Active management

In active management, the fund manager seeks to pick stocks with the aim of beating the benchmark and generating alpha. A fund manager cannot possibly invest in the same stocks as the/she has to take a call on picking stocks outside the index or keeping the exposure of sectors different from the index. Similarly, when the fund manager deems fit, he can raise cash or move some assets to money market instruments if he finds the markets are over-valued or too volatile.

Passive management

A fund is passively managed if the fund manager replicatesthe inde with exactly the same stocks and in thr same proportion. Here the fund manager is trying to replicate the index performance with as little tracking error (we will have a post on tracking error soon. Suffice to say that it refers to the deviation of the performance of the fund from its benchmark) as possible. Since the fund manager has to mimic the index he will have very little cash and that too, only to meet redemption proceeds. Index funds and ETFs are examples of passively managed funds. While ETFs are traded in the stock exchanges and can be bought through a demat and brokerage account, index funds can be bought like any other mutual fund. We will now look at how these categories of funds vary in their characteristics:

Expense ratio:

Passively managed funds sport a lower expense ratio as these funds need less management, given that they simply have to mimic the index. Identification of right stocks and sectors and opportunities are not needed with passive fund management. On the other hand, an actively managed fund will have a a team of analysts and fund managers who will study the various parameters of the economy and take calls on sectors and stocks in order to generate higher returns.

Turnover ratio:

Turnover ratio in an actively managed fund will be high compared to a passively managed fund. This is so since a lot of active stock calls are taken continuously in active management while in a passively managed fund, the churn is only when there is a change ina stock in the index or when the fund has huge inflows and the same needs to be deployed in the index stocks.

Performance and volatility:

Though in actively managed funds the fund manager aims to create alpha there is also a possibility that the fund may underperform the if its calls go wrong. Active management also at times lead to higher volatility in returns compared with benchmark. Since a passively managed fund mirrors its benchmark in every aspect, the possibility that the fund may underperform its index by a huge margin is Low. At best the return differential could arise as a result of tracking error.

Active funds would generally score over passive funds in terms of the flexibility and diversification they offer. You can choose funds from different marketcap segments or funds using different strategies (such as growth or value). You can also choose funds with a combination of equity and debt or those that invest based on market valuations. On the contrary, passively managed funds offer little choice in the Indian context. There are very few index funds/ETFs that are based on mid cap indices and none exists in the small cap space. Nor is there is a fund that will invest in a combination of asset classes. You cannot also have a passive fund reducing its equity allocation or upping it based on market valuations.

Under unforeseen scenario such as 2008 or 2002 market crash, actively managed funds can sell the stocks in the fund and move the money to cash or money market funds to prevent further erosion of investment. While passively managed funds such as index funds and etfs will not be able to do so. In inefficient markets like India where there information dissemination is asymmetric and not all information regarding the stocks and markets are available to all, at all times, well managed active funds tend to outperform the markets, handsomely generating alpha. For those wanting to build wealth for the long term, actively managed funds do a better job than passive funds.

Yes, investments made in the names of different investors (that were created using a single login ID) can be seen in one consolidated portfolio view as separate investments. For example, a husband might have invested in a few schemes, his wife may have invested in a different set of schemes, and both of them may have jointly invested in a third set of schemes. All these investments can be viewed in a consolidated fashion in the dashboard when all these three accounts have been created under a single login ID.

Yes! You may add any number of investors to your R9 Wealth account.

This feature is particularly beneficial for families as they can consolidate all their investments in one convenient online location. Moreover, you can log in to your account with one common login ID and password, eliminating the need to remember innumerable passwords and IDs.

You can also create a joint investor account for which you may need to add more than one investor to your existing R9 Wealth account. Here’s how you can do this:

• Log in to your R9 Wealth account.

• Select the ‘Investment Profiles’ option from the menu.

• Choose the option ‘Create Profile’ from the top left side.

• Choose the appropriate category for the person you will be adding to your account.

• Fill the required fields with information on the new investor joining your account, and submit his account-opening documents to us.

That’s it! If there is no discrepancy in the information provided, the new investor will be added to your account in just 24 hours.

