Making MF transfers easy - Nominee for your funds

What is a Nomination?
An investor can nominate a person(s) called nominee(s) to whom his/her Mutual Fund Units will be transferred on his / her demise.

Mutual Fund units get transferred to the nominee registered in the folio on the demise of the Investor.
What are the benefits of registering a nomination?
Registering a nomination facilitates easy transfer of funds to the nominee(s) on the demise of the investor. In the absence of the nominee, a claimant would have to produce a host of documents like a Will, Legal Heir-ship Certificate, No-objection Certificate from other legal heirs etc. to get the units transferred. The process is simple if a nominee is registered in the folio.
How can an investor make a nomination?
Nomination can be registered at the time of purchasing the units. While filling in the application form, there is a provision to fill in the nomination details.

Alternatively, an investor may register a nomination later through a form which may be submitted with relevant particulars of the nominee.

The forms are available on the mutual fund websites.

Investors may also request the registrar and transfer agent to send a form.
Can an investor make multiple nominations?
Yes! An investor may make up to three nominations and even specify the percentage of the amounts that will go to each nominee.

If the percentage is not specified, equal shares will go to the nominees.
Can a minor be a nominee?
Yes! A minor can be a nominee. However the guardian will have to be specified in the nomination form.
Can a nomination be changed?
A nomination can be changed and even cancelled. The relevant form should be filled and submitted to the Registrar or Mutual Fund Office.
If an investor has different schemes in a folio, will all units of all schemes be transferred to the nominee?
A nomination is at folio level and all units in the folio will be transferred to the nominee(s).

If an investor makes a further investment in the same folio, the nomination is applicable to the new units also.
Who can nominate and who is eligible to be a nominee?
Nominations can be made only by individuals applying for / holding units on their own behalf, singly or jointly.

Non-individuals, including societies, trusts, body corporates, partnership firms, the karta of an HUF, and the holder of a power of attorney (POA) cannot nominate.

Nomination can be in favour of individuals, including minors, the Central Government, State Government, a local authority, any person designated by virtue of his office or a religious or charitable trust.

A non-resident Indian can be a nominee, subject to the exchange control regulations in force from time to time. 

Record earnings to propel equity markets: SENSEX to cross 23,500 by March 2013

Key points

> Companies in SENSEX are back to the high earnings growth stage, a stage last seen between FY 2002-08

> There is a strong possibility that SENSEX will rise to their all time highs, and indeed, move beyond that

> We are bullish on Indian equity market and forecast that the SENSEX will cross 23,500 points by March 2013

> The foreign institutional investors (FIIs) are also bullish on India, due to high growth prospects of the economy and Indian companies

The Rising Market
For the past 6 financial years (FY2004-10), Indian equity market has been one of the best performing equity markets in the world. From the Chart 1, we can see that the benchmark index, BSE SENSEX has led the stock market rally and given compounded returns of 20.98% during these 6 financial years. This financial year alone (as at Oct. 12 2010), the equity market is up by 15.26%, with the SENSEX currently trading at 20203.3, just 669 points away from all-time high of 20,873 points which was earlier scaled on 8 January 2008. In fact, the bell weather index is on a roll for the past two months delivering 12.32% return. To put these returns into perspective, the year to date (YTD) return of SENSEX (as at Oct. 12 2010) has been 15.68%. In this article, we take a look into the future to see if the Indian equity market still has steam left to generate returns.

Chart 1: Performance comparison of SENSEX with major global indices

Earnings Growth
The key determinant of share prices in the long run is Earnings per Share (EPS) of a company. Although the prices may deviate in the short run from their earnings trend, in the long-term however, the prices follow the earnings integer. In this context, the earnings of the companies in SENSEX had grown at a compounded rate of 17.08% during FY2002-08, which was followed by a bull-run wherein, the index moved from close to 3500 points to over 20,000 points as seen in Chart 2.

Chart 2: Relationship between SENSEX and EPS of SENSEX 
Now, according to consensus estimate gathered from Bloomberg (Chart 3), companies in SENSEX are back to the high earnings growth stage, and are expected to touch all-time high in the next two financial years. Hence, based on the growth in the earnings, we have estimated SENSEX to cross 23,500 points by March 2013. 

