Importance of nominee in a mutual fund investment

Providing a nominee may be a simple but important step in making a mutual fund investment. The importance of this step comes in when a nominee or legal heir has to claim the investment proceeds after the death of a mutual fund investor. A joint-holder, nominee or legal heir can claim the proceeds. The process is called transmission.

Asset Management Companies (AMC) have a common procedure for transmission of units, however, there might be a slight variation in formats or documents required across AMCs, but broadly the process is the same.

The nominee or legal heir should submit the required documents along with the letter requesting transmission of units to the AMC. It is necessary to contact every mutual fund house separately where the deceased person had investments.

There can be three situations:

  1. Transmission to surviving joint holders
  2. Demise of sole or all holders, where nominee is registered
  3. Demise of sole or all holders, where nominee is NOT registered.

In all the cases, surviving holders or nominees or legal heirs should submit the following common documents with the AMC.

  1. Letter requesting for transmission of units-It should be in the AMC’s specified format.
  2. Original or duly notarized or attested photocopy of death certificate of the deceased unit holder
  3. KYC confirmation of nominee or claimants or surviving unit holders
  4. New bank mandate in AMCs specified format with attestation from bank branch manager or a cancelled cheque with account number and holder’s name printed on the cheque or bank account statement. The bank mandate has to be given on bank’s letter head or, if on a plain paper, bank branch seal, employee name and number seal should be affixed on it
  5. FATCA self-certification

Now coming to the most important part, while in case of situation 1 and 2 one will require the documents stated above in case of situation 3 where nominee is not registered needs two additional legal documents- Indemnity bond signed by all legal heirs confirming the claimant and individual affidavit by legal heirs. However, if the claim amount is above a certain hurdle limit, the claimant will be required to produce a notarized copy or probated will or succession certificate by a competent court or Letter of Administration, which makes the process harder.

The problem arises if claimant’s name in the identity documents or bank record and AMC’s record do not match. For instance, the identity documents carries middle name and AMC’s record do not or vice-versa, or different spellings. So, while mentioning nominee, make sure the details match the nominee’s identity records. Also, if the claimant is a minor, all stated document of the guardian will be required. If all required documents are in place, the process will take up to 15 days after submission of request letter and relevant documents.

Finally, all these things are possible only if the investor keeps someone informed about his investments. If no one is aware of the investments, the investment will keep lying as unclaimed. So, make sure that you keep the nominee or someone in the loop about your mutual fund investments.

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

Debt Mutual Funds: Duration Funds vs Accrual Funds

A debt fund holds debt instruments, and these instruments pay a particular coupon (interest). An accrual strategy is holding a bond, earning the interest due, collect the principal at maturity and reinvest it in fresh bonds. Liquid funds, ultra-short term funds, short-term debt funds, income funds and credit opportunity funds primarily follow an accrual strategy.

A fund following a duration strategy seeks to gain from bond price rallies when interest rates fall. When interest rates fall, bond prices rise – since new bonds will carry a lower interest, existing bonds become more attractive and thus prices rise until yields match the new bonds. A duration fund will try to make capital appreciation from the bonds it holds.

An accrual fund does not try to time the interest rate cycle. Given the rate scenario and its own mandate, it will look for those instruments that deliver an optimal yield. A duration fund, on the other hand, will estimate the direction interest rates will move and adapt the portfolio to maximize the chances of bond price appreciation.

Duration potential is felt the most in government bonds (sovereign bonds or G-secs or gilts). Gilts are the most liquid debt instruments and also among the few instruments with very long maturity (10-20 years). They tend to therefore reflect rate cuts and rate cut expectations the most. Therefore, a duration fund will load its portfolio with gilts when it anticipates rate cuts. If you see a debt fund holding a large proportion of sovereign bonds, you will know that it is playing duration. These funds will have high average maturities (usually above five years). As gilts don’t pay high interest, the yield-to-maturity of these portfolios will be low. Investing in gilts is for the capital appreciation they offer and not for the interest component.

An accrual fund will primarily have corporate bonds or NCDs, commercial papers, bank bonds and certificate of deposits. It will have minimal to no holding in gilts. Depending on the type of accrual fund it is the average maturity of the portfolio ranges from a few weeks to a few months to a few years. Depending on the fund, the yield to maturities will be higher than duration funds.

