Monday, December 28, 2015

December 2015

Investors pulled out more than Rs 31,000 crore from various mutual fund schemes in November 2015, with liquid and money markets contributing the most to the outflow. This follows an inflow of about Rs 1.35 lakh crore into mutual fund products in the preceding month. According to data from the Association of Mutual Funds in India, investors withdrew a sum of Rs 31,196 crore from mutual fund schemes in November 2015. Mutual funds saw an outflow in mutual fund schemes last month mainly on account of huge redemptions in liquid and money market funds. However, investors continued to maintain bullish stance on the equity schemes. Liquid or money market fund category saw Rs 42,059 crore being pulled out last month, while equity and equity linked schemes saw an inflow of Rs 6,379 crore. Liquid and money market funds invest mainly in money market instruments like commercial papers, treasury bills, term deposits, and certificate of deposits. These funds have a lower maturity period and do not have any lock-in period. With the latest outflow, the net inflow in the schemes was at Rs 1.84 lakh crore in the period April-November 2015. The asset base of the country's 44 fund houses fell to Rs 12.95 lakh crore in November 2015 from an all time high of Rs 13.24 lakh crore in October 2015.

Equity mutual funds witnessed an addition of nearly 27 lakh investor accounts or folios in the first eight months of the current fiscal, primarily on account of strong retail participation. This follows an addition of 25 lakh folios for the entire last fiscal, 2014-15. Folios are numbers designated for individual investor accounts, though one investor can have multiple accounts. According to the SEBI data on investor accounts with 44 fund houses, the number of equity folios jumped to 34,367,673 last month from 31,691,619 at March-end, a gain of 26.76 lakh. April last year saw the first rise in more than four years. Prior to 2014-15, equity mutual fund sector had seen a continuous closure of folios since March 2009, following the global financial crisis in late 2008. From March 2009, as many as 1.5 crore folios had been closed. The investor base reached its peak of 4.11 crore in March 2009, while it stood at 3.77 crore in March 2008. Before 2014-15, there was a complete lull in equity inflows as well as generation of new folios, but in the past one year, equity markets have come back to life and yielded solid returns. Heightened investor interest has led to a sharp increase in retail folios. It is the optimism of investors because of which the folios in equity segment have increased. Besides, increased participation by retail investors in equities has led to an increase in folio numbers.  Mutual Funds have reported net inflows of Rs 66,314 crore in equity schemes in the first eight months of 2015-16, helping the industry grow the folio count. Besides, addition in equity folios helped increase overall base to 4.52 crore in November 2015 from 4.17 crore at the end of March 2015. 

Piquant parade

Shriram Asset Management Company Ltd. has recently got the go-ahead from Securities and Exchange Board of India to undertake 'offshore fund management'. Simplifying norms for domestic funds to manage offshore pooled assets, SEBI earlier this year, among others had dropped '20-25 rule', which required a minimum of 20 investors and a cap of 25% on investment by an individual, for funds from low-risk foreign investors. India's relatively higher growth and diversity of themes present an attractive opportunity for foreign investors over the medium-to-long term. The sentiments have become investor-friendly due to government's announcement of a series of reform measures in recent months, such as not imposing retrospective MAT on overseas investors for the years prior to April 1, 2015.

Nomura has initiated the process of exiting from the mutual fund business in India. In a BSE filing, LIC Housing Finance informed the markets that it is buying Nomura’s 19.3% stake in LIC Nomura Mutual Fund. The deal has been pegged at Rs. 27.36 crore. The mutual fund company is co-owned by LIC, LIC Housing Finance, and Nomura Holding with 45%, 20%, and 35% stakes respectively. With this deal, Nomura’s stake will come down to a little above 15%. This is the first step towards Nomura completely exiting the mutual fund joint venture.

Regulatory Rigmarole

Investors need to work again to complete their KYC. New KYC requirement expects investors to furnish their networth details, and if they are politically exposed. There are a couple of details that every investor needs to provide and one of them relates to the fact that they should indicate the amount of income that they earn or their net worth which will give the fund an idea of the kind of income or the assets that are held by the investor. This is meant so that there is some sort of linkage of the amount that is invested and the income or the assets held so that there is no big discrepancy present. This is meant to ensure that there is no money laundering that is going on and that the investor is investing the funds that are his own. The investor also needs to indicate whether he is a politically connected person and this has to be answered in the form of a yes or no. The other detail that has to be submitted relates to the coverage under the new agreement signed for disclosure of foreign assets if a US citizen invests in India and hence this is also a significant thing as it could put the mutual fund at risk if it is discovered that the investor has hidden assets in the country from the US tax department.