Chart 3: Estimates of EPS of SENSEX for the next 3 Financial Years

Liquidity Driven Market

We can expect market to cross 23,500 levels earlier than March 2013, if Foreign Institutional Investors (FIIs) continue to be bullish on India. Even the FIIs are chasing the earnings growth of Indian companies and are continuing to invest huge sums of money into India. This is evident from the huge inflows into the Indian markets. As at 11 October 2010, the FIIs have pumped in USD21.7 billion, the highest inflows into India ever.

Apart from FII flows, India has been receiving a steady stream of investments in the form of Foreign Direct Investments (FDI). According to Department of Industrial Policy & Promotion, from April 2000 to June 2010, over USD 170 billion has been invested into India through the FDI route, in comparison to FII equity investment of USd 68.5 billion in the same period.

Indian economy and Indian Companies to grow fast
In the coming decade (FY2011-2020), we are sure that Indian economy will get into sustained high growth trajectory which can lead to higher growth in companies` earnings.

There are several reasons to be upbeat about India`s economic growth; the important ones are listed below.

> Infrastructure Thrust: The 11th five year plan (2007-12) had estimated that over USD 1 trillion is expected to be invested in the infrastructure sector in 12th Five Year Plan (2012-2017). Most of these investments will be in public infrastructure space like power, ports, airports, roads, railways, etc. This will benefit not only Indian companies in terms of higher revenues and profit but also for global companies on account of technology transfer fees.

> Demographic Dividend: According to a US census department report, India`s dependency ratio (ratio of total dependant population to the total working age population) is expected to fall from 62.0 in 2000 to 49.6 in 2020. This means that India will have more people in the working age category than ever. The media has termed this fall in the dependency ratio as the demographic dividend. We are already seeing the effects of the demographic dividends in the rising GDP and increased domestic consumption. Increased domestic consumption implies higher revenues to Indian companies. We expect domestic consumption to accelerate more in the future.

> Robust domestic economy: Even though the Indian equity market is tightly coupled with the rest of the world, the Indian economy is relatively insulated from the negative economic events across the world. This relative immunity is due to the huge domestic consumption and is one reason why the economy was able to jump back to its high growth trajectory with a smaller stimulus by the government post the 2008 crisis as compared to the policy initiatives from the developed nations.

> Tax collections: At 6.8% of the GDP, the fiscal deficit is a major concern for the policy makers on account of three stimulus packages and tax cuts extended to industry during the period of financial slowdown. The government had set a fiscal deficit target of 5.5% of GDP for FY2010-11. We expect the fiscal deficit to be below 5.5% as a result of huge and unexpected auction inflows from the 3G and broadband spectrum and a 13.9% rise in the direct tax collections (between April and August 2010). Due to the higher-than-expected growth in the economy and tax collections, we expect the fiscal deficit to reduce at a much faster rate than the road map given in the Union Budget 2010.

> Implementation of GST tax regime: In a study conducted by National Council of Applied Economic Research, the implementation of GST in India is expected to increase the GDP by 0.9% to 1.7%. The present value of the GST-reform induced gains to the GDP is expected to range between USD325 billion and USD637 billion (discounted at a real rate of 3%.)
Macro risks for Indian economic growth
> Inflation: The high level of inflation in the economy is a worry for the banking regulator. Despite hiking key policy rates five times YTD, inflation is higher than the level expected by the Reserve Bank of India (RBI). The RBI is trying hard to control inflation without affecting the growth. We expect the inflation to moderate in the coming months.

> Current Account Deficit: The widening of Current Account Deficit (CAD) of India seems to be a concern for most economists. Currently, the CAD for June 2010 quarter widened to USD13.7 billion, from USD4.5 billion a year ago. Traditionally, the deficit had stayed well below USD10 billion, but for the past three quarters, it has exceeded the USD10 billion mark. Our exports have fallen due to lower demand from developed world but India`s economy grew at over two year high of 8.8% in the first quarter of FY2010-11 leading to higher imports.

