Reader's corner: Mutual Fund

How does the change in mutual fund benchmark to the total return index will impact investors?

The regulator has proposed to change mutual fund benchmark to the total return index. As an investor, how does this impact me?
 

The regulator has mandated the change in performance benchmark from Price Return Index (PRI) to Total Return Index (TRI) to increase transparency and align mutual funds with global practices. TRI is computed taking into account the dividend and interest payments on the index constituents over and above the capital gains that form a part of PRI. For investors, this will provide a better comparison of the scheme returns against the benchmark.
 

A lot of fund houses are launching fixed maturity plans (FMPs). Are these good products to buy in the current rising interest rate environment?
 

Fixed Maturity Plans are closed-end debt schemes that invest in debt securities that have maturity similar to that of the fund. FMPs have different maturities and credit profile. Being closed-end schemes, FMPs are not liquid investments and can be redeemed only on stock exchanges before maturity. Due to the lock-in period associated with FMPs, the yields are also said to be locked in at the time of the launch of the scheme. You can look at investing in an FMP in the current high-interest rate environment post understanding the duration of the investment and the risk associated with each type of FMP. 
 

Recently the 10-year government bond yield touched around 7.75 per cent. I have invested in a few income and dynamic funds. The returns from these funds have turned poor in recent times. What should I do?
 

Income funds mainly follow accrual strategy and only a small portion is actively managed. Dynamic bond funds run mainly on duration strategy. Dynamic bond funds are actively managed funds where the duration of the fund varies based on the interest rate view of the fund manager. Income and dynamic bond funds should be looked at with a medium to long-term investment horizon. In the current interest rate scenario, the yields have moved up over the last few months against the backdrop of global and domestic uncertainties, such as global liquidity tightening, fear of fiscal slippage in India and rising crude oil prices. These uncertainties should settle down in the coming quarters. You can stay put with your investments for a longer term and avoid redeeming looking at short-term volatility. 
 

How do I choose between a retirement fund and an equity-linked savings scheme (ELSS)? I want to invest to save tax.
 

You can meet both your retirement and tax savings objective with regular investments in ELSS. A systematic investment plan in ELSS would enable you to meet the current tax saving requirement along with helping you build a corpus for your retirement. ELSS has a lock-in period of only three years, and SIP in ELSS can help you achieve your near terms goals as well as help build a corpus for retirement.
 

I invested in a balanced fund with a dividend option. I want to change to growth option due to the taxation changes announced in the Budget. Can this be done through an application or will I need to redeem and reinvest my investments?
 

Yes, you can shift your investments from dividend option to growth option by submitting an application. You will need to fill in all the details in the transaction slip and opt for switch request. Please note that switching from dividend option to growth option would be taken as a redemption from the dividend plan and purchase in the growth plan because both the plans have different NAVs. In case you are switching from a direct dividend plan to a regular growth plan, it will attract an exit load as applicable to the scheme. 

The writer is MD and CEO, SBI Mutual Fund. The views expressed are the expert’s own. Send your queries to yourmoney@bsmail.in.