SEBI is likely to come out with guidelines on electronic KYC soon to expedite the process of client verification. e-KYC enables financial institutions to complete KYC process online with direct authorization of clients. By going electronic, KYC can be done on a real time basis. The key objective of e-KYC is to reduce turnaround time and paper work. Typically, KYC Registration Agencies (KRAs) take 8 to 10 days to verify a KYC application. Earlier, SEBI had allowed fund houses to accept e-KYC of UIDAI as a valid proof for the KYC verification. The e-KYC service offered by UIDAI enables individuals to authorize service providers to receive electronic copy of their proof of identity and address. Investors have to authorize intermediaries to access their Aadhaar data through UIDAI system to avail this facility. However, it has not taken off in a big way due to lack of coordination between UIDAI, financial institutions, and KRAs. Banks and insurance companies are already using Aadhaar linked e-KYC service to carry out their KYC verification procedure. However, many banks and insurance companies insist on submitting physical documents even after carrying out eKYC. It remains to be seen whether the new eKYC can address these issues and provide hassle free service to investors.
In a fresh twist on e-commerce distribution space, SEBI is likely to ask e-commerce distributors either to develop their own skill sets like IFAs or work in a tie up model with IFAs (market place model). SEBI has reportedly decided to come out with the guidelines on distribution of mutual funds through e-commerce websites like FlipKart, Amazon, and Snapdeal at a meeting of SEBI’s Mutual Fund Advisory Committee. SEBI said that there would be three routes through which mutual funds would be distributed on e-commerce – distributor route (both online and offline facility), only distribution route (online distribution), and advisor route (direct route).
In a bid to rationalize costs, SEBI has barred new ELSS schemes from charging an additional 20bps TER. Thus, the three recently launched ELSS – Mirae Asset Tax Saver Fund, DHLF Tax Savings Fund, and Peerless Long Term Advantage Fund are not charging this 20bps extra TER. SEBI had allowed fund houses to charge an additional TER to the extent of 20 bps with effect from October 2012 in lieu of exit loads. Also, the market regulator had mandated that the entire exit load should be credited back to the schemes. Typically, ELSS schemes have a lock in period of three years and have no exit load period. ELSS category manages Rs. 40,313 crore as on October 2015. A rough calculation shows that the industry is charging close to Rs. 81 crore in lieu of exit loads in ELSS. Most closed end schemes are charging an additional 20bps. In fact, a few no-load schemes are also charging this additional expense from investors. Meanwhile, IFAs are demanding that all closed end schemes and schemes with no exit loads should be barred from charging extra TER. Almost all existing ELSS schemes and closed end schemes charge this additional TER despite the fact that these schemes do not have exit load periods. SEBI should look at these schemes to make mutual funds more cost effective for investors.
SEBI will introduce norms that will restrict investments by mutual funds in rated debt instruments. There could be some sort of sectoral cap or single-company investment limit (in terms of bonds). The new norms are aimed at preventing excessive exposure of a mutual fund to a single company and come in the wake of Amtek Auto defaulting on Rs. 190-crore worth of bonds held by funds of JP Morgan. At present, a mutual fund scheme can invest up to 15% in debt papers issued by a single company.

Even though the year started with great expectations around economic reforms and revival, these hopes were belied to a large extent over the next few months. As a result, stock markets corrected sharply in the second half of the year, dragging down the benchmark indices nearly 15% from their peaks. The main cause for the correction was global markets, which were hit by expectation of Fed raising interest rates and sharp fall in commodity prices, leading to capital outflows from emerging markets in general and the debt crisis in Greece. The slowdown in corporate earnings growth was another factor that led to the downfall. In spite of these factors, Indian markets exhibited a Buddha-like calm to begin with. But what upset the scale was fear of massive slowdown in China along with weakness in major global economies such as Brazil, Russia, and Japan. "Currency war" was the other oft-heard thing during the year as China sharply devalued the yuan, which put pressure on most emerging market currencies. The positive side of these developments was that market valuations became reasonable and retail investors invested in a big way, effectively filling in the void created by the exodus of foreign investors.