> Execution Issues: Even though around USD 1 trillion is expected to be invested in the infrastructure, the execution of those infrastructure projects has always been an Achilles heel of India. According to the India Infrastructure Report 2009, the primary woe of any infrastructure developer is land acquisition. Much of the land for any infrastructure project needs to be acquired from farmers so, the government has been trying to draft a policy that involves job security and / or profit / revenue sharing with the farmers which can appease all parties involved in land acquisition process. Apart from land acquisition, corruption and bureaucratic hurdles are other problems.

Conclusion
India is one of the fastest growing economies in the world. Robust economic growth along with improved public infrastructure, demographic dividends and increased domestic consumption will lead to higher profitability for Indian companies. Hence, based on the consensus earnings estimates, we expect SENSEX to exceed 23,500 points by March 2013. Precisely so, the FIIs are bullish on India because of the same reasons.

Consolidating folios Source: BUSINESS LINE (18-OCT-10)

I have too many folios in the same mutual fund and am unable to manage, maintain and track the same. What should I do?

Most investors fill in a fresh application form even while investing in the same mutual fund. This leads to creation of multiple folios (accounts) and investors may find it difficult to maintain and keep records.

Mutual funds and registrars have given investors the option to consolidate all their folios in the same mutual funds into one single folio. Consolidation is the merger of two or more folios into one single folio.

Consolidating folios into one would give you the benefit of having to track and transact in one folio and allow you a single view of your investments in the Fund ��" all investments in a Fund would reflect in a single statement.

How can I get all my folios in the mutual fund consolidated into one folio?

Investors may submit a simple, signed request letter to the mutual fund / transfer agent asking for the consolidation of the multiple folios in the mutual fund into any one of existing folios. The folio numbers should be mentioned in the letter. Consolidation can be done subject to the fulfilment of some conditions.

What are these conditions?

Basically the below details should be uniform in all the folios:

All holders  names - should be in the same order in all folios

Address

Bank details

Tax status of the investor

Holding nature - Joint or Either or Survivor

Nominee registered in the folios

Dividend option of the same scheme should be same i.e. either Re-invest or Payout

If the above details are the same in your folios, the same can be consolidated into one single folio called the `Target folio`.

Some mutual funds may have other guidelines and investors may contact the mutual fund or registrar to get more information on these details.

What if one of the folios does not meet the criteria?

If any of the folios does not meet the criteria, the other folios meeting the criteria will be consolidated and the investor informed.

Investors also have the option of giving a request to change the address, bank details, nominee and dividend options. Once these match, the consolidation can be effected.

What is the communication after consolidation?

A statement of accounts of the consolidated (target) folio is sent to investors along with a covering letter.

If the folios are consolidated into one, will a statement reflect all transactions for all schemes of the folios?

Yes. The statement of the ‘target` folio will contain all the details of all the transactions of schemes in all your previous folios.

If you wish to make a transaction in the same mutual fund in future, please mention the folio number in future transaction slips and any new investment will be created in the same folio.

(Contributed by Investor Education Team of CAMS. The views expressed herein are general practices in the mutual fund industry and may vary on a case to case basis.)

Creating multi-sector portfolio from concentrated exposure Source: BUSINESS LINE (11-OCT-10)

We have not discussed much about sector funds in this column so far. For one, such funds carry concentration risk. For another, investors need to have a view on a sector before buying such funds. Given these factors, it was somewhat surprising when several readers wanted if such funds are attractive investments.

This article shows how investors can create a portfolio using sector funds. It uses a naive asset allocation process to make it more meaningful for individual investors. Sophisticated asset allocation process can improve such portfolio`s risk-adjusted returns.

It should not be surprising if mass-affluent investors find sector funds risky. Take Franklin FMCG Fund. It had more than 10% exposure in its top three holdings as on August 2010. But that is not as concentrated as ICICI Prudential Technology Fund, which had about 75% of the total exposure in just two stocks during the same period!

The point is that sector funds carry high concentration risk. Such funds are typically meant for investors who have a view that a certain sector is likely to outperform broad-cap index in the future. An investor, for instance, would have generated about 50% if she had invested in the FMCG sector last year.

