At the AT&T Developer Summit on Monday, CEO Ralph De la Vega announced a slew of new phones including the HTC Titan 2, the first LTE Windows Phone. While LTE 4G is exciting and all, I was more interested in the Titan 2’s 16-megapixel camera.
Can you do a systematic investment in just one mutual fund scheme and be done with? Axis Mutual Fund is coming out with this idea which also happens to be low cost. Unfortunately, its not tax efficient and asset allocation is conservative
Axis Mutual Fund plans to launch an open ended fund-of-funds scheme (FOF)—Axis Life Plan according to the offer document filed with the Securities and Exchange Board of India (SEBI). The scheme will offer four different plans—Plan 2020, Plan 2025, Plan 2030 and Plan 2035. Each plan will have a different portfolio. The name of the plan mentions the target date (31st December of the respective year) based on which the asset allocation will be run as per the investment strategy. The assets of the scheme will be allocated in a range of mutual fund schemes including equity funds, debt funds, gold ETFs (exchange-traded funds) and offshore funds. The scheme will also invest in debt and money market securities for liquidity.
The target asset allocation of the plan(s) changes over time which is decided by the number of years between the current date and the target date of a particular plan. After the target date is reached, the fund will maintain its asset allocation on an ongoing basis. The target asset allocation becomes more conservative as its approaches its target date by reducing its equity exposure.
The indicative allocation that the scheme will follow is mentioned below:
The investment in equity funds includes investments of up to 10% of the net assets of the scheme in domestic gold ETFs, balanced/hybrid funds and up to 10% of the net assets will be invested in offshore funds consisting of both the equity funds and debt funds. Up to 10% would be invested in debt and money market securities. The scheme will primarily invest in schemes of Axis Mutual Fund but can invest in schemes of other mutual funds based on the view of the fund manager.
The cost of the scheme is low compared to other equity diversified schemes. Here the recurring expense is 0.75% compared to 1.75%-2.25% which is charged by most equity-oriented schemes. However, investors will not benefit when it comes to paying taxes compared to other equity-oriented schemes. As this is a FOF scheme, long term capital gain tax would be 10% (20% with indexation) and short-term capital gain would be taxed according to the income slab of the investor to the scheme.
Axis Mutual fund was set up in September 2009. Most of its schemes are just over a year old. Though in the last one year the Axis Equity Fund and Axis Long Term Equity Fund have beaten the benchmark, the question arises on the long-term performance of these funds. Another area of dispute is that what kind of equity schemes would the fund be investing in? This has been left to the fund manager to decide. The fund manager for the scheme, R Sivakumar has about 12 years of experience and manages mainly debt funds of Axis MF.
Would this be a safe and smart scheme to invest in? Assuming the fund manager does his research well and invests in the best schemes available; investing in such a scheme would definitely be safe over the long term. But would it be smart? If you enter the Plan 2030 with a view to invest for a 15+ year term, just 50%-55% of your assets would be invested in equity and that too for a period of just three years (2012-2015). Therefore if you would be investing far less in equities than what you should ideally do for a term of 15+ years. A better option would be if you would invest around 75% of your asset in a good equity diversified mutual fund and the rest in a bank FD. Most importantly, all fixed formula-driven approach that is not flexible enough would give sub-optimal result. For instance, towards the end of 2008, the markets were at a low—the Sensex was around 10,000-but picked up significantly in the following years. Had this been a time for a change in allocation, the scheme would sell around 5% of its assets invested in equity which it may have purchased at a time when the Sensex was around 15,000-18,000. If we face a similar phase in the years to come, at the point of change in allocation of the scheme, one would end up selling low instead of increasing allocation in equity which ideally should be done.
Also, as happens with all hybrid or asset-allocated schemes, it would be hard for investors to figure out how much to invest in such schemes without the help of a planner.