When rates are falling duration funds delivers more than accrual. Accrual funds too use duration strategy in a falling rate scenario (as the top-rated corporate bonds they hold can be traded) to push up returns.

Duration funds are inherently more volatile. As bond yields and prices fluctuate on both actual and expected rate action, the NAVs of the funds will also fluctuate. Funds also actively manage the portfolio, upping or dropping the gilt holdings, adding to volatility. Apart from the volatility, the risk is that the fund gets the interest rate call wrong. These funds are generally meant for holding periods of more than two years.

Accrual funds have lower volatility. But they aren’t automatically lower risk than duration. Risk in accrual funds comes in when the funds hold debt instruments that are of lower quality or credit rating, called credit risk. Funds take this risk for the higher coupon such papers offer. Rating downgrades hit bond prices and thus NAVs. Defaults by shakier companies, though rare, can cause losses. So when picking an accrual fund, you need to be careful and look at the portfolio.

In some accrual categories, the credit risk is more or less clear. Liquid funds stick to very short-term papers of the highest quality. Income funds are meant for holding periods of over two years and these funds take limited to no credit risk. Credit opportunity funds make it a point to take high credit risk. It gets tricky in short-term and ultra-short term funds as some take credit risk in various degrees and some do not.

Duration suits investors who can take bouts of volatility in their debt fund returns. Dynamic bond funds are the best since they change their portfolio and strategy as per the rate scenario leaving little to do on your part other than sit tight. Gilt funds need timed entry and exits as duration works only on falling rates and thus suit only informed investors. Accrual suits moderate and conservative investors as they do not have much volatility and are stable.

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

What is driving liquidity in the markets?

The current rally in Indian market is fuelled by strong liquidity from domestic investors. With low bank fixed deposit rates, subdued real estate market (with high transaction cost) and stagnating gold prices, equities seems to be the most viable domestic investment avenue for investors. Thus in spite of the markets reaching all-time highs & rich valuations there is very strong cash inflows into the equity markets.
One observation is that domestic institutions have been flushed with funds ever since demonetization was announced and even till date the latest rally in equity markets is purely driven by excess liquidity. It may be a mere co-incidence but it could also be possible that the notes that were previously hoarded in homes & not in circulation is flowing into the equity markets after being deposited into banks.
Let us look at the different investment avenues in order of risk expected returns:


Liquid funds, ultra short term funds
Less than 1 year
Safe. Liquidity with some extra return over normal savings a/c. Taxable returns.
Bank FD
1-5 years
Safe & fixed returns. Marginally extra returns with liquidity but fully taxable other than 5 year FD.
3 years+
Returns not guaranteed. Moves in contrary to equities & does well in times of global distress.
Debt funds
1-5 years
Safe but returns may fluctuate. LTCG indexation if held more than 3 years.
Safe & fixed returns. Extra returns but illiquid. Mostly long term government savings schemes.
Hybrid funds
1-5 years
Marginally risky. Extra returns due to mix of equity & debt in the portfolio.
Real Estates
3 years+
Risky, returns may fluctuate. Illiquid long term investment. Transaction cost of buying & selling is very high (12-15%) & lengthy. LTCG indexation after 3 years holding
3 years+
Risky, returns may fluctuate. Capital appreciation, Liquidity. To achieve high priority long term goals. Tax free after 1 year.
The objectives above are in the order of priorities as well as return which means the liquid fund should be looked for first as liquidity then return, similarly while investing into equity one should keep the capital appreciation as top priority even if it offers liquidity that automatically sets condition for long term investing.
One should look at post tax real return i.e. (Real Return= Return-tax-inflation). Thus for each of the asset classes they should atleast beat inflation post tax to be viable. With inflation currently at ~3-4 all the above assets may be generating positive returns but bank FDs would be giving you the least post tax returns amongst all. (Assuming liquid funds are invested in for 3-6 months to take care of short term liquidity & not an attractive investment avenue).