Choosing the right sector is, of course, not easy. If an investor had bought technology sector fund in 2007, the three-year average return, according to Morningstar, was just 7%. In contrast, the three-year average return on the Pharma sector was 20%.

Clearly, sector funds are attractive investment but risky. How then can investors take exposure to such funds?
Typical diversified funds have sector tilts. That is, a diversified fund may be overweight on technology sector if the portfolio manager believes that the sector would outperform the benchmark index. The excess returns or the alpha in such case is generated through the sector allocation decision.

Diversified sector exposure?
Individual investors can also engage in such sector allocation decision. How? An investor can, for instance, take higher exposure to a banking sector fund if she believes that the sector would do well in the next year.

Generating excess returns from sector allocation decision, however, requires forecasting models. For those investors who do not have the resources (time and/or skill), naive asset allocation would suffice.

Naive asset allocation is a two-step process. First, the investor has to choose sectors which have sector-specific funds. Second, the investor has to invest equally across all these sectors. No rebalancing is required thereafter. We call this equally-weighted multi-sector portfolio.

Of course, the investor still has to take an active decision- to choose funds in each sector. And fund selection is not easy. We, therefore, decided to see how a portfolio will perform if an investor had taken exposure to the (ex-post) worst performing fund in four different sectors - FMCG, pharma, banking and technology. We assumed that an investor would take exposure to just one fund in each sector.

Our assumption was based on the reasoning that exposure to more than one fund in a sector would only lead to fund diversification, not portfolio diversification. This is because pure sector funds tend to have similar portfolio within that sector.

Based on the ex-post returns of the worst-performing fund in each sector, the five-year holding period return on the equally-weighted multi-sector portfolio was 16%. This compared well with the 8% return on the worst performing diversified fund.

Conclusion
An equally-weighted multi-sector portfolio is not necessarily attractive. This is because the downside risk is high, as a sector fund could generate significant negative returns if that sector underperforms. Of course, unlike our assumption, investors will not have exposure to worst-performing fund in each sector. If the one or more of selected funds perform well, the portfolio returns could be better.

A valuable route to diversifying debt

Investors who would like to diversify their debt options can take exposure to the infrastructure bonds floated by IDFC, preferably the cumulative option.

IDFC is the second NBFC (after IFCI) to raise long-term infrastructure bonds and the first one to come up with a public issue. These bonds are eligible for 80 CCF tax benefits, which allow tax exemption on the initial investment of up to Rs 20,000.

The post-tax yields for investments up to Rs 20,000 would be similar to yields of tax savings deposits of banks. Currently, SBI capgain fixed deposit for five years has a interest payout of 7.5%; same as that of IDFC with a buyback option. Investments can be done through demat accounts, which makes the offer hassle-free for equity investors.

Investment options
These instruments are secured and are available in four series with coupon rates between 7.5% and 8%. Of these, the most attractive option is the cumulative scheme with a buyback (7.5%  interest compounded annually) after five years.

This scheme gives a post-tax annual yield of 13.5% over a five-year period, for those in the highest tax slab. For investors in 10% and 20% tax brackets, the post-tax yields work out to 9.1% and 11.1%respectively. Investors who choose to exit after five years stand to benefit the most.

The series without buyback option have coupon rate of 8% in order to incentivise long-term investments (10 years). But in longer-term options the post-tax yields fall.

For instance, cumulative option without buyback and coupon of 8% gives 9.9% annual yield, spread over a ten-year period.

As all the options are listed on the bourses, one can exit through the market. This option would help improving the yields as the sale of such instruments would entail lower tax outgo (capital gain tax is lower than tax on interest). For a 7.5%  cumulative scheme with a buyback option, selling in the market would give an additional 1.6 percentage point annual yield over a scheme, which is bought back by the company, assuming that the market price and bond value are the same. The capital gains tax has been calculated in keeping with the likely rates that would prevail after the introduction of the Direct Taxes Code.

However, such exit (market exit) is exposed not only to interest rate movements but also to higher impact costs in the event of limited liquidity.