Yes, best mutual funds to invest​​ through R9 Wealth is absolutely free. There are no account opening charges, transaction or maintenance fees. In the case of mutual funds, we earn through trail revenue that we receive from the mutual fund houses. These are paid out of the annual fund management fees of mutual funds.

Non Resident Indians (NRIs) all over the world can invest in all the mutual fund schemes offered by all Asset Management Companies (AMCs). However, most AMCs do not allow investments from investors in USA and Canada due to regulatory restrictions. Such investors can invest in all the mutual fund schemes of L&T Investment Management Limited.

Explaining everything there is to know about debt funds makes for a very long article, so we will take it in stages. This week, we’ll look at the types of debt funds that there are. Next week, we’ll take up how their returns come in, the kind of risks involved and taxation.

What they are

Companies borrow for various purposes – to meet working capital requirements, to fund expansion, for capital expenditure, and so on. Similarly, the government also borrows for its own spending needs. These entities issue instruments for these borrowings – bonds, debentures, treasury bills, commercial papers, certificates of deposits, and such.

These debt instruments carry a specific interest rate and maturity period (tenure). They are also called fixed income instruments. Maturities can range from a few days to a few months to a few years. In the case of government securities, it can go up to several years. Generally, short-term instruments are less risky than long-term ones for the simple reason that the uncertainties linked to a company’s fundamentals are higher over the long term.

Debt investments carry two types of risk. The first is that interest rates change over time. If interest rates move lower, new debt instruments issued will consequently have lower interest rates. But then the older instruments that are already issued still carry the old interest rate (called coupon). They however, adjust to the new interest rate scenario by way of change in their price. Thus, the bond prices traded in the market move in line with change in interest rates. This relationship is captured by what is called the ‘yield’ of the bond. We will discuss more about it in another article.

The second risk is that the borrower fails to meet payments. Companies are graded on their credit-worthiness or their ability to meet interest and principal repayment obligations on time. This grade is termed its credit rating. A high credit company is safer than a low-quality one, and will, consequently, pay a lower interest rate. While risk is higher in poor-quality company, rates are also higher as it is forced to pay a higher price in order to borrow.

Debt fund types

Debt mutual funds invest in a combination of debt securities - short or long term, corporate bonds, bank debt, gilts, high-quality papers, low quality papers, secured and unsecured bonds, and so on. There are, at all times, several instruments to invest in with varying interest rates and maturities. Debt funds actively juggle these instruments in their portfolio based on the interest rate movement to deliver returns. The type of debt fund it is depends on the average maturity of the instruments in its portfolio or then the kind of strategy it follows. The longer the maturity period is, the higher the risk, and thus higher the return.

Liquid funds

Liquid funds hold instruments of extremely short maturities. By rule, they cannot invest in instruments whose maturities are more than 91 days. Typically, liquid funds hold instruments that mature in a matter of days. These can be commercial papers issued by companies (CP), certificate of deposits issued by banks (CD) or government treasury bills. These are collectively called money market instruments. Liquid funds also stick to instruments of the highest credit quality.

The short nature of these instruments, the high quality, and the lack of volatility in their NAV make them very safe investments. They have no exit loads and you can redeem investments very easily in these funds. For these reasons, liquid funds are the perfect alternative to savings bank accounts, which carry the lowest interest rates. Money left idling in your savings bank account, therefore, can be shifted into liquid funds to get higher returns.

Ultra short-term funds

Ultra short-term funds are a step above liquid funds in terms of the maturity of the instruments they hold. That is, while they hold CDs and CPs, they go for corporate or bank bonds that are a bit longer term in nature of up to one year, or maybe a little longer. Therefore, they require a holding period of around a year. Currently, the average maturity period of ultra short-term funds is around 9 months. Most ultra-short term funds invest in high-quality credit. They are good parking grounds for surplus money that you don’t need immediately but may require a little later on. They deliver higher returns than liquid funds.

Short-term debt funds

Short-term debt funds go for longer maturity periods than – yes, you guessed it –ultra-short term funds. They invest in corporate bonds to a greater degree, and rely far less on CD and CPs. They may also have some holding in short-term government securities. The average maturity periods of the portfolios will typically be around 2 years or a maximum of 3 years. They require a holding period of around 2 years.