Monday, December 21, 2015

December 2015

NFOs hit speed bump

NFOs seem to be moving in a low gear as fund houses have launched only 340 new schemes in April-September of 2015 following SEBI's direction to rationalise and consolidate offerings with similar goals. In comparison, mutual funds had come out with 1,059 NFOs for the whole of 2014-15. The numbers stood at 1,023 and 1,168 in 2013-14 and 2012-13, respectively. Over the past few years, there has been a declining trend in the issuance of NFOs. This trend has been partly due to the regulator's direction to rationalise and consolidate mutual fund schemes with similar objectives, according to a report titled 'Indian Mutual Fund Industry- The Road Ahead' from ASSOCHAM. The requirement from the regulator to demonstrate the differentiation in investment style and attributes of a potential new fund has also impacted the pace of approvals. Furthermore, the requirement of disclosing details and number of funds managed by each fund manager has also led to more circumspection. Most of the new schemes launched in April-September have been aimed at investment in equity and equity-related securities. Besides, the products have been focused on diversified funds, exchange-traded funds, tax-saving instruments, and arbitrage schemes. Overall, a total of 120 draft documents have been filed with capital markets regulator SEBI to roll out new NFOs in the current fiscal so far.

Close-ended NFOs adorn the December 2015 NFONEST.

SBI Debt Fund Series B - 29

Opens: December 17, 2015
Closes: December 21, 2015

SBI Mutual Fund has unveiled a new fund named as SBI Debt Fund Series B - 29, a close ended debt fund. The tenure of the fund is 1200 days from the date of allotment. The investment objective of the fund is to provide regular income, liquidity, and returns to the investors through investments in a portfolio comprising of debt instruments such as Government Securities, PSU & Corporate Bonds, and Money Market Instruments maturing on or before the maturity of the fund. The fund will invest 70%-100% of assets in debt and invest up to 30% of assets in money market securities with low to medium risk profile. Exposure to domestic securitized debt may be to the extent of 40% of the net assets. Benchmark Index for the fund is CRISIL Composite Bond Fund Index. The fund manager is Rajeev Radhakrishnan.

ICICI Prudential Capital Protection Oriented Fund Series IX Plan C

Opens: December 8, 2015
Closes: December 22, 2015

ICICI Prudential Mutual Fund has launched a new fund named as ICICI Prudential Capital Protection Oriented Fund - Series IX - 1195 Days Plan C, a close ended capital protection oriented fund. The tenure of the fund is 1195 days. The investment objective of the fund is to seek to protect capital by investing a portion of the portfolio in highest rated debt securities and money market instruments and also provide capital appreciation by investing the balance in equity and equity related securities. The securities would mature on or before the maturity of the plan under the fund. The fund would allocate 70%-100% of assets in debt securities and money market instruments with low to medium risk profile and invest up to 30% of assets in equity and equity related securities with medium to high risk profile. The performance of the fund will be benchmarked against CRISIL Composite Bond Fund Index (85%) and CNX Nifty (15%). The fund managers are Vinay Sharma (equity portion), Chandni Gupta & Rahul Goswami (debt portion) and Shalya Shah (For investments in ADR / GDR and other foreign securities).

Sundaram Long Term Tax Advantage Fund Series II

Opens: November 3, 2015
Closes: March 15, 2016

Sundaram Mutual Fund has launched a new fund named as Sundaram Long Term Tax Advantage Fund -Series II, a 10 year close ended equity linked savings scheme. The duration of the fund is 10 years from the date of allotment of units. The investment objective of the fund is to generate capital appreciation over a period of ten years by investing predominantly in equity and equity-related instruments of companies along with income tax benefit. The fund will allocate 80%-100% of assets in equity and equity related securities with high risk profile and invest up to 20% of assets in fixed income and money market securities with low to medium risk profile. The fund's performance will be benchmarked against S&P BSE 500 Index. The fund will be managed by S. Krishnakumar & Dwjendra Srivastava.

UTI Long Term Tax Advantage Fund Series III

Opens: December 18, 2015
Closes: March 30, 2016

UTI Mutual Fund has launched a 10 year close-ended equity linked savings scheme as “UTI-Long Term Advantage Fund-Series III”. The investment objective of the fund is to generate capital appreciation over a period of ten years by investing predominantly in equity and equity-related instruments of companies along with income tax benefit. The fund will be benchmarked against S&P BSE 100 Index. This is an ideal plan for long term wealth creation and tax-saving under section 80C of Income Tax up to a deposit amount of Rs. 1,50,000/-. Besides this, as per the present tax laws there are no tax on long term capital gain too. It is a tax saving scheme and a wealth creator too for the investor. 1st series of UTI – Long term Advantage fund was launched in 2007 & the 2nd series in the year 2008 and both have done a fair job in wealth creation as well as tax–savings for the investors.