Suitability
These instruments are only suitable for investors who have run out of their 80 C tax exemption limit, as instruments such as National Savings Certificate have better yields as compared to infrastructure bonds. Deposits with banks for five year terms may offer yields comparable or better than these bonds, if stripped of their 80CCF benefits.

Investors have an option of investing in various schemes as long as the investment is at least Rs 10,000. Therefore, investing in two units of Rs 5,000 each in cumulative options with buyback and without buyback option also makes sense.

As the monetary tightening may continue due to persistent inflation, the 10-year government yield may get pushed to above 8 per cent levels, allowing infrastructure financing companies to price their future bonds at a higher coupon rates (before March 2011).

About the company
IDFC, which is present across the financial sector value chain, has a credit rating of FAAA from ICRA - which denotes highest investment grade. The capital adequacy ratio of the company stood at 26%, making it one of the most under-leveraged NBFCs.

The company has a well managed asset-liability book and strong risk management systems towards reducing or minimising the default risk. Around 82.5% of the company1s exposure is in energy, transport and telecom - sectors that have huge growth potential - and majority of the loans are secured, reducing the risk of asset quality slippages. The Net NPA ratio as of June 30 is around 0.15%. The consolidated net profit for the year ended March 2010 was Rs 10.64 billion.

The issue closes on October 18. The allotment is on a first-come, first-serve basis. Investors may note that there may be three other institutions - REC, PFC and LIC -  wanting to raise funds using the infrastructure theme over this fiscal by issuing similar bonds.

Financial inclusion needs friendlier products Source: Business Line (13-OCT-10)

Financial services must enable households to manage the risk of uncertain incomes.

Well-targeted financial products can go a long way in meeting the varied needs of low-income households. The fact that financial inclusion remains an unfinished task points to the absence of such instruments to address the needs of the poor. Understanding the supply-side response of the Indian financial system will give us some hints as to why this crucial task remains incomplete.

In India, policy decisions related to nationalisation of banks, branch licensing norms and the big push to the co-operative and postal networks have been instrumental in establishing deep branch networks. On average, there is one bank branch for 20,000 individuals.

More recently, there have been significant contributions by non-bank entities, notably the micro finance institutions (MFI), organised chit funds and self-help groups (SHGs). While the adequacy of this network is debatable, it is nevertheless a deeply penetrated infrastructure. Why, then, has this network not translated into the kind of financial access that is meaningful?

WHY PRODUCTS FAIL

Jonathan Morduch, Professor of Public Policy and Economics at New York University, gives us a useful framework to score the quality of financial access. He lays out four critical ingredients: convenience, reliability, flexibility and continuity.

Let`s examine the performance of our financial system against each of these. The innocuous issue of the timings of a bank branch are a case in point. A typical bank branch is open from 10 am to 4 pm. This is precisely the time when people are busy at work on their farms.

This, combined with the distances from the village to the branch and the procedural barriers there, make frequent transactions challenging. So, even if bank accounts exist, there is very little transaction intensity. Contrast this with the informal provider, who comes to the doorstep of the customer and transactions with whom require minimal procedures.

Further, most formal institutions that do reach low-income households today, such as the post-office or the MFI, offer only a limited range of financial services. For a customer, this means visits to multiple providers (both formal and informal) to access the full range of financial services they need - including life insurance, general insurance, pension plans, short-term savings, investments, remittances and loan products. This greatly increases the cost and complexity of access to financial services by a household.

Many rural, urban and migrant low-income households lack documents that provide proof of identity, residence and income. Even the onus of proving identity has been transferred to the individual. (It is hoped the UID will transform this scenario). This becomes a fundamental barrier for them to interact with the formal financial system or, at the least, imposes a very high cost of access. In the absence of formal records, for instance, there is rent-seeking behaviour by local authorities to provide substitutes. As a system, we clearly fail the test of convenience.

The scorecard is not very different on flexibility and reliability either. Good product design is critical to flexibility. A key feature of low-income households is uncertainty in incomes caused by such factors as ill-health and accidents as also such regional factors as rainfall failure.