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’ 

Equity Savings Fund- New kid on the block

Equity savings funds are a new variant in the equity mutual fund basket. They had emerged after the Union Budget 2014 increased the holding period for debt mutual funds to qualify as a long-term capital asset from one year to three years. The funds aim to generate returns from equities, arbitrage trades, and fixed income securities. To retain equity taxation, funds will restrict the fixed income (debt) exposure to 35%. Besides, to reduce volatility and hedge the portfolio, these funds actively use derivative strategies. Some amount of equity (15-40%) is unhedged to prop up the returns of the portfolio and the rest of the portfolio is hedged to gain from arbitrage opportunities. The equity and the derivative exposure are considered as ‘equity’ allocation and hence, these categories of funds are treated as equity funds for tax purpose. The basic idea is that they invest a third in equity, a third in arbitrage and a third in fixed income.
All of us understand equity & debt, but let us understand the arbitrage strategy. Let us assume that ABC Ltd. trades on NSE cash market at Rs.100 and Rs.101 (same month futures price) in the futures market. By the end of the month, the future price converges with the cash price. Buying in the cash market and selling in the futures market will entitle a gain of 1%. If we assume a 0.2% brokerage for these transactions, then the net gain is 0.8%, or an annualized return of 9.6%. Thus the risk profile is fixed income but their tax profile is that of equity. These are conservative funds. They can be looked at as MIPs which are treated as equity funds from a taxation point of view, thus making your long term gains tax-free after one year instead of three. Fund managers opine that there are significantly higher arbitrage opportunities in a bull market, but lesser during falling or flat markets.
If you plot the fund categories on a risk-return axis, equity savings funds are positioned between MIP funds and balanced funds. They stand a notch higher than MIP / debt-oriented funds, and one notch lower than balanced funds in their risk-return proposition. From a utility point of view, conservative investors trying to seek income from their investment and not wanting to assume great risk should look at them.
The following table summarizes a comparison between different investment avenues.

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’ 

Balanced funds for monthly dividends- Temporarily Regular…

‘Balanced funds’ fall in the hybrid category of mutual funds and invest more than 65% of the corpus into equities, while the rest is allocated among fixed income instruments. Older retired investors are considering investing into such equity focused funds. They seem to be pretty impressed with the monthly dividends being generated by balanced mutual funds, and are thinking of moving significant chunks of their portfolio from banks into these funds. Although investing a proportion of your retirement corpus in balanced funds is a prudent investment decision one should not be misled or get lured into it by monthly dividends/regular income opportunity. A balanced fund or a MIP with growth option & a monthly/quarterly SWP is a better long term option.
Of late I see that balanced funds are being sold as a retirement solution with regular monthly income. This I feel is a dangerous thing and investors are largely unaware of the downside risk associated to the higher equity allocation. It all sounds good as long as the markets are going up, but what happens if the markets start falling? All hell will break loose in this segment as your initial capital will erode & the monthly dividend payment will stop.
While everyone in the mutual fund industry have been consciously working towards greater inclusion in the markets, mis-selling like this is a little bit worrying as it goes against well-proven asset allocation strategies of equity investments being recommended for long term. The trend of older or conservative investors moving their life savings into balanced funds essentially means that they are convinced these funds can give them regular dividends that can beat fixed deposits by a good margin over the medium to long term. This might be true in the current scenario, but this is unlikely to be the same even 1-2 years down the line leave alone a longer period.
Fund houses can pay out regular dividends only out of the distributable surplus available with them. Markets have been moving up over the last 2-3 years since BJP came to power. This has given opportunities to fund management teams to create ‘alpha’ (a return in excess of that indicated by the benchmark index) in their portfolios by picking up gems in the mid/small/micro caps space. This in turn has allowed them to garner good distributable surplus in their funds, and thus pay out good dividends. To top it all, the duration calls in the fixed income space have also been supporting the returns on these funds as the debt portfolio has also earned double digit returns due to interest rate decline.
On the other hand over the last 6 months there have been very strong inflows every month into domestic mutual funds. Given the current level of the stock markets most fund managers are not comfortable investing the entire amount of inflows coming into the funds. As we all know this market up move is driven largely by surplus liquidity rather than fundamentals. Thus fund managers find it more prudent to return part of the monthly inflows through monthly dividend payments so that they have a lower amount of investable surplus. Balanced funds having the ability to pay out regular dividends may prove to be unfounded if stock markets change track and move in a southward direction for some time.
Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’ 

