Yeh Mutual Funds Kya Hai?

Flexi Cap: This primarily refers to mutual funds which invest across all the Large, Mid and Small at a flexible ratio. This is a very common fund choice for long term investing and for investors who don’t want to worry about specific market caps and its volatility (mid, small caps) or its lower alpha (large caps)  e.g: Kotak Flexi Cap, Canara Robecco Flexi Cap etc.

ELSS: Equity Linked Saving scheme is generally a tax savings scheme with a lock in period of 3-5 years useful to save tax under Section 80C.)  e.g: Quant Tax Plan, HDFC Tax Saver etc. More on tax saving options covered in our other blog [Bachao Humhe – Tax se !!! – kyronconsultants.com]

Corporate Bonds: A very common Debt fund which invests into a mix of Government securities or bonds like REC, NHAI [atleast 80% as a ] and also private corporates to generate returns little over inflation rate with minimal risk and sovereign guarantees.  e.g: Nippon India Bond, Axis Corporate Bond etc.

Liquid Funds: These funds are actually a debt fund which invest in fixed-income instruments like commercial paper, government securities, treasury bills, etc. with a maturity of up to 91 days. Generally  investors can get their withdrawals processed within 24 hours. These funds carry the lowest interest-rate risk in the debt funds category and very commonly used to park funds for short period to preserve capital.

Benchmark: Benchmark is the reference or criteria of comparing any mutual funds return against the theme its investing.. for e.g: A Large Cap mutual fund would always be compared to NIFTY 100 TRI benchmark returns, a flexi cap with Nifty-500 TRI, a small cap fund against Nifty – 250 TRI

AUM: Assets Under Management is the total amount that is being managed by the fund manager under the mutual fund. This is the actual invested and appreciated amount of the investors put together in the mutual fund. Usually new funds would initially start with few hundred crores and over longer period of time with appreciation and fund performance balloon easily to few thousand crores.

NAV: Net Asset Value is the actual price of 1 unit of a mutual fund. Most mutual funds when they come out with new offering peg this at INR 10 face value. As the performance of the mutual fund grows the NAV grows too. This though should not be directly coorelated to the price of a mutual fund meaning less NAV is not better than higher NAV. A higher NAV may infact reflect growth over long years. This though should be compared to benchmark and other factors including some highlighted below before choosing any fund.

XIRR: Extended Internal Rate of Return is the return calculation of investments or redemptions done at varied times of varied amounts as well. This is the ideal criteria to apply to understand your returns in a mutual fund where the investments and redemptions happen not in a fixed pattern. Unfortunately many of the broker portals do not showcase this prominently for your portfolio as of today. Many financial advisor portals and apps do showcase this by default and should be utilized to thoroughly understand your portfolio performance.

Absolute Returns: This is a simple calculation done on your portfolio from investment to gain or loss perspective. This gives the larger picture but not specifics of exact yearly or accrued performance over a period of time. This though is a good indicator of how far you have come in your investment journey when looked at from multi year perspective.

Rolling Returns: This is a very important metric generally used by financial advisors while evaluating any mutual fund returns. What it reflects is a point to point return calculated over the entire life cycle of the mutual fund. More than anything else it displays the consistency of the fund manager approach and churn rate or volatility of the fund. Higher churn rates mean higher transactions charges which affect the NAV of any fund but gets hidden. Understanding this return is critical while choosing any mutual fund for long term investing.

Expense Ratio: This is the total expense charged by any mutual fund and includes the fund manager and distributor fees. Generally regular plans expenses would be higher compared to direct plans with underlying assumption of the distributor providing professional advice and guidance as part of recommendation or creation of your portfolio. A DIY investor can opt for direct plans though all initial investors would be better off taking professional guidance as they start their journey to understand the nuances before attempting on their own. One very critical aspect to keep in mind in equity investments is “time” is the actual currency and not the “money”. A few years lost making below average returns cannot be regained. Likewise more the number of years you have in hand guarantees an above average returns if invested in disciplined manner without interruptions or redemptions.

RiskoMeter: A riskometer is a pictorial representation of the risk a mutual fund carries. The graph is designed according to the Association of Mutual Funds in India (AMFI) guidelines. Though not complete in its purpose for customized requirements of individuals, what it successfully highlights is the volatility an investor should expect with the fund. Lower Risk will always mean average inflation adjusted returns and Higher Risk would map to above average returns. Both are essential based on who is investing and for what purpose basis their risk profile. A senior citizen with no income should ideally opt for Low Risk funds or a balanced approach while a young investor who has just started his career can easily digest higher volatility in his fund choices as long as it delivers above average returns over long periods of time. A prudent financial advisory would always ensure a mix of risk basis life stage of their clients.

Rebalancing becomes an important aspect at regular block of intervals [common one being age criteria of 35, 40, 50, 55, 60 years etc.]