Financial services need to enable households to manage these risks better. An agricultural loan with fixed monthly repayments misses the basic point of the seasonality of the underlying income and imposes undue hardships on the household. Several categories of crucial financial services remain unaddressed because of poor product design.

Livestock is an important source of income for many rural households. However, they are unable to protect against the risk of death of livestock due to fairly trivial design challenges around livestock identity and fraud management. These are capabilities that surely exist in the financial system; however, these have rarely been brought to bear in the context of these markets.

RULES OF THE GAME

A reliable provider lays out the `rules of the game` in advance and stays true to it. This predictability is important for people to plan their financial lives over long periods of time. Often, government policy, on debt waivers for example, injects considerable uncertainty in the environment that erodes reliability.

Continuity is a parameter that speaks to the sustainability and governance of the provider. Improper risk management and controls have often resulted in the exit or bankruptcy of financial service providers. This creates a lack of trust in the provider, particularly for services where the individual is taking a risk.

Think of insurance and savings, where the contributions are made in the present, with expectation of payoffs in the future. Lack of trust in the continuity of the institution can result in a very low take-up of these categories of products.

The existing financial infrastructure, despite its significant size and span, has not been designed to meet even one, leave aside all four, of the characteristics desired by a low-income household.

It is clear to us that the architecture of our financial system needs to be revisited. We need several more entities that are able to deliver on the parameters of convenience, reliability, flexibility and continuity.

If a number of rural households are still not covered by banks, post-offices and MFIs, it is because their products do not pass the test of convenience, reliability, flexibility and continuity. We need more entities to deliver on these counts.

Monthly income schemes: Prudent investments for the risk-averse

A retail investor is short of investment options. S/he is apprehensive about investing directly in stock markets because of the inherent risks and its ups and downs. Fixed income investments, on the other hand, give him low returns and sometimes not even a positive real rate of return after adjusting against inflation. The retail investor is flummoxed.

Monthly income schemes or MIS - a mutual fund product bundling both debt and equity - provide an optimal solution to the retail investor. Such a portfolio is typically overweight on debt, investing 75-85% of the fund`s corpus in various debt instruments. This is aimed to provide stability of returns and also to preserve the invested capital over a medium to long investment horizon. The balance is invested in equity, providing the investor with a more return vis-a-vis traditional debt instruments. Together, these disparate asset classes provide consistent returns to the investor even in volatile times.

Investment philosophy

Of the two classes of investments, while the debt portion of the portfolio primarily provides stability of returns, the equity portion provides growth in the form of appreciation. This way, the investor concerned can participate in a stock market rally without being fully exposed to its vagaries.

Monthly income schemes of mutual funds stick to the mandate of a fixed asset allocation. Therefore, while investing in monthly income schemes, a prospective investor ought to evaluate the returns of the entire portfolio and not individual asset classes. Come to think of it, even a fall in equities by over 25% would not result in negative yield of the scheme over a period of 18 months due to returns from the debt portion. This feature alone provides a huge psychological comfort to the risk-averse investors.

Regular pay-outs

What`s more, Monthly Income Schemes of mutual funds provides regular cash flows in the form of dividends. For many investors, it is not the quantum of cash flow which matters but its predictability. Elderly citizens who have predictable expenses at monthly intervals find such schemes ideal since Monthly Income Schemes provide monthly cash flows to meet such expenses.

FDs Vs. MIS

FDs with banks also provide regular income. But, these do not provide growth, thanks to the equity component, which Monthly Income Schemes offer to counter inflation. Plus, monthly income schemes of mutual funds provide tax efficient returns. The interest earned from various fixed income instruments including bank deposits are taxable at the hands of investor at his marginal rate of taxation, which can be as high as 30.99%.

Compared to FDs, MIS of mutual funds are more tax efficient. MIS dividends are tax free at the hands of investors. The mutual fund, of course, pays a dividend distribution tax of 12.5% (in addition to the surcharge and education cess). This compares favorably with the marginal rate of taxation associated with FDs.

Prospective investors can also choose growth option, where the investor can get cash flows by redeeming units systematically through systematic withdrawal plans. The tax liability in this case would be only 20% with indexation or 10% without indexation, whichever is less on only the capital gains.