IDFC money Market Fund, ICICI Prudential CPSE ETF, Reliance Children Fund, Canara Robeco Equity Opportunities Series 1 and 2, IDFC Sensex ETF, IDFC Nifty ETF, and SBI Children Benefit Fund – Investment Plan are expected to be launched in the coming months. 

Monday, December 14, 2015


December 2015 

Average investors need a balanced investment portfolio in order to earn reasonable returns at an acceptable level of risk. This is achieved by investing money in debt funds besides diversified equity funds.

All the GEMs from the 2014 GEMGAZE have performed reasonably well through thick and thin and figure prominently in the 2015 GEMGAZE too. 

ICICI Prudential Long-term Gilt Fund Gem

Launched in August 1999, ICICI Prudential Gilt Investment Fund sports an AUM of Rs 1738 crore. Being a gilt fund, the credit quality of the portfolio is very high with Government of India securities constituting 97.64% of the total assets. There are thirteen holdings in all with an average maturity of 23.88 years and yield to maturity of 7.95%. The fund earned a return of 5.81% in the past one year as against the category average of 6.55%. The expense ratio is 0.95%. The fund is benchmarked against the I-SEC Li-BEX index. The fund is managed by Mr. Rahul Goswami and Mr. Anuj Tagra.


Canara Robeco Income Fund Gem

Canara Robeco Income Fund was launched nearly a decade ago in 2002. The current AUM of the fund is Rs. 172 crore with 17 holdings. Central Government and State Government loans and securities constitute 94.48% of the total assets and 2.88% is invested in AAA rated bonds. The credit quality of the fund is reasonably high. The interest rate sensitivity of the fund is high with the average maturity at 20.56 years and yield to maturity of 8.03%. Its return in the past one year is 5.64%, almost on par with the category average of 7.27%. The expense ratio of the fund is high at 1.9%. The fund is benchmarked against the CRISIL Composite Bond Index. The fund is managed by Mr. Avnish Jain since June 2014.

Birla Sunlife Dynamic Bond Fund Gem

Birla Sunlife Dynamic Bond Fund manages assets worth Rs. 15,898 crore, making it the largest fund in the income category. This fund is a steady top quartile performer with low volatility. It has delivered returns across interest-rate cycles and is among the top few in its category. The one-year return of the fund is 7.74% as against the category average of 7.27%. In the last five years, Birla Dynamic Bond Fund has generated compounded annual returns of 9.88%, putting it among the top couple of funds in its category and ahead of peers such as SBI Dynamic Bond, Kotak Flexi Debt, and BNP Paribas Flexi Debt. Consistency of returns shows in the fund trailing its benchmark in only one of the last ten years (2013) and beating its category in all ten years. It has managed good returns even in difficult periods for bond markets such as 2005 and 2009. The NAV took a knock of 3.7% in the bond shock of May-August 2013 but has since more than made up for it with high one-year returns. Not overly focused on G-secs, the fund does use a mix of G-secs and corporate bonds in its portfolio to deliver returns. The number of holdings in the fund’s portfolio is 55 with an average yield to maturity at 8.15%. The expense ratio is 1.36%. Maneesh Dangi is the fund manager since September 2007.

Birla Sunlife Government Securities Long term Fund Gem 

Launched in October 1999, the fund has an AUM of Rs 919 crore. The one-year return of the fund is 5.37% as against the category average of 6.55%. The fund is benchmarked against the I-Sec Li-Bex. The fund has eleven holdings with the yield to maturity of 7.79%. The expense ratio of the fund is 1.42%. Prasad Dhonde and Kaustubh Gupta have been the fund managers since October 2012 and June 2014 respectively. 

Birla Sunlife Floating Rate Short term Fund Gem

This relatively young fund, launched in October 2005, boasts of a massive AUM of Rs 3628 crore.  In the past one year, this liquid fund has returned 8.44% as against the category average of 8.1%. The number of holdings in the fund’s portfolio is 46 with an average yield to maturity at 7.55%. The expense ratio is a mere 0.12%. The fund is benchmarked against the CRISIL Liquid Index. Sunaina da Cunha and Kaustubh Gupta are the fund managers.

Monday, December 07, 2015

November 2015

When planning to invest in mutual funds, whether equity or debt, there are two questions you must ask yourself:
·         What is my risk appetite?
·         What is my investment horizon?