Long-term debt funds

Long-term debt funds (you’re now a pro!) invest in much longer-term debt of 3 years and more. These funds require holding periods of at least three years and should form a part of every long-term investment portfolio. Think of both short-term and long-term debt funds as an alternative to your normal go-to option of fixed deposits.

Short-term and long-term debt funds may take a call to invest in instruments of low credit quality companies. Because such instruments carry attractive interest rates, the portfolio’s yield moves higher and returns jump, though the risk also moves a couple of notches higher. Funds that explicitly (by mandate) follow such a strategy of identifying companies with poor credit and high interest rates and lending to them are called credit opportunity funds and are among the highest-risk debt funds.

Some short-term and long-term debt funds are also called income funds due to their strategy. These funds hold bonds to maturity and primarily aim at earning interest income (or in finance-speak, an accrual strategy) across rate cycles. They do not try to predict or play the interest rate cycle. Such funds primarily hold corporate bonds as that’s where rates are higher and fluctuations in bond prices lower.

Gilt funds

Gilt funds are funds that invest entirely only in government securities (or gilts, for short) and try to benefit from changes in bond prices as interest rates change. There can be both short-term and long-term gilt funds. These funds are akin to sector funds in equities – they require careful watching and timed entries and exits and are thus the highest-risk category of debt funds.

All the above are open-ended debt funds. This apart, you have close-ended debt funds called Fixed Maturity Plans, which have a fixed tenure. Your investment is locked for this period. Tenure can be a few months to a few years. They invest in money market instruments, bonds, and gilts. FMPs usually match the maturity profile of the portfolio to their mandated maturity period.

Professional management

Qualified professionals manage your money, but they are not alone. They have a research team that continuously analyses the performance and prospects of companies. They also select suitable investments to achieve the objectives of the scheme. It is a continuous process that takes time and expertise which will add value to your investment. Fund managers are in a better position to manage your investments and get higher returns.

Diversification

The cliché, "don't put all your eggs in one basket" really applies to the concept of intelligent investing. Diversification lowers your risk of loss by spreading your money across various industries and geographic regions. It is a rare occasion when all stocks decline at the same time and in the same proportion. Sector funds spread your investment across only one industry so they are less diversified and therefore generally more volatile.

More choice

Mutual funds offer a variety of schemes that will suit your needs over a lifetime. When you enter a new stage in your life, all you need to do is sit down with your financial advisor who will help you to rearrange your portfolio to suit your altered lifestyle.

Affordability

As a small investor, you may find that it is not possible to buy shares of larger corporations. Mutual funds generally buy and sell securities in large volumes which allow investors to benefit from lower trading costs. The smallest investor can get started on mutual funds because of the minimal investment requirements. You can invest with a minimum of Rs.500 in a Systematic Investment Plan on a regular basis.

Tax benefits

Investments held by investors for a period of 12 months or more qualify for capital gains and will be taxed accordingly. These investments also get the benefit of indexation.

Liquidity

With open-end funds, you can redeem all or part of your investment any time you wish and receive the current value of the shares. Funds are more liquid than most investments in shares, deposits and bonds. Moreover, the process is standardised, making it quick and efficient so that you can get your cash in hand as soon as possible.

Rupee-cost averaging

With rupee-cost averaging, you invest a specific rupee amount at regular intervals regardless of the investment's unit price. As a result, your money buys more units when the price is low and fewer units when the price is high, which can mean a lower average cost per unit over time. Rupee-cost averaging allows you to discipline yourself by investing every month or quarter rather than making sporadic investments.

Transparency

The performance of a mutual fund is reviewed by various publications and rating agencies, making it easy for investors to compare fund to another. As a unitholder, you are provided with regular updates, for example daily NAVs, as well as information on the fund's holdings and the fund manager's strategy.

Regulations

Amoolya by R9 Wealth allows you to select any date of the month (up to 28th) for your SIPs. However, for an iSIP (internet-based SIP), you will be able to select only those dates which are allowed by the AMC.

Any Redemption in the form of full or partial, will lead to cause your insurance cover to lapse.

Instant redemption is a facility offered by the Super Savings Account, where the redemption request is processed almost instantly, and the money is credited to your bank account within 2-3 minutes (maximum time is 30 minutes).

A minimum amount of Rs 1000 is required for SIP insurance investment.