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To carry on where we left off with our previous post about money market funds, we’re now going to talk about the one single drawback to debt instruments, as well as the remedy. As we all know, debt instruments like corporate bonds, for example, decrease in value as prevailing interest rates go up. This is because when interest rates go up, people would rather put their money in banks than invest in bond funds at lower interest rates, causing the bonds to decrease in value. The inverse is also true here which means if prevailing interest rates fall, corporate bonds that were issued before the fall, will increase in value.

Maturity roll-down

As we mentioned in our previous post on the money market, floating rate funds try to negate this effect by investing in bonds with interest rates that change in accordance with prevailing interest rates in the economy.  However, this is typically accomplished by increasing risk by investing in sub-par bonds and in some cases, debt that is close to junk status. This is why floating-rate funds are considered high-risk and definitely not for the cautious investors looking for high-quality corporate paper or government bonds. What then is the solution to reduce the risk of rising interest rates on debt instruments?

Now with money market funds in particular, we have open-ended funds and we have fixed-maturity funds, both of which are affected adversely by rising interest rates, the only significant difference being you can’t enter and exit any time in a fixed-maturity fund. Bringing you the best of both worlds, are Maturity Roll-down funds which give you a fixed-maturity period while still remaining open-ended. This serves two purposes, to give investors the predictable returns of a closed-end fund, while also allowing the freedom to enter or exit on any business day.

Using the yield curve

How does a fixed-maturity fund remain open-ended is the obvious next question here, the answer to which is the fact that the fund invests only in papers that match the remaining tenure of the fund. So for a 25 year fund where investments are made in corporate bonds with a duration of 25 years during the first year, during the second year investments will only be made in bonds that have 24 years remaining, and so on, and so forth till the fund reaches maturity. This is done without increasing risk like floating rate funds and is the reason why returns are more predictable.

The next question, how does the fund achieve this without increasing risk? The answer, yield curves are always upward sloping so the longer the maturity, higher the yield. This is why holding a fund till maturity over a longer period of time is the best way to negate the effects of rising interest rates. Now let us assume you invest in a 25 year bond that’s currently trading at 6.7%, while a 20 year bonds is trading at 6.5%. What will happen after 5 years is that you will have a 20 year bond with an extra 0.2% yield which investors will be ready to pay more for.

This is because an older bond with higher yield and is more valuable than a newer bond with lower yield having the same residual maturity. Additionally, since the duration of the bond reduces over time, so does the risk of rising interest rates. That being said, lets take a look at a new fund offering from Nippon India, that’s an open-ended, fixed maturity scheme with roll-down strategy.

Nippon India Nivesh Lakshya Fund

Average Maturity: 24.06 years (as on 10th February 2021. Source: Nippon India Mutual Fund).
Modified Duration: 11.19 years (as on 10th February 2021. Source: Nippon India Mutual Fund).

Investment portfolio: This scheme predominantly invests in long-dated Government Securities (25 to 30 years maturities). G-Sec is a lot safer than corporate bonds and a lot harder to invest in as an individual.

Yield: The current yield to maturity (YTM) of the scheme is 6.7% (as on 10th February 2021. Source: Nippon India Mutual Fund).

Like we already discussed, since the scheme employs a maturity roll-down strategy, as the remaining tenure reduces, so does the interest rate risk, which will continue to reduce over the investment tenure.

Credit risk: The scheme only invests in Government Securities which means there is virtually no credit risk since Government Securities come with a sovereign guarantee which means interest and principal payments are guaranteed by the Government.

Investing long-term

In conclusion, given the steepness of the curve at present, there’s really no substitute for investing long-term and holding on to high quality corporate or G-Sec funds till maturity. That being said, if you’re looking for good money-market products that offer all the features discussed in this post, particularly, products built with longer maturity and quality corporate or government papers, feel free to contact us for further details. Remember different player, different playing style, so don’t hesitate to contact us for a tailor made strategy to suit your risk-profile.

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Greetings,

We hope you found our previous post on open-ended, fixed maturity funds, both useful and informative. If you haven’t had a chance to read it yet, we’ve put it here so you don’t miss out!

While 2020 ushered in a global crisis on a scale that humanity had never seen before, 2021 continues to teach us hard lessons earned over decades of practicing unsustainable economics. Pollution, strip-mining, deforestation, over-fishing, and hunting animals to extinction are just a few examples of the effect our economies have on the environment. As the world tries to move forward from the mistakes of the past, one of the things we’re trying to focus on is sustainability, and not taking more from the environment than we can put back. This focus is being delivered right at the root of our financial ecosystem by changing the way responsible investors invest their money.

