SECTOR-THEMATIC NFOs

SECTOR-THEMATIC NFOs

Beware lack of track record, cyclicality, concentration risk

To capitalise on the bull market, mutual fund houses launched 202 new fund offers (NFOs) in 2024, a record high, according to the data from Morningstar. This was the first time NFOs crossed the 200-mark in a calendar year. Investors, however, should carefully scrutinise these offerings rather than succumb to hard-selling tactics.

Why the upsurge in NFOs?

The Indian markets have witnessed a prolonged bull run.

A large number of new investors joined the equity markets during this period. NFOs are one means through which assets managers try to capture market share.

Several new funds houses have been launched. They came out with NFOs to complete their product suite.

           Most equity NFOs belonged to the sector-thematic or the passive fund category. The Securities and Exchange Board of India’s (Sabi’) rules restrict fund houses from having more than one fund per diversified equity category. The established fund houses already have funds in these categories. It is only in the sector-thematic and the passive space that they can launch multiple products as long as the sector-theme or the index is unique.

The passive segment offers unlimited scope for launching new funds, as index provides can always create new indices. With growing awareness, demand for passive funds has also risen, prompting funds houses to launch more products.

Risks of sector-thematic NFOs

All NFOs lack a performance track record, and investors often have no clarity on the style of fund management. Investors also run the risk that the investment thesis may not play out as projected by the fund house.

Sector-thematic NFOs come with additional risks. Many of the thematic funds that have been launched recently have been very narrow, limited to just one or two sectors.

Such funds carry high concentration risk, with a small number o stocks accounting for the bulk of the portfolio. Investors often chase sectors and themes that have done well recently. That may be precisely the wrong time to enter these funds because the cycle could be set to turn for them.

Their cyclical nature demands precise timing of entry and exit, and that in turn requires careful monitoring. Many retail investors may not have the expertise to do so.

What should investors do?

Avoid most NFOs if established funds with proven track records from the same category are available. Most sector-thematic NFOs should also be avoided because of the timing risk in them. Investing in a sector-thematic NFO only when the investor is keen to invest in a specific theme or sector for which no fund already exists.

Investors must have deep knowledge of the sector or theme they wish to invest in and confidence in its ability to perform in the current market. Finally, warns too many funds to the portfolio by investing in a large number of new launches. Also cautions against Investing in NFOs for quick gains solely due to the marketing that accompanies these launches.

 

PASSIVE FUND NFOs : RISKS AND STRATEGIES

RISKS –

No performance track record available, tracking error and difference are also not available

Fund’s risk profile may not match investor’s appetite, alpha and momentum funds, for instance, should be avoided by conservative investors

Factor-based funds may not outperform their parent market-cap based indices

High historical returns of index may not continue post-launch due to factors like liquidity issues in stock that have to be picked and inflows-outflows from fund

WHAT SHOULD YOU DO?

Invest in a factor-based passive fund only after it demonstrates sound performance over a full market cycle

Restrict investment to a small portion of your satellite portfolio

 

 

For More Details: Pooja Manoj Gupta, visit www.giia26.com

Email: pmgiia26.com Mobile  9868944340

AGGRESSIVE HYBRID FUNDS

 

AGGRESSIVE HYBRID FUNDS

Cope with volatility, benefit from rate cuts

Volatility in the capital markets continues to pose a challenge to equity investors. At the same time, the possibility of interest rate cuts following a prolonged wait, is growing. In such an environment, taking a balanced approach to investment through aggressive hybrid schemes of mutual funds may offer a prudent path forward. 

Aggerssive hybrid funds are well-suited for the current market environment as equity markets are volatile due to global economic uncertainties, inflationary pressures, and shifting interest rate expectations. Their balanced asset allocation allows these funds to navigate such challenges more effectively.

Hybrid funds are all-season funds. They are best for new investors in equity markets as they help build confidence in the asset class.

Cushion against volatility

Aggressive hybrid funds are designed to allocate 65-80 per cent of their  assets to equities, with the remainder invested in bonds. Most of these funds employ a large-cap-heavy strategy for their equity portfolios. This helps to reduce volatility compared to portfolios with significant exposure to mid and smallcap stocks. If interest rats decline, the bond component of these portfolios could generate capital gains. Conversely, rising interest rates may cause short-term losses.

At present, the category has over 70 per cent of equity allocation to largecap stocks, which offer stability and are less susceptible to market fluctuations compared to midcaps and smallcaps. With only 5-7 per cent exposure to smallcaps and the remainder in midcaps, these funds’s equity portfolios reduce the risks associated with midcaps and smallcaps, which are trading at premium valuations. The debt component provides further stability.

Largecap stocks are also better positioned to withstand economic slowdowns and subdued corporate earnings compared to their mid and smallcap counterparts.

Hybrid funds tend to underperform pure equity funds in a trending market like that FY24. However, over longer periods, they tend to deliver better risk-adjusted returns as markets generally move in cycles. The year 2025 could be a volatile year after the past two years of spectacular retunes for equity markets. Hybrid funds generally outperform during these times. Also we expect the Reserve Bank of India (RBI) to cut rates this year, helping debt funds to generate higher returns as bond prices could rally.

Who should invest?

Aggressive hybrid schemes may appeal to investors seeking equity exposure with relatively lower volatility.

These funds are ideal for moderate risk-takers who seek exposure to equities with reduced volatility due to the debt component. They are also suitable for new investors looking for a safer entry into equities, and those with medium-term financial goals.

Points to consider

Investors should assess the underlying portfolio and choose a scheme aligned with their risk tolerance. They should also evaluate the fund’s historical performance. While these schemes offer a smoother ride, occasional bouts of volatility are inevitable. Investors should enter with a minimum investment horizon of five years.

