It should be of least concern to investors whether the MF units are in fraction or whole number. When MFs buy and sell stocks, they don't have to pay capital gains tax unlike individual investors
Why MF units in fractions?
I invested Rs 5,000 in an equity fund at an NAV of Rs 17.91. The fund house issued 279.173 units to me. My worry is that is it okay to accept units in fractions? Do all AMCs do this or my fund house is an exception?
- Atanu Saikia
Don't worry. Your investment is perfectly alright. When you invested at an NAV of Rs 17.91, the price of each unit purchased stood at Rs 17.91. Dividing Rs 5,000 by per unit cost will give you a fractional number of units. The number of units one receives can also be a whole number. However, it should be of least interest to you whether the units are in whole number or a fraction since all units are issued in electronic and not in physical form. This means that when you sell (or buy) units, you can sell (or purchase) these 'fractional' units also. Although there is no hard-and-fast rule about the allotment of units, usually fund schemes allot units up to three decimal places.
Does the corpus of a fund affects its performance? Is it true that funds with lower AUMs do better than larger ones?
One cannot conclusively say that small-sized funds do better than their large-sized counterparts within the same fund house. A large size can be a cause for concern, particularly for mid- and small-cap funds. First, there is a need to find more and more attractively-priced stocks. A large size can lead a fund towards over-diversification as even huge sums invested in particular stocks form only a miniscule part of a portfolio. This can impact performance since exceptional returns of a few multi-baggers tend to get diluted. Secondly, large size tends to make the fund less agile. Liquidity problems are frequently associated with mid- and small-caps. A big fund might find itself stuck with mid-cap stocks from which it cannot exit quickly because of poor liquidity.
MFs: The Wiser Option
I have been advised to invest directly in stocks rather than invest through a mutual fund, as the loads and expenses make funds costlier. I feel that I can do that with the help of your website. At valueresearchonline, I can compare the performance of the funds to identify the best performing ones and then simply look at their portfolio details to identify the stocks which I need to buy on my own. By doing this, I can avoid the expenses of mutual funds. Isn't this a more cost and time efficient way of investing?
Portfolio of a fund is not static but keeps changing. The details of a fund's portfolio are made public only at the end of the month. So when a fund manager forms a view over a company and invests in it and say his targets are met, or due to any other reason if his view changes, he exits the stocks and looks for other options. Now this could happen at any time during that month. Given the volatility of equity markets you may loose the opportune time to sell or buy a certain scrip. Consequently you might end up getting stuck with stocks which the fund manager would have already exited. In the light of the recent volatility in the markets this is quite a possibility. Therefore, keeping a close track of the fund's portfolio on an individual basis and trying to closely follow the fund manager is a futile task and time consuming task. A fund manager has the muscle of a large corpus through which he can build a diversified portfolio. An investor in his individual capacity may not be able to build such a portfolio due to lack of such a huge investment amount, and hence lack diversity. Given the element of diversification, a fund manager might once in a while take a risky bet on the stock. And if you are confident about a fund manager's moves then why not let him make the investment decisions and instead better utilise your time in picking robust funds. However fund managers have also made mistakes in the past in judging the valuation of stocks. Lastly, we don't think mutual funds are alarmingly expensive so as to deter you from investing through them. In fact, you have missed out the fact that when mutual funds buy and sell stocks in their portfolio, they do not have to pay any capital gains tax. But when you as an individual churn your portfolio, you will are liable to pay a capital gains tax at the rate of 10 per cent.
Right FrequencyWhat is the optimum frequency of installments for investing through an SIP? Should I invest monthly, quarterly or half-yearly?
The optimum frequency of an SIP should be a function of your convenience. You should first ascertain how frequently you can set aside funds for investment without pushing your finances to the edge. While there is no doubt that SIP is the best way to invest in equity funds, there is no sound basis of saying that a particular frequency of investment is the most profitable. If you can invest comfortably every month, why not go for the monthly option? In this case, the concept of rupee cost averaging may also work better for you. Moreover, whether you invest monthly or quarterly will not affect the performance of your portfolio as much as your discipline over the long term. Therefore, focus upon investing in good, established funds over the long-term, and don't get carried away by tall claims.