The reason being these two questions determine your investment avenue. So if you are a risk-taker with a long-term horizon (at least 5 years) you can park your money in equity funds. Conversely, for risk-averse investors with 3-5 years’ investment horizon, debt funds are a safer and better option. Debt funds are mutual funds that invest in debt and fixed-income securities, such as corporate bonds, debentures, government securities, and commercial papers. These securities guarantee safety of principal and income. However, these two features come at a cost — returns are much lower than that of equities in the long run. Therefore, debt funds suit you if you prefer certainty of income with low or moderate level of risk.

Debt funds vis-à-vis Bank Fixed Deposits

But safe investors will say why not invest in bank fixed deposits instead of debt mutual funds? Well, here is why you should not:

1.      Gains from falling interest rates: The 50-basis point repo rate cut by the RBI recently has led to the lowering of FD rates. Many banks have cut their deposit rates by 25 basis points. So, if you have been parking your investments in bank deposits, your returns from future deposits will take a beating. But, guess what — even falling interests could help you earn more! Unlike bank deposits, debt funds allow you to gain from falling interest rates as bonds prices have an inverse relationship with interest rates.
2.   Better liquidity: Bank deposits are not tradable and if you wish to withdraw money, you cannot close the fixed deposit in part. Banks charge penalties for premature withdrawal. However, debt funds are more liquid as you can withdraw any amount from your total fund value.
3.      Low taxation: Debt funds attract almost nil taxes after 3 years while interest earned from bank deposits is taxable. Moreover, the interest earned from bank fixed deposits will be taxed under your maximum tax slab while a debt fund redeemed after 3 years would attract long-term capital gains (LTCG) tax of 20% flat rate with indexation. Thus, if you fall under higher tax bracket, you stand to gain from investing in debt funds even if the rate of returns from debt funds and fixed deposits are the same.

Points to ponder

However, there are some aspects that buyers must keep in mind while investing in a debt fund. There are attractive opportunities in debt schemes for retail investors, starting from overnight investment in liquid funds to duration debt products like, gilt funds, income fund, and dynamic bond funds. Liquid debt funds are ideal for those with an investment horizon of less than a month and ideally should be used to park money instead of a savings bank account. Ultra-short term fund investments are for less than 90 days and can be compared with short-term fixed deposits. Short-term debts funds are ideal for those with an investment horizon of 12 months. The tenure of the debt fund is very important because due to the longer period, there is additional risk and higher exposure to interest rate fluctuation. As the value of bonds is inversely proportional to the interest rate, a rise in the interest rate will see a fall in the price of bonds and vice-versa. So, a bond with shorter duration has less chance of fluctuation in the interest rate as compared with long term bonds. Investors must focus on the risk appetite and return expectation to decide on the right tenure of debt fund.

The economy paints a rosy picture…
Apart from these parameters, the prevailing economic conditions may also influence your decision to invest in debt funds. Let us review some of the factors that may affect the performance of debt funds in short- to medium-term horizon.
         Falling interest rate regime: The Reserve Bank of India (RBI) has already cut the repo rates by 125 basis points in 2015.  The latest 50 basis points rate cut by the RBI on September 29, 2015 has led to hike in bond prices in India. During a falling interest rate regime, debt funds with longer investment horizon, such as dynamic bond funds, gilt funds, and income funds, would gain the most when compared to short-term debt funds.
         Falling global commodity and fuel prices: The falling global commodity and fuel prices would ease inflationary pressures in India which would, in turn, give RBI more room to further bring down interest rates. As bonds prices and interest rates have an inverse relationship, falling interest rates would further increase bond prices, thereby, pushing up the value of your investments in debt mutual funds.
         Volatility in global markets: In a globalized world, Indian markets cannot stay totally immune to adverse events in peer markets. The present volatility in global markets, coupled with slowdown in China, has adversely affected the FII inflows into India. An expected Federal Reserve rate hike may further lead to flight of capital from emerging markets, including India. As the reduced FII inflows may hurt returns from your equity funds, you can invest in debt funds if your risk appetite is limited.
To sum it up, in the current economic scenario, if you are a risk-averse investor looking for assured returns, debt mutual funds would provide higher returns compared to other fixed income options like bank fixed deposits.
…but are debt funds lagging their benchmarks?  