Measuring sustainability
Sustainability today is measured in terms of E, S, and G, which stands for environmental, social, and governance respectively. Organizations that wish to be ESG compliant need to adhere to a stringent set of standards and regulations. While the environment score is determined by carbon footprint and the impact an organization has on the environment, the social aspect pertains to gender equality, social diversity, racial diversity, as well as diversity based on sexual orientation.

The governance aspect, today, has a lot to do with the ESG data that an organization makes available to the public, the quality of that data, as well as its transparency in operations. This is because financial disclosure and transparency are key aspects of ethical governance and organizations that are in compliance automatically become a much safer choice for investors. Given a choice between full disclosure and ambiguous operations, most investors would choose the former.

Indian ESG Funds
While assets managed by ESG funds globally reached a total of $1.65 trillion as of the December quarter of 2020, assets managed by ESG funds in India reached about 45 billion INR and continue to grow steadily. This is undoubtedly due to the effect the global pandemic has had on people and businesses around the globe. ESG funds weren’t that common pre-pandemic, however, 2020 saw a number of large asset management companies launch ESG schemes in India like the ones listed below.

Aditya Birla Sun Life ESG Fund
1.Started in December 2020 and managed by Mr. Satyabrata Mohanty.

2.Management is active while investments are 60-80% in large cap and remaining in mid and small caps.

3.Portfolio is focused 40-50 ESG compliant companies.

4.The fund retains the right to invest 35% of the fund’s net assets in ESG compliant international securities.

Axis ESG Fund
1.Started in February 2020 and managed by Mr. Jinesh Gopani.

2.This fund is focused on 52 ESG compliant holdings, the top 5 of which include Bajaj Finance, Kotak Mahindra Bank, HDFC Bank, Avenue Supermarts, and Tata Consultancy Services.

3.Management is active and return are at 31.20% since the fund’s inception on December 23, 2020.

4.Investments are 80% in stocks that rate highly on ESG factors.
 
ICICI Prudential ESG Fund
1.Started on October 2020 and managed by Mr. Mrinal Singh.

2.This fund is focused on 30 ESG compliant holdings, the top 5 of which include HDFC Bank, Kotak Mahindra Bank, Housing Development Finance Corp, Infosys, and Reliance Industries Ltd.

3.Management is active and return are at 10.90% since the fund’s inception on December 23, 2020.

4.Investment are predominantly in companies with a high ESG score. Stock selection is based on internal research as well as the Nifty ESG universe. The fund also reserves the right to invest in international organizations that are ESG compliant.

SBI Magnum Equity ESG Fund
1.Originally named SBI Magnum Equity Fund, this fund was relaunched as SBI Magnum Equity ESG Fund in May 2018 and managed by Mr. Ruchit Mehta.

2.This fund is focused on 39 ESG compliant holdings, the top 5 of which include HDFC Bank, Infosys, Tata Consultancy Services, Reliance Industries Ltd, and ICICI Bank.

3.Management is active and returns are at 10.84% as of December 23, 2020.

4.Investments are 80% in ESG compliant equity, while the remaining 20% in other equities, debt, or money market instruments.
 
Kotak ESG Opportunities Fund
1.Launched on December 2020 and managed by Mr. Harsha Upadhyaya.

2.This fund is focused on 48 ESG compliant holdings including Infosys,Bharti Airtel, HDFC Bank, Tata Consultancy Services, Eicher Motors,Larsen and Tourbo, Axis Bank, Ultratech Cement, Cipla, and more.

3.Investment is 95% in ESG compliant Indian stocks, 57.84% of which is in large-cap stocks, while 17.95% is in mid-cap stocks, and 9.63% is in small-cap stocks.

In conclusion, the world has changed in terms of environmental awareness and social consciousness and as responsible citizens of the world it is our duty to follow suit. Please feel free to contact us for more information on investing in ESG funds.

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Greetings,
We hope you found our previous post on ESG funds both useful and informative. If you haven’t had a chance to read it yet, we’ve put it here so you don’t miss out!