A Systematic Investment Plan (SIP) is widely regarded as the most effective method of investing in these funds. An ideal holding period for aggressive hybrid funds is three to five years, allowing them to navigate market cycle and deliver balanced returns.

These funds can constitute 15-25 per cent of the portfolios of moderate risk-takers, while conservative investors may limit exposure to 10-15 per cent.

High penalties for cash transactions: know I-T dept’s key restrictions

The Income Tax Department recently released a brochure emphasising the importance of limiting cash transactions in daily transactions. There is a limit to daily cash transactions and its breach invites penalties.

Key provisions associated penalties:

SECTION 269SS: Restrictions on cash loans and deposits

MANDATE: Prohibits acceptance of loans, deposits, or specified sums in cash exceeding Rs. 20,000.

PENALTY: Violations result in a penalty equal to the amount accepted in cash, imosed on the recipient.

SECTION 269ST: Limit on cash receijpts.

MANDATE: Bars receipt of Rs 2 lakh or more in cash from a person in a day, or in respect of single transaction or related transactions.

PENALTY: Non-compliance leads to a penalty equivalent to the amount received in cash.

SECTION 269T: Restrictions on cash repayments

MANDATE: Prohibits repayment of loans or deposits in cash if the amount, including interest, is Rs 20,000 or more.

PENALTY: Breaches attract penalty equal to amount repaid in cash. 

For More Details: Pooja Manoj Gupta, visit www.giia26.com

Email: pmgiia26.com Mobile  9868944340

YEAR-END REVIEW OF INSURANCE PORTFOLIO

 

YEAR-END REVIEW OF INSURANCE 

PORTFOLIO

Boost term cover with rising income and liabilities

Increase health cover tackles rising medical costs; consider super top-up and critical illness plan

A robust insurance portfolio provides the foundation upon which a strong investment strategy is built. 

Reviewing term coverage

If you have started working and have dependants who rely on your income, you must buy term insurance at the earliest. Premiums are lower when you are younger. Premium in a term policy remains unchanged throughout the policy tenure so a lower price is beneficial. He adds one ages, the onset of health conditions can cause insurers to charge higher Premiums.

A good rule of thumb is to purchase term cover amounting to 7-10 annual income, plus outstanding liabilities.

While choosing the cover, select an appropriate tenure. The term cover should last until your liabilities are paid off and your children have stared earning.                        

When to enhance cover: If there has been a significant change in your income over the past year, review the sum insured. Your family gets accustomed to a higher standard of living, which means you need a higher cover to help them maintain that lifestyle. New liabilities, such as a vehicle, home, or education loan, should also be factored into your insurance needs. Lifestyle changes, such as marriage, the birth of a child, and other significant milestones, are also important triggers for reassessing coverage.

When to reduce coverage: one may reduce coverage after repaying a significant liability, such as a home loan.

Before reducing the cover, consider whether you wish to use the term plan to transfer wealth to your children. Maintaining coverage can be beneficial as a tax-efficient way to leave a legacy for the next generation.

Should you switch?  Stay with your insurer unless there are serious issues, such as consistently poor claim settlement ratio or delays in claim processing compared to industry standards. Discontinuing your existing policy resets the three-year protection provided under Section 45 of the Insurance Act, which mandates claim settlement after three years.  If new policies with better features or more attractive pricing become available, buy a supplementary policy instead of replacing the current one.

Reviewing health cover

Is sum insured enough?  Healthcare inflation in India is around 14 per cent. If you purchased a policy a few years ago, the sum insured might no longer be sufficient to cover rising medical costs. If you are under 30, plan your health insurance cover with an eye on your 50s and beyond, when hospitalisation risks typically peak. He emphasises upgrading your coverage early, as enhancing it later may not be possible if health issues arise.

Major life events also necessitate adjustments to coverage.

Life events like marriage or childbirth can increase healthcare needs, warranting an adjustment in coverage.

Why consider a super top-up?  For those seeking more comprehensive coverage, a super top-up policy can be useful.

A super top-up is often a more cost-effective option as it provides additional coverage beyond the specified deductible amount at a lower premium compared to increasing the base policy’s sum insured.

 Purchasing the super top-up from the same insurer to streamline claim processing and minimise the risk of conflicts or delays.

The case for a critical illness cover: Individuals with a family history of serious illnesses, those in high-risk professions and those with lifestyle issues (like smoking) should evaluate the need for a critical illness policy. These plans provide a lump-sum payment upon the diagnosis, which can be used to meet expenses other than those covered by the base policy.

Reduce coverage?  Reducing the sum insured is generally not advisable due to rising healthcare costs. However, in rare cases, it may be necessary. If the rising premium of your base policy makes it unaffordable, consider reducing the sum insured on your base policy while adding an affordable super top-up policy to maintain overall protection against large medical bills.

Identify gaps in coverage:  Understand what your policy covers and excludes. Ensure it includes hospitalisation, day-care treatments, and pre-and post-hospitalisation expenses. Check for sub-limits on room rent and specific treatments, as these can reduce the claim amount.

Also, verify the insurer’s hospital network so that you can avail of cashless treatment. Review the waiting periods for pre-existing conditions as well.

Should you consider porting?  Porting health insurance policy may be useful if you are unhappy with claim settlement, service quality, or significant premium hikes. It is also advisable if the insurer has a limited hospital network in the new city you have moved to.

 

For More Details: Pooja Manoj Gupta, visit www.giia26.com

Email: pmgiia26.com Mobile  9868944340