and hence launching
a new scheme becomes a no brainer. After all, who wants to have Daal every day?
A look at Sundaram
BNP Paribas Portfolio shows around 115 stocks. This shows that there are
several marginal ideas besides some excellent ones. When the fund does not know
what to do with the new money that comes in, it’s generally time to exit the
investment and take it elsewhere. Whether it has 5 star rating or not is
immaterial. A fund has got a 5 star rating because of its past performance and
not because of its future performance. So 5 star or not, it’s time to look at
the door.
4. Are
your investments really diversified?
One of my readers
had come across had around 40 funds with Rs 10,000 invested in each of them.
Infosys was the common stock in 38 of his funds. This does not amount to
diversification. Infact 20 stocks were common across 30 of his schemes. There
was hardly any element of diversification. The point is having many funds does
not mean you are diversified as funds often have similar kind of stocks in
one’s portfolio. You can sell most of your funds if you find yourself in such a
situation and keep only two funds with a good track record in each category
diversified across fund managers, houses, type of stocks, sectors and style of
investing. So take a hard look at whether a fund really
complements your portfolio and exit where there is significant overlap between
the funds.
5. Need
Money for a Goal
This is
one of the most important reasons to sell a fund. When you need money for a fund and you have
achieved your targets, you can move partially 50% in debt or 100% depending on
the market outlook. Since it is often difficult to time the markets, it is
better to sell your fund and move into debt 6-12 months before you need money
for a goal.
6. Rebalancing
your portfolio / Moving into Cash or Debt
In today’s market,
your equity allocation would have exceeded the figure that you like to have as
a part of your portfolio. If this is the case, then you can either move some of
your worst performing funds into debt / cash OR add additional funds to the
debt part of your portfolio namely FMP’s. It’s best to undertake the asset
allocation exercise as an annual ritual.
Finally before you press the Sell button, take stock
of the tax implications and exit loads if any. If you can a tax by being
invested for a few days or months, it makes sense to wait and then sell on
completion of 1 year. However sometimes it’s good to exit (at the cost of
paying short term capital gains tax and exit loads) if you have made
substantial profits in a very short period of time or if the scheme is in deep
trouble.
One of the biggest
and most common reasons why people sell which I have not mentioned is the worry
of market coming down and whether the markets can sustain at 15,000 levels.
Well I don’t have the answer whether the markets will stay at this level in the
next few days or will correct sharply as the Gloom Doom Guru repeatedly says on
business channels. Market moves are random and one certainly cannot predict the
next set of moves whether up and down with a consistent level of accuracy.
Corporate India’s
report card will be out this week starting with bellwether Infosys and though
corporate earnings will slow down from 30% plus levels to higher teen levels, a
15% earnings growth for the next 4 years remains a possibility. This can translate
into a 12-15 % return by well-managed diversified equity schemes or for that
matter even by balanced funds.
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