UTI`s MIS offerings

UTI provides two options - UTI MIS and UTI MIS Advantage with different asset allocations. The 15% and 25% equity allocation with the balance portion invested in debt helps in providing consistent returns even in volatile times. Past statistics show that in any 18-month period, both the funds have always provided positive returns. The debt portion of both the funds consists of bonds with a 1-3 years maturity aimed to generate regular income with capital preservation, focusing on Y-T-M play without taking active duration calls.

In conclusion

To sum up, since equity provides returns in excess of inflation over medium to long-term investment horizons, monthly income schemes blending equity with a predominance of debt provide the ideal exposure to the risk-averse investor. Investing in monthly income schemes of mutual funds is, thus, common sense investing.

The article is contributed by R Raja, head of products, UTI Mutual Fund. The views expressed here are personal and not necessarily of the fund house.

Systematic withdrawal plan: Exit at right time for higher gains

Investing isn`t just about picking the right funds and products. Unless you are able to maximize your returns by making the exit at the right time, you wouldn`t be able to fully realize the fruits of your well-thought out investment plan. Even the best products are susceptible to the vagaries of the market and can make your investments look like duds in the short run. While timing the market isn`t something that average investors are good at, one can cut losses, and benefit from market upswings by making exits at periodical intervals.

A systematic withdrawal plan (SWP) allows you to do just that. SWP is the opposite of systematic investment plan (SIP) and lets you to automatically redeem a predefined amount of your investments at regular intervals. With even dividends from diversified equity mutual funds (MFs) to be taxed at 5% under the new direct taxes code (DTC), investors can take the growth option and pull out the gains through an SWP.

``SWPs will become more popular after the DTC comes into effect as it is tax neutral (not much change in tax structure),`` says R Raja, head, products, UTI MF. The biggest advantage with SWPs like SIPs is that it eliminates the risk of timing the market. ``Only if you try to time the market you lose. With SWPs you neither exit at the opportune moment nor at the inopportune time and by this you can average out your withdrawals (from the corpus),`` he adds.

``SWP is a good way of disciplined profit booking. Just like one has an investment discipline (through SIPs), a discipline in selling is also necessary,`` says Lakshmi Iyer, head (fixed income and products), Kotak Mahindra MF.

However, SWPs, unlike SIPs, are not widely used by investors because they are more used to redeeming their units as and when they want, she says. But inert investors may hold on to the gains and cash out at the wrong time leading to losses, say observers. An SWP would help an investor to rebalance the portfolio and reallocate cash to other efficient asset classes depending on market conditions, they say.

But it has its downside as well. ``SIPs and SWPs are not a sure recipe for success. They would lose out in a continuously falling market,`` says an industry official. With the markets trading within a band, one needs to be careful about exercising such options, say observers.

The amount to be withdrawn through an SWP is based on an individual`s requirements and the corpus which is invested.

The article is contributed by R Raja, head of products, UTI Mutual Fund. The views expressed here are personal and not necessarily of the fund house.

STPs: Best suited for small investors who want to stagger their investments in equity schemes

Systematic investment plans (SIPs) and systematic transfer plans (STPs) are somewhat similar in nature. Therefore, it is important to understand what distinguishes these investment plans, and how investors can access plans of their choice depending on their investment needs.

Systematic investment plans or SIPs allow an investor to make small periodic investments in a scheme (especially equity schemes) to build a sizable corpus over time. Essentially, from the perspective of the small investor, small amounts invested at frequent intervals help build a corpus to meet one`s financial goals. Importantly, SIPs compel an investor to invest across various cycles - be it bearish or bullish.

While it is financially prudent to invest when the stocks are low, psychological fear prevents one to invest in such times. SIPs, however, make it imperative for the investor to invest across various cycles, thereby enabling one to diversify across time periods. Such investment plans act as an anti-panic device as investors, even in a falling market, do not redeem in fright. Instead, they stay invested in the scheme because of the assurance that their future investments will get eventually invested at lower levels.