A steady cash flow is the most important aspect of any retirement plan, and a lot of people look to Mutual Funds to either create or supplement a regular income. While a number of schemes exist that provide monthly or quarterly dividends, these are completely dependant on profits and hence cannot be classified as guaranteed returns. This is where SWPs or systematic withdrawal plans step into the picture and provide investors with a tax-efficient way to maintain a guaranteed cash flow while also outperforming a fixed deposit.

Disciplined withdrawals
A lot of people talk about discipline while investing, but not many about discipline while withdrawal which is an equally important aspect of maintaining a steady cash flow post-retirement. An SWP helps maintain discipline during withdrawal by redeeming a fixed amount of mutual funds every month, irrespective of the state of the market. This effectively does two things, it protects you from selling lump sums when the market is down, as well as overinvesting when the market is on a high, both of which are counterproductive if your aim is to create or supplement a steady income.

Now unlike a fixed deposit where you only withdraw the interest and your corpus remains intact, with an SWP, you’re actually withdrawing both, a part of your capital, and the interest. So say for instance you invest one lakh rupees to buy 10,000 units of a fund (NAV 10) and want a 5,000 INR monthly withdrawal. What will happen here is every month, 5,000 INR worth of units, based on the “Rupee-cost-average,” will be sold every month to supplement your income, irrespective of the state of the market.
Tax efficiency
This benefits investors in a number of ways, as opposed to a lump sum withdrawal which is subject to a single NAV at any particular point in time, Rupee-cost-averaging gives investors the ability to withdraw their funds at an average NAV that is collected over a longer period of time. This not only supplements your cash flow with fixed monthly returns but also gives your investment a longer period of time to grow and consolidate. Additionally, as opposed to interest earned from a fixed deposit that is classified as income and taxable as such, in an SWP, only the growth or profit is taxable as income.

To further elaborate, If 10,000 units of a fund that you bought for one lakh rupees grown to a value of 1.1 lakh rupees INR, registering a 10% growth, only 10% of your monthly withdrawal is taxable as income. Using the above example where the goal was to create a 5,000 INR monthly cash flow, only 500 INR will be taxable as income. When compared with the interest earned on a fixed deposit that is completely taxable, SWPs make a pretty good argument as a tax-efficient way to create a steady cash flow. To know more about SWPs and which ones are best for your portfolio, age, and risk profile, feel free to contact us.

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Greetings,

In case you missed our previous post on systematic withdrawal plans, we’ve linked it here so you don’t miss out!

Greek physician Herophilus (325-280 BC), the father of anatomy, credited with the first ever scientific human cadaveric dissection, and arguably the greatest anatomist of all time wrote: “when health is absent, wealth becomes useless.” Fast forward to the 20th century and Mahatma Gandhi (1869-1948) famously said: “it is health which is real wealth, and not pieces of gold and silver.” While the timelines involved here are drastically different, what rings true across the centuries is the comparison between health and wealth, and the realization that one is quite useless without the other.

While both the distinguished gentlemen mention above hit the nail on the head while asserting that the pursue of wealth at the cost of one’s health is a rather useless endeavour, in today’s world, both are equally important. The connections between financial, physical, and mental health are undeniable. While poor health and healthcare bills can have a seriously negative impact on one’s financial life, poor finances can leave you unable to tackle a medical emergency or unable to recover from the cost of a medical procedure.

So if we can all accept that both are equally important, the problem then lies in the fact that while most parents and teachers instiil in us all the good habits to stay healthy, it’s a very rare occurence where someone teaches us about wealth in the same way. Luckily enough, since most people already knows the habits to stay healthy like brushing their teeth in the morning, drinking a lot of water, and getting enough sunshine and exercise, we can have some fun drawing parallels between good health habits and good wealth habits.  

1.Waking up early in the morning: This one is pretty straightforward, similar to “the early bird get’s the worm” philosophy, building wealth and investing as early on in life as possible is probably the biggest advantage you could ask for.

2.Eat a balance diet: If wealth was your food, this one would translate to maintaining a diversified investment portfolio. Similar to the “don’t put all your eggs in one basket” philosophy, spreading out your investments across sectors and risk-profiles is a great way to minimize risk while also increasiong the potential for growth.

3.Drink lots of water: This one is easy, maintain liquidity! Liquidity is essential so staying afloat, and while the temptation to overinvest or over commit oneself while investing is always high, having enough liquidity is key to maintaining wealth.

