The three options available in mutual fund schemes to help you choose one.
Most mutual funds offer an option to investors to either receive the dividends or to have it reinvested in the fund. This is an interesting choice that investors have to make while making investments in mutual funds. The investor has to decide whether he wants to receive the amount of income earned in the form of dividends or to accumulate the gains through the growth option. The option of dividend reinvestment can be used favorably by investors depending on their specific needs.
There are three options available for an investor:
• Dividend option
• Growth option
• Dividend reinvestment option
Under the dividend option with a payout facility, the investor receives regular income in the form of dividends as and when the fund declares dividends. In case the investor opts to take dividends, he gets a current income. Also, he gets tax benefits on such a payout. As per the current income tax rules, income received in the form of dividends is tax-free in the hands of the investor. However, it should be noted that the dividends may not be regular and are dependent on the performance of the fund.
In case an investor opts for the growth plan, the gains accumulate in the net asset value (NAV) of the fund. Here, whenever one sells the units, there will be a capital gain or loss. This will be short-term if the units are sold before 12 months and long-term if sold after 12 months holding period. In the case of long-term gains, there is a concessional tax treatment of a flat 10 percent, or 20 percent with indexation benefits.
Dividend reinvestment option
In case of a dividend reinvestment option, investors can keep their amount invested to be the same but still save a bit on the tax front. They can take advantage of the tax benefits that come on dividends while maintaining their total overall investment. Under the dividend reinvestment option, when a dividend is declared, the investor is entitled to the payout. However, this will not be received in cash but would be reinvested back into the scheme at the then prevailing NAV. Due to this, the number of units of holding will go on increasing with each dividend payout, although no amount will be received.
At any time up to maturity, the investor can have these units encashed. The benefit is that there is a dividend being received which is then being invested back into the fund automatically, so the investor does not have to bother about looking for investment avenues.
Choosing an option
The choice of an option would depend on a number of factors which may include the risk appetite of the investor, the need for current funds, tax bracket in which the investor is etc. In case an investor has invested with the basic maim of getting regular income, the dividend reinvestment option is ruled out.
For people in high tax brackets, income by way of dividends may offer some benefits of saving on tax.
Investors who want to invest for a longer period and in no need of current funds, may go in for the dividend reinvestment option. They can plan for the longterm needs by choosing this option. In any case, one should keep in mind the fact that as the time period increases, the risk element also increases.
MFs to beat volatility
Go for mutual funds if the volatility in the markets is too much for you.
The past few months have been an amazing rollercoaster ride. Tears and heartbreaks spared none. Both big and small investors felt the pinch. The fall was across sectors. For sometime, some companies would see unexplainable investor interest, spiking the Sensex. But within hours, selling followed, pulling the Sensex down to newer troughs. The promising markets that were on a constant uphill climb, suddenly betrayed the investors. The fall was predicted by none. It came as a shock. Volatility continues to rule the markets.
The stock markets are considered volatile avenues. Hence, investors are warned of its risks before they take a plunge. What is volatility? It is a statistical measure of the behavior of the market to rise or fall sharply within a time span. Volatility is either measured by using the standard deviation or variance between returns from that same security or market index. The greater the volatility, the greater the fluctuations. This amounts to greater risk. In such a scenario what is the option left out for a small retail investor?
Everything was going good for Rajesh till a few months ago. Around 40 percent of Rajesh's salary is spent on home loan repayments. Another 40 percent goes towards monthly expenses and contingencies. Rajesh judiciously invested the remaining 20 percent in the stock markets. He was excited when he realised that he had almost doubled his investments. But the recent crash and ensuing volatility, has made him extra cautious. He does not want to enter the markets, at least for now. The 20 percent of his salary that he used to invest every month is now idling in his bank account. He is seriously contemplating increasing the repayments towards his home loan instead of buying stocks.
People like Rajesh should not abandon their savings or investment habits altogether. Though you may be debt-ridden, it is wise to keep a small portion away as a part of your savings.
What are the options open for investors like Rajesh who have shunned the markets totally after the recent fall?
Some investors find this an opportune time to fish for good stocks that they were unable to purchase when the Sensex was soaring. If the company fundamentals are good, and if the stocks have fallen to attractive low prices, adding them to your basket may be a good idea. The dark clouds of volatility haven't passed by yet. So the novice needs to tread with extreme caution. Those who aren't market experts are better off not investing directly in the stock markets. Using the mutual fund route is the ideal option for small investors.
When an investor puts his money in mutual funds, the decision to buy/sell and juggling the portfolio in line with latest developments, is the job of fund managers. Fund managers are pure professionals who know how to act when markets aren't behaving favorably. Investors, who panic at every market slide, must keep away from the markets in volatile times. Systematic investment plans offered by most fund houses, are a good means to beat the market volatility. Here, the investor invests a small fixed amount every month, for say three years. There may be market ups and downs. But the impact of volatility will be less and returns attractive over the long term.
So, for those investors who are wondering what next - mutual funds are the way to go.
Choosing a mutual fund Based on Performance
The selection of an existing mutual fund depends on its performance - past as well as expected. How should an investor judge the performance of a mutual fund? What criteria should be used to evaluate and rank a mutual fund? There are a number of mutual funds in the market. New schemes are hitting the market almost daily, with new names and targets. So, it becomes difficult for the small investor to judge the performance of the fund accurately, and to know how his investment his moving.
The performance of a mutual fund scheme is reflected in its net asset value (NAV) which is disclosed on a daily basis in case of open-ended schemes and on weekly basis in case of close-ended schemes.
The NAVs of mutual funds are required to be published. The NAVs are also available on the web sites of mutual funds. All mutual funds are also required to put their NAVs on the web site of the Association of Mutual Funds in India (AMFI). The investors can access NAVs of all mutual funds at one place. The NAV is the most common denominator which summarizes the entire performance of the fund.
The mutual funds are also required to publish their performance in the form of half-yearly results which also include their returns/yields over a period of time - last six months, one year, three years, five years and since inception of schemes. Investors can also look into other details like percentage of expenses of total assets as these have an effect on the yield, and other useful information in the same half-yearly format.
In addition, the mutual funds are also required to send an annual report, or abridged annual report, to the unit holders at the end of the year. These contain the details of investments made by the fund in addition to the other financial information.
Various studies on mutual fund schemes, including yields of different schemes, are published. Many research agencies publish research reports on performance of mutual funds, including a ranking of various schemes in terms of their performance. Investors should study these reports and keep themselves appraised about the performance of various schemes of different mutual funds.
The investors can compare the performance of their schemes with those of other mutual funds under the same category. They can also compare the performance of equity-oriented schemes with the benchmarks like BSE Index, sector index, S&P CNX Nifty etc.
The mutual funds are required to disclose full portfolios of all of their schemes on a half-yearly basis which are published. Some of the mutual funds send newsletters to the unit holders on a quarterly basis which also contain portfolios of the schemes.
Some mutual funds send the portfolios to their unit holders. The scheme portfolio shows investments made in each security i.e. equity shares, preference shares, debentures, money market instruments, government securities etc, and their quantity, market value and percentage of NAV. These portfolio statements are also required to disclose illiquid securities in the portfolio, investments made in rated and unrated debt securities, non-performing assets (NPAs), etc.
On the basis of performance of the mutual funds, the investors should decide when to enter or exit from a mutual fund scheme. Apart from the past, one should also look at the future expectations from the funds. Past may not be a true indicator of the future.