For actively managed mutual funds, the return generated in excess of the chosen benchmark is what determines the worth of the fund. While this is particularly true in the case of equity funds, debt funds are not subjected to this scrutiny for various reasons. But a close inspection of fund performance relative to benchmark brings out a sharp contrast in the two categories' performance in recent times. While equity funds' relative performance has been strong, debt funds have not fared well on this count. Over the past one year, for instance, 49% of debt funds have underperformed their respective benchmarks. For the same period, just 17% of diversified equity funds failed to beat their benchmark. Over three years, 57% of debt funds have been beaten by their benchmark whereas only 11% of equity funds met the same fate. While debt funds by nature cannot outperform their benchmarks to the same extent as equity funds, the degree of underperformance in the former does raise some questions. Lack of liquidity in the debt market is the primary reason for debt funds' underperformance. The underperformance is visible across short-term and long-term debt funds. However, short-term debt funds cannot outperform much. They are highly susceptible to redemption pressures arising out of liquidity needs. A slight underperformance in debt funds should not be a concern. Unlike equity funds, relative performance is not really much of a criterion in the selection of debt funds. A good debt should provide the right balance between safety of capital and reasonable return.

Selection strategy

Debt funds are considered to be the safe investment, but if not selected properly in line with the suitability, they can be as risky as equity funds. Some of the checks one can make before selecting among debt funds are as follows:
1.     Average Maturity: You should be clear about your goal and time horizon. Your time horizon should match with the average maturity of that fund. Average maturity tells the weighted average maturities of all securities held in that fund. So if you want to park your money for 1 month then you should not go with Income funds or Gilt funds having higher average maturity. The best selection for you would be liquid or ultra-liquid Funds.
2.     Modified duration: Modified duration is the measure of sensitivity of particular fund to market interest rates. Like Beta is for equity funds, Modified duration is for debt funds. Higher the modified duration, higher will be the volatility. Thus if you expect market interest to go down in near future than you should go with the funds of higher Modified duration. But be informed it also carries equal risk, which means that if your expectation does not turn up correct then your assumed gains can be converted into losses.
 3.     Yield to maturity (YTM): This figure will give you an idea of what returns can you expect out of fund’s portfolio. This figure must be compared with current returns of your safe instruments like PPF/Bank Fixed deposits. Yield of funds should not be much higher in comparison. Higher yields sometimes would mean compromising on the quality of papers and thus safety of instruments. This increases credit risk in those bonds and sometimes leads to liquidity risk also.
 4.     Quality of papers in portfolio: The quality of debt instruments in the fund’s portfolio is of utmost importance and should be scrutinised closely. One should check the credit rating assigned to each instrument like AAA, AA+ etc. This signifies the level of credit/default risk. The higher the rating, the safer the instrument. While a debt fund with a risky paper is likely to yield higher returns, it may work unfavourably for the investor. As to a debt investor the safety of capital is very important, so one should avoid the funds with low quality investments.
5.     Expenses ratio: The expense ratio is very critical for a debt fund as the returns are low. Return expectation out of debt fund is in the range of 8-10%, thus expensive cost structure will have a negative effect on the returns. So it is very important for investors to ensure that the cost structure is low and in line with the returns being offered by the fund.
Match holding period with the specific strategy you choose

The recent downgrade of a bond held by two schemes of a major fund house has brought risks involved in debt mutual funds back into the limelight. The episode has shifted the focus on how fixed income mutual funds work and how they should be used in a portfolio. It is believed that robust portfolio construction (how you allocate your money across different debt mutual funds categories) is the most crucial element to be put in place before buying debt mutual funds or reviewing the funds that you have in your portfolio. A well balanced debt mutual fund portfolio needs to have different elements combined together to deliver superior risk adjusted returns. Combine different strategies: Debt mutual funds serve different purposes — liquid and ultra-short-term funds are for parking temporary surpluses, and tend to outperform savings/current accounts in banks where short-term surpluses are typically kept. Dynamic bond funds have the flexibility to decide how the fund manager wishes to allocate the money across the mentioned strategies. In addition, there are also fixed maturity plans (FMPs) which hold bonds to maturity to try to lock into a certain rate of interest. A clear understanding of each of these strategies is critical, and to combine them together to create a well-diversified portfolio is imperative. Always keep time horizon in mind: Each of the above strategies is suited for a certain holding period and it is therefore critical to match the period with the strategy. A mismatch in holding period expectations and portfolio construction could cause a significant challenge. Factors like modified duration and average maturities of the portfolio, exit load structures and composition of underlying securities must be monitored.