Is there any chance where I can increase the equity exposure of my balance funds as the markets are growing now after some time?
— Prahlad Sharma

Balanced funds typically maintain an allocation of between 65% to 75% to equity with the remainder in debt. The minimum 65% allocation to equity is to ensure that the fund qualifies for equity taxation. Further, the discretion to vary the allocation lies with the fund manager based on her market views. As an investor, in case you would like to manage the asset allocation you could invest in a mix equity funds or shares or ETFs, debt, etc. and rebalance the portfolio according to your views. But you should also consider the cost-benefit implications including transaction costs, taxation, etc. of frequent re-balancing. An annual review and re-balancing of one’s portfolio is normally considered adequate.

I am getting calls on robo investments in mutual funds. How does it work and how would I take advise when needed?
— Sumit Agarwal

Robo advisory is a relatively new phenomenon in the financial markets. These are online platforms that provide investment advice and at times investment execution capabilities with no / limited human interaction. In other words, these platforms have various tools, which on provision of relevant information by the user / investor, automatically generate investment advice. The information required would tend to vary as per the platform with some providing goal based planning & risk tolerance based advice and others only investment options based on basic criteria. Investments are executed online and one would receive investment confirmation and regular portfolio updates online. Further, some platforms provide portfolio review and rebalancing services / advice on an ongoing basis.

Some platforms also provide online chat and customer call centre facilities wherein one can interact with representatives / advisers who provide investment and portfolio planning assistance. Typically, platforms offer advice only and advice plus execution options. Advice only options would charge an advisory fee and one is free to execute transactions through any mode whereas advice plus execution platforms may not charge any advisory fees since they earn on the execution of transactions.

These platforms are typically meant for investors who possess basic understanding of investments and prefer online investing with minimal/limited human intervention. These platforms can be compared to e-commerce sites wherein one can view and purchase various goods online.

I have been advised by my RM to invest in arbitrage fund instead of parking money in savings account. I am still not convinced. What would you advise me?
—Ashish Lele

Arbitrage funds as the name suggests, try to take advantage of the price differential of a stock in the cash market and the futures markets. Typically, the price of a stock in the derivatives market quotes at a premium to its price in the cash market. This allows for an arbitrage opportunity which such funds attempt to encash by buying a stock in the cash market and selling it in the futures market thereby earning the differential premium between the two prices.
In other words, in case the price of the stock was to move below its purchase price during the month, the value of the stock holding would come down but the value of the futures position would increase since the stock was sold in the futures market at a higher price, thereby setting off the loss incurred on the stock position. Eventually, the return on these positions i.e. the buy stock-sell future trade, would be tend to be equal to the premium or price differential between the stock and futures position that was locked in when the trade was undertaken.

Typically, arbitrage funds when executing these trades buy a stock and sell the one-month future contract on that stock thereby locking-in a return for a month. The spreads or differential between the cash and futures price can vary on a month-on-month basis, resulting in varying returns. This occurs due to various reasons including demand-supply scenario in the derivatives market, prevailing short term interest rates, market trend, etc. Typically, spreads (and therefore returns) tend to reduce when the demand for such positions is high and/or when interest rates are falling and vice-versa.

The tax treatment for arbitrage funds is favourable vis-à-vis debt funds, interest from savings account and other debt instruments. For taxation purposes, arbitrage funds are treated as equity, as a result, dividends and long term capital gains (units held for one year and above) are tax free whereas short term capital gains (units held for less than one year) are taxed at 15%. In terms of liquidity, arbitrage funds carry exit loads for exit up to one month or so (some funds may have loads for longer periods). Due to their return characteristics, market neutral nature and liquidity provisions, arbitrage funds are considered debt-like, acting as substitutes for savings accounts, ultra-short term and short term debt funds and are suited for a horizon of six to 12 months.

How do I buy some tax-free bonds from the markets, as this year the government will not issue fresh tax-free bonds?
— Kaustubh Shah

Tax-free bonds are listed on the debt segment of various exchanges such as NSE and can be traded there, although the liquidity might vary from bond to bond. An important feature of tax-free bonds is the differential coupon applicable for the institutional and retail options of the same bond, which might result in different prices and yields available on those bonds.

The writer is director, Investment Advisory, Morningstar Investment Adviser (India)

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