Cut off date on entry loads

I had invested in Magnum Tax Gain and Fidelity Tax Advantage via Systematic Investment Plans (SIPs). Despite the recent regulation by Sebi abolishing the entry loads, my investments in August were made subject to an entry load. Is the new regulation not applicable for existing investors as well?
-Mohit

The new norm regarding the abolition of entry loads in mutual funds is applicable only to SIPs registered on or after August 1. SIPs registered earlier will continue to be subject to entry loads. If you wish to avoid this, you may consider discontinuing the present SIPs and starting new ones.

What is the difference between the Net Asset Value (NAV) of a fund and market capitalisation? Are they important while deciding which fund to buy?
-Kiran Nayak

The NAV of a fund merely reflects the market value of securities represented by a single unit. It is the total of assets managed by the scheme divided by the number of units subscribed to it.

On the other hand, the market capitalisation is the sum of weighted market capitalisation of the stocks a fund holds. For example, if two stocks, X and Y, comprise 30 per cent and 70 per cent of a fund's assets and their market capitalisations are Rs 200 crore and Rs 500 crore, respectively, the market capitalisation of the fund will be Rs 410 crore.

While choosing between two funds, a higher or lower NAV is immaterial, as the value of investment will be the same. It is the fund's returns that should govern investing decisions. But a fund's market capitalisation can tell about the size of companies it has invested into. The larger the cap, the more it will be holding onto bigger companies. This can be used for ready comparison, to find if a fund is a large-cap or mid- or small-cap.

Do the returns under the daily, weekly or monthly dividend options in liquid funds differ? Which option should I choose if I want to invest in a dividend reinvestment option?
-Murthy

The returns under different dividend frequencies do not differ, as the underlying portfolio is always the same. Whatever the return, it is the same for all. The point of difference is that in one, dividends will be distributed more frequently than the other.

Moreover, all the dividends distributed under liquid-plus schemes are subject to dividend distribution tax of 28.33 per cent. It will not matter which dividend frequency you choose.

I invested in the ICICI Income Plan on August 20. Despite this being a pure debt fund, the NAV has been going down. Are debt funds not supposed to be safe? Do they give negative returns as well?
- Mehul Somaiya

Contrary to general perception, the principal and returns in debt funds are not assured and can give negative returns. But, certainly, they are not as volatile as equity funds. The market prices of debt instruments are inversely related to interest rates. Whenever interest rates rise, the value of debt instruments will go down. As a consequence, the debt funds lose. This volatility is observed more in medium- and long-term debt funds than short-term debt funds and liquid funds.

Due to the ongoing government borrowings, the interest rates went up during August. The fresh bond issues caused their prices to fall, and hence the medium-term debt funds lost. We further expect the medium- and long-term debt funds to be volatile in the coming months. The average return of this category for the month was minus 0.44 per cent, while the fund had lost 0.45 per cent.

Value Research