SIP up from strength to strength…

The Indian markets have been consolidating over the last month with NIFTY/SENSEX hitting new highs of 9532/30712 on 17th/19th May 2017. Investor sentiments are buoyed towards a further upside over the next year. There has been very strong DII buying in the last 12 months. The number of SIPs in the mutual fund industry has doubled in the last three years. From 51.96 lakh SIPs in 2013-14, they have more than doubled to 1.28 crore by March 2017. SIPs, which collected Rs 1,206 crore per month in 2013-14, got more than Rs 3,989 crore in March 2017. SIPs have caught the fancy of retail investors with volumes hitting an all-time high of Rs 4,200 crore a month in April 2017. Domestic Mutual Funds have been net buyers in Indian equities of Rs.66554 cr in the last 12 months.
The markets are at all-time highs currently and sentiments are positive from both DIIs & FIIs. The initial trend in March quarter results have been positive especially for banks. NPA levels declared by most banks till now have been lower sequentially with the exception of a couple of private banks. Although there has been some profit booking by FIIs as they have been net sellers, it has more than been offset by very strong inflows in domestic mutual funds which have been net buyers. Domestic capital by nature is more stable than foreign capital & this should provide strength to the markets. Though a minor correction may be on the cards a major fall is unexpected.
Current valuations are on the higher side as Sensex is currently trading at a P/E band of 22-24X. Thus corporate earnings have to keep improving every quarter to sustain markets. Crude prices are again below $50/ bbl and a sharp appreciation in the Rupee against the USD will help in a further decline in crude import bill. Crude prices are unlikely to decline sharply from current levels given global economic growth. Gold prices amongst other metals are also stabilizing in a range. We expect global metal prices to consolidate with a positive bias as global demand improves. There has been a significant shift in strategy for IT companies with news of large layoffs in India & recruitment in USA. How it pans out over the next few months needs to be seen. GST is likely to be implemented from 1st July 2017 and the tax rates for different goods/services have just been announced and have largely been in line with expectations with minor deviations from case to case. Given that the markets are at all-time highs one needs to tread with caution at current levels as a correction due to lower than expected results or strong profit booking cannot be ruled out. For long term investors one should keep accumulating on dips as the markets are braced for significantly higher levels over the next couple of years.
Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’ 

How much to invest in Equities

One of the initial investment decisions that one has to make is what proportion of assets to invest in equities & what proportion in debt.
One of the basic thumb rules used over the years to decide on equity allocation is the 100 minus age allocation. The risk taking capacity of a person is maximum at a young age & keeps declining as the person gets older. Thus one should subtract the current age from 100 & invest that proportion in equities & the balance in debt.
This is just a basic thumb rule for guidance. It does not align with the financial goals of a person which are the actual purpose of creating a financial portfolio & building a corpus. Thus this rule may be a good starting point but various other factors like life expectancy, age of retirement, financial goals, other liabilities & risk profile of the investor should be considered before making the asset allocation decision.
Investment in equities can be done in various ways:
1. Invest directly into equities
2. Invest through an equity mutual fund ( again the fund can be diversified large cap focused, mid/small cap focused or sector focused & the risk-return will depend on the type of fund invested)
3. Invest in a Hybrid Mutual Fund (Balanced Fund/ MIP) which invests a proportion of your money into equities
Equity investments should always be made with a long term horizon of at least 5-10 years to mitigate risk. The short term fluctuations in the economy tend to even out in the long run & thus the higher the time period of holding the lower the risk. Also equity investments should be as diversified as possible not only across funds/stocks but also across time periods. As the saying goes ‘Never put all your eggs in one basket’. Thus one should ideally do a systematic monthly/quarterly investment in 4-5 mutual funds or 10-15 stocks or a combination of both and stay invested for more than 10 years.
One should always take specialized advice for building up your portfolio as per your profile & goals. Given a gradual increase in life expectancy globally over the years, investment in equities have gained importance to ensure that you get more out of your hard saved money and your money lasts longer than what it did previously.
Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’