4.See a Doctor if you’re feeling under the weather: The worst thing you can do in an unhealthy situation is to try and Google a cure or diagnose yourself. While self diagnosis and self medication can be downright dangerous to your health, similarly with finances, seeing a professional financial planner is a basic fundamental to living a wealthy life.

In conclusion, you can’t really have one without the other and while a healthy man may be able to work hard and earn himself a living, earning and maintaining  wealth is another thing altogether. For more information on wealth management feel free to contact us.

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In today’s post we’re going to take a quick look at a new fund offering called Aditya Birla Sun Life Multi-cap fund, along with a summary of its investment philosophy and key benefits. A multi-cap fund is an equity-oriented mutual fund scheme that invests across market capitalizations. What’s important to note here is that markets regulator Securities and Exchange Board of India (SEBI) on September 11 announced changes to the constitution of multi-cap funds. According to the new constitution, these funds are now required to invest a minimum of 75 percent of their total assets in equity and equity-related instruments, as well as a minimum of 25 percent each in large, mid, and small-cap stocks.

In reference to this update Mahesh Patil, Chief Investment Officer, Aditya Birla Sun Life AMC, was quoted stating: “The economy is expected to grow at a much faster rate in the next three to five years. Many small-cap companies are expected to report healthy earnings growth, making them good investments for the medium term.” Similarly, A Balasubramanian, MD & CEO, Aditya Birla Sun Life AMC, said that while large-caps are proven quality compounders and must-haves for any portfolio, from a long-term perspective, it’s the mid and small-cap segment that is proving to be rewarding.

 This fund will be an open-ended equity scheme investing across large-cap, mid-cap & small-cap stocks with a minimum of 25% portfolio allocation each to large, mid, and small caps. The NFO is open from April 19, 2021, till May 3, 2021.

Investment Profile:

1. The scheme will invest 25-45% in Large-cap and a minimum of 25-35% each in Mid and Small-cap segments
2. The scheme will follow a bottom-up approach of stock selection

Key Benefits:

1. Combines the stability of large-caps and the high growth potential of mid & small-caps in one portfolio.
2. Disciplined market cap allocation and active rebalancing provide the opportunity to invest in fast-growing sectors/companies across the spectrum.
3. A bottom-up approach helps build a portfolio of high conviction ideas to enhance return potential.
4. Ideal portfolio to play high growth cycle

In conclusion, India is expected to be among the top 3 economic powers within the next 15 years. An open-ended fund that has no restrictions on sector or market cap is definitely a lucrative investment options for those who want to grow with India. That being said, however, whether this particular fund is a good investment option for you is completely subjective and depends largely on your existing investment portfolio. For more information on what funds best suit your age and risk profile, feel free to contact us.

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Tennessee Williams once famously said: “Ignorance of mortality is a comfort.” While ignorance is indeed bliss, it’s also a comfort that people with loved ones and dependents, cannot afford to have. In today’s post, we’re going to look at the importance of estate planning, as well as the benefits of designating heirs for your assets in case of your untimely demise.

While the word “estate” might mislead readers to think this is only for large landowners, estate planning is for anyone who has assets that they would like to leave behind for loved ones or dependents. The main goal here is to make sure that all your assets are distributed as per your wishes, while also minimizing taxation on whatever you leave behind.

Additionally, estate planning isn’t just about distributing wealth and you can also delegate responsibilities like in the case where you have children, you can delegate a legal guardian to care for them in case fate doesn’t permit you to. Protecting what you leave behind from taxations by the government is another important aspect of estate planning and it is best to get professional money management services for this.

There are 4 critical components of a good estate plan that we are listing below:

    1) A will that clearly identifies:

    a. The heirs to your assets
    b. Your children’s guardian
    c. The executor of your will

    2) A power of attorney that will enable:

    a. Someone to make financial decisions on your behalf
    b. Someone to pay bills and make legal decisions on your behalf
    
    3)   A medical power of attorney to:

    a. Enable your doctor to make medical decisions for you in case you are unable to

    4)   A Trust to:

    a. Minimize estate taxes
    b. Control how your assets are distributed

In conclusion, as Surya Das put it so well. “If we accept and internalize the fact of our own mortality, then, by definition, we have to deal with the essential questions of how we live and spend our allotted time.” This means not only making peace with the fact that one day we have to leave this world, but more importantly, ensuring that all our affairs are in order before we go. This not only helps ease the situation for your loved ones who are coping with grief and loss but also prevents ugly legal battles caused by the lack of a proper estate plan.

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