Yay!......... Review on Tata Mutual Funds

Beautiful! Those were the words expressed by me when I recently saw my returns from a certain mutual fund. Besides I am writing this review after explaining to Imran and Sikandar about it. For all the members at MS, Sikandar and Imran are my bread and butter at my workplace. It’s more like Hey! Bagwan (Bagwan Sikandar) Yeh Sauda (Imran Saudagar) kab confirm hoga?

They have been pestering me for the past few days to provide more information in “simple Hinglish” – as though the other versions of English were not enough! I suppose I am now well equipped to explain it to the laymen and students or any new investors who do not want the risk of investing in stocks. I hope it helps you all….

To begin with, mutual funds collect money and invest it in various schemes, instruments or in the stock market. Instruments can be in the form of say government bonds. Here the returns are fixed, say about 12-20 % but the income is fixed and offers a constant return for life. There are no risks associated with this type.

The most popular type is the one where the stocks pool your money and invest in stocks. This is the most popular as there is no fixed returns. Here the returns can be as less as 15 % to as high as the stocks perform. There is of course no fixed percentage as this is again dependent on the stock market performance. In fact in mutual funds which invest in stocks, below is a base guideline to the returns offered by mutual funds.

Upto 18 % - Poor 18-35 % - Average

35-60 % - Good Greater than 60% - Very good

Even the poor returns are much better than a bank deposit! The scenario has changed much since the stock meltdown. At that time if you had invested in mutual funds you would have seen very poor or often negative returns. The funds however have appreciated since then to give more than 25-150 times the returns. That’s awesome!

Interested? Let’s look at the various options offered by mutual funds in detail. Most offer these fund options - Growth, Dividend Reinvestment and Dividend payout.

To have a closer look at the three options, consider that you have invested a sum of 10000/- towards the purchase of a 1000 units (@ 10 per unit) during the initial fund offering. Also consider that no fund costs or insurance costs have been incurred. At the end of one year, the value of your investment has increased to say 20000/- for the same 1000 units. The NAV value for the units is around 20/- per unit. Note that the NAV value in most cases for all the three fund options would be the same till the first dividend has been announced.

It makes sense to look at Dividend payout first. Suppose the company offers a dividend of 2 Rs, which would be about 2 Rs per unit or 2000 for a total unit value of 1000. The value of your investment would decrease by that much, i.e, from 20000 to 18000/-.

The two thousand has been credited to your bank account (or a cheque issued for the same). This option makes sense for middle aged and old timers who want a steady annual income. The number of your units is the same and the value of the units after the payout is 18000 (@ 18 per unit). Here the dividend paid to you is not subject to market risks or fluctuations.

Dividend Reinvestment - The dividend amount of 2000 is reinvested towards the purchase of additional units at the market price of approximately 18 (This would vary around the ballpark figure at the time of purchase). So an additional 111.11 units are added to your existing 1000 units. (A total of 1111.11 units @ 18 = 20000) So in effect the value of your units is equal to the original appreciated value. Here the gains are in the number of units. The total number of units increases depending on the market value and the dividend offered.

Growth – Here the value of your investment made is invested till the time you intend to withdraw it for profit. There are no dividends offered at any time during the fund’s operation. If the market value is 20,000, then the value remains the same. The money is reinvested till the time of your withdrawal.

There is a greater chance that you may profit more from the Growth option especially if you stay invested for a longer term (6 to 10 years or more). The growth fund increases in the NAV value every year and any market downturn is reflected for that year only. However this may not be the case with Dividend Reinvestment. It is a good option if the market is always on the upswing. If there is a downswing in any one year, then the NAV values for the dividend Reinvestment option are adversely affected.

Let me substantiate here. Consider that the Dividend has been announced as stated in the original example. So after the purchase of the additional units, there is a market downturn. Let’s say the NAV values go down by a Rupee. (It may not be the same for both growth or Dividend option. But the NAV values would still be proportional considering that it is only the first dividend which has been announced) The NAV values for growth would go down from Rs 20 per unit to 19 per unit. The NAV values for the Dividend Reinvestment would go down from 18 to 17 per unit. (As dividend has already been used to buy additional units)

In this case, the Value of your Growth option would be around 191000 =19000 value. The value for the dividend reinvestment would be around 171111.11=18888.87 value. Hence there is a greater loss with dividend reinvestment when the market is down.

I do not know much about when the market is on the upswing. Theoretically the Dividend Reinvestment value gain might be slightly higher. The costs incurred for the Dividend Reinvestment option also are slightly higher. So, I doubt if there is any substantial gain with respect to this option. However, it should equal the returns of the growth option. This is where I am slightly confused myself.

In all the above three scenarios, you are eligible for a flat tax of 10 % if you withdraw the units before 1 year. (Capital gains tax) You are not paying any tax for period of greater than one year. (Again the sum invested should not exceed 50000)

Well! I have a very private reason to post this under the Tata mutual funds. For me Tata is synonymous with trust. I purchased the Tata Infrastructure fund about 18 months back. At rs 10 per unit. The current Nav per unit is 20.40. That’s double in 18 months! Though it is not one of the market leaders, it has performed well. There are also other exceptional performers.

A few tips for those looking to invest and people who invest in stocks.

• Check the funds which give very good returns in the market. Check the companies in which they invest. (This information can be obtained from their website) Invest in a similar portfolio to see long term gains. You would see more capital appreciation than your mutual fund can offer.

  
  




• Check the funds you wish to invest. A few good ones are Franklin Templeton, SBI Magnum, Fidelity, UTI (The market leader) , Tata mutual, Reliance and ones like the Standard chartered, Merrill Lynch. Do not go for LIC. Though they invest the most in stocks, they give average returns.

  
  




• If you are eligible for income tax, try investing in tax saving or ELSS schemes. These are also tax saving and you are exempt from income tax. Each fund house has to offer at least one ELSS.

  
  

Take care…..