Systematic transfer plans (STPs) are similar to SIPs except that, instead of regular investments, the investor initially makes a one-time lump sum investment in a source fund, which would either be a liquid fund or a debt fund with low risk. The next step involves the asset management company transferring a fixed amount at specified intervals to a designated equity scheme on specific instructions by the investor. Fundamentally, investing in an STP is similar to investing in an equity scheme every month through an SIP.

This is how STPs actually work: An investor puts Rs 12,000 in the liquid or debt fund (source fund) with standing instructions to transfer Rs 1,000 for one year to the equity fund of his choice. At the time of transfer, mutual fund units equivalent to Rs 1,000 are redeemed at the source scheme with simultaneous allotment under the equity scheme - all at prevailing NAVs of the respective schemes.

STPs are, thus, best suited for those investors, who have a lump sum amount ready for investment but want to stagger their investments in equity scheme.

Mapping investments to liability structure Source: BUSINESS LINE (18-OCT-10)

We strongly believe that a portfolio should be constructed based on investment objectives, not on expected returns.

Returns are means to achieving an investment objective, not the reason for creating a portfolio. The question is: How can individuals create portfolios to meet their investment objectives?

This article shows how individuals can construct custom-tailored portfolios to meet liability structures. Such `Target Portfolios` can reduce price risk at the horizon and also help in efficient use of investment capital.

Liability Matrix
We define `Target Portfolio` as one that is created to meet pre-defined liability structure. Take a middle-aged investor. She may have the following requirement: Higher education expenses for her child 10 years hence, medical expenses for the family on continual basis, buying a house five years hence and retirement in 15 years.

Given that liabilities carry different priorities, we divide them into 2 categories - `Must-have` and `Should-have`.

`Must-have` liability ranks high in priority and is needed to maintain and improve individual``s standard of living.

The `Should-have` category includes liability structures which are required, but whose consumption can be deferred.

We likewise divide the liability horizon into long maturity and short maturity, where short maturity refers to liabilities with maturity less than or equal to 5 years.

Based on priority and maturity, we arrive at a 2 X 2 matrix- Long maturity `Must-have`, Long maturity `Should-have`, Short maturity `Must-have` and Short maturity `Should-have`. This matrix helps in creating Target Portfolios. To understand how the Liability Matrix helps in creating Target Portfolios, consider this: The investment portfolio required for education has a different characteristic from that required for retirement.

For one, the maturity of the education portfolio is less that of the retirement portfolio. For another, risk tolerance for the education portfolio is lower. This is because an investor requires money for higher studies when her child turns 18. Retirement can, however, be postponed or advanced.

From the above, it would be clear that the education portfolio would carry less exposure to risky assets than the retirement portfolio. Another important factor is the initial capital allocated to achieve each liability structure- higher the capital, lower the need for the portfolio to have exposure to risky assets.

This is the primary argument in creating Target Portfolios- each liability structure carries a different maturity, initial capital and risk characteristic that demands different investment structure.
Target Portfolio
How should investors create Target Portfolios? We list below the five-step process to constructing such portfolios.

First, the investor has to identify important liabilities she expects to incur during her lifetime. This would include pre-retirement and post-retirement liabilities.

Second, the investor has to estimate cash flows required to meet each such liability. This process will be easy when the liability relates to buying a house. It would be difficult to estimate liabilities that lead to continual cash flow requirement- medical expense, for instance.

Third, the investor has to decide the risk tolerance level for each liability. The `Must-have` liability will carry less tolerance for risk than `Should-have` liability.

Fourth, the investor has to decide on the capital to allocate for each portfolio. The required return for each Target Portfolio will be that return which enables investment capital to appreciate to the liability payments at the horizon.

Fifth, the investor has to calculate the expected return on various asset classes. Mapping the expected return on the asset classes with the required return on investment helps in the asset allocation decision. Investors should typically choose from equity, bonds, commodities and real estate.
Conclusion
Some Target Portfolios can be set-up using core-satellite framework. Target Portfolios help investors evaluate lifestyle needs and map investments to the liability structure. This helps in effective utilization of investment capital, as it is rationed based on priorities. Investors, thus, increase the probability of achieving the required investment value at each liability date.