Adopt a safety-first principle in debt funds

by | Oct 5, 2018 | Market Pulse, SAS Updates

At present you should stick to funds that avoid both duration risk and credit risk ? Debt funds are sold to investors as a less risky alternative to equity funds. However, investors should not make the mistake of equating these funds with instruments like fixed deposits where there is no risk of loss of capital. In debt funds, investors can suffer erosion of their capital, owing to a variety of risks. The first type of risk in debt funds is interest-rate risk. When interest rates are falling, prices of bonds rise. This results in capital gains within mutual fund portfolios, which boosts their returns. But when interest rates are rising, prices of bonds within debt fund portfolios decline. Such losses are higher in case of bonds of longer tenure, and lower in bonds of shorter tenure. Over the past year and a half, interest rates have been on the upswing in India. In such a scenario, investors should stick to debt funds that have a low average maturity. Liquid funds, ultrashort term debt funds, and short-term funds are some of the categories of debt funds that investors should stick to in a rising interest rate environment. The second type of risk that debt funds face is credit risk. When a bond that is held within a mutual fund portfolio gets downgraded, or defaults, the net asset value (NAV)of the fund declines. This is what has happened in the case of IL&FS and its group companies. This company and its subsidiaries currently have a total debt burden of around Rs. 90,000 crore. Of this mutual funds hold around Rs 2,282...

Keep your SIPs going

It is when the markets decline that you reap the real benefit of SIP by being able to buy more units of a fund Recent news reports suggest that one in three SIP-related request this year has been for closure of SIP accounts. Earlier, a report from UBS had also warned that SIP-based inflows into the equity markets could stall if historic returns turn negative. With the markets turning volatile, there is very much a risk of that beginning to happen now. Whatever others may do, you should not stop your SIPs as this could do a lot of damage to your long-term investment plans. Novice investors, who entered the equity markets in the past couple of years, when there was a bull run in progress, are most likely to stop their SIPs when the markets decline. These are usually investors who have not fully understood the risk in equities. They have not internalised the reality that equity markets tend to be highly volatile in the short term. But if they hang on to their investments, they will be rewarded with high returns in the long term. Many investors also tend to stop their SIP investments because there is a mismatch between the ideal investment horizon for equities, and the time horizon with which they entered this asset class. The ideal time horizon should be at least 7-10 years. If you came into the markets expecting to make money within a year or two, you are likely to be perturbed by the interim volatility in the markets. Recalibrating your time horizon will enable you to deal with markets turbulence better....
Avoid NFOs, stick to tried and tested funds

Avoid NFOs, stick to tried and tested funds

If you go to the Association of Mutual Funds in India (Amfi) website, you will be able to see the list of new fund offers (NFO) that are currently available (https://goo.gl/rMMLio). Your friendly neighbourhood mutual fund agent may also be pestering you to buy a hot new fund which, according to him, has great prospects. Before investing in an NFO, you should do a little research. An NFO is basically a new fund that a fund house has just launched. Such launches are typically accompanied by an advertising and marketing blitz. Often, mutual fund agents are offered high upfront commissions on these new products, which is why they urge you to buy them. The biggest drawback of buying a new fund is that it does not have a track record. In an existing fund that has been around for a long time, you can check how it has performed vis-a-vis its benchmark and also compared to its category peers. If the performance is sound, and the fund manager who was responsible for earning these returns is still there at the helm, you can invest in such a fund with a certain degree of confidence. Since an NFO does not have a track record, investing in it is akin to taking a blind bet. In bullish market conditions, certain sectors tend to outperform others. In such an environment, fund houses launch NFOs for sectoral and thematic funds. Investing in such NFOs can be even more dangerous than investing in the NFO of a diversified equity fund. When the hot streak of that sector ends, such sectoral and thematic funds take...
4 Money Management Rules

4 Money Management Rules

Dear Trader As trading is an enterprise to make a profit in an atmosphere of wide-ranging probabilities, a flexible approach is a must. Therefore, the following four rules are not supposed to be taken as sort of traffic rules that need strict adhering to. They are more like a checklist of do’s and don’ts – a bit like the routine a pilot goes through before pressing the ignition button. Nevertheless, a new trader would do himself a great favour by sticking to them as the traffic rules for a while. CAP rule Count All Pennies involved in the total monetary value of the instrument to be traded beforehand. Especially the hidden ones that come up gift-wrapped in the form of Leverage, because Leverage is the real villain responsible for dispatching the trading capital on the road to hell more than often.     Let’s say, for example, that a nifty contract can be traded MIS for under 20,000 and as NRML for about 50,000. Now, this 20k leverage is the 25th part of approx. Rs. 500,000, the actual value of 75 shares of Nifty. The leverage thus is 25 times. So a trader with 100,000 trading capital can easily trade 3-4 contracts in one go, right? Wrong. What gets forgotten is that one Nifty contract will move with the full weight of 500K, not with that of 20K. That is, loss and profit will be calculated in terms of full value, not in terms of leverage. One simple rule to follow to save yourself is to make sure you never lose more than 2% of your capital on a...
Muhurat Trading 2016

Muhurat Trading 2016

What is Muhurat Trading? Muhurat Trading is a symbolic and old ritual, that has been retained and observed from ages by Trading Community. Muhurat Trading is the stock market trading activity which happens for about an hour on the Diwali day. The markets open in the evening on Diwali day and most traders buy on this day. It is a symbolic ritual which has been performed for years and investors make some token purchases on this day.   As Diwali also marks the beginning of the New Year – Samvat in Hindi, it is believed that Muhurat trading on this day brings in wealth and prosperity throughout the year. This is Samvat 2072. Usually, the Sensex closes on a higher note on the Muhurat tradings day. In the past 10 years, the benchmark Sensex index has lost value only twice during the Muhurat session.   This year the exchanges will conduct a special muhurat live trading session from 18:30 hours to 19:30 hours on October 30, 2016 on Diwali in NSE Segment and from 18.30 hours to 19.30 hours in MCX Segment . Do remember to login and trade. May the odds be always in your...
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