Todays investor is very well read and informed. Financial advisors need to be well informed about the ins and outs of the markets and some basic terminologies to select the right fund for your investor. Below are some –
What does Alpha mean?
Alpha is the value the fund manager is adding when you invest in a fund. For instance, if Nifty delivers 10 percent return and the fund manager is able to deliver 10 percent-plus returns, then the plus return is alpha. So, return in excess of underlying benchmark is called alpha.
What is beta?
If your beta is more than 1 percent, then it’s high and if it’s less than 1 percent, then your beta is low. Market has a beta of 1 percent. If a fund or strategy has beta 1.2, it means that if the market goes up by 1 percent, that fund will go up by 1.2 percent. If the market goes down by 1 percent, that fund will go down by 1.2 percent. This means that the fund is 20 percent riskier or aggressive than the market. If the market falls, the high beta will fall even more and if the market goes up, the high beta goes up more.
What is turnover ratio? Should we grade funds on basis of turnover ratio?
Turnover ratio means a sum of purchases made by the fund house on buying equities and selling of equities. So, it’s “buy” and “sell” put together as a percentage of total asset of the fund. If a fund is continuously getting inflows, then it will have high turnover. If the fund is facing redemption, then also there will be a high turnover.
What is indexation and how would investor get the benefit of indexation?
Indexation is not applicable to equity mutual fund, portfolio management schemes. It is applicable in other assets like immovable property and unlisted shares with a window of two years. You have indexation after you invest for at least two years. For rest of the assets, it is 3 years. If you look at debt and jewellery, it is beyond three years.
Suppose you bought something in the current financial year. Let’s say you invested in a debt mutual fund and in three years the value of Rs 1 lakh has become Rs 1,30,000. So, Rs 30,000 is your gain. Ideally, you should be paying tax on Rs 30,000. But we have a concept called indexation. The indexation numbers which is Cost of Inflation Index comes every year from income tax department. Whatever is the consumer inflation of the last financial year, 75 percent from it is taken as a CII. Indexation increases the cost of asset but there has to be time period. You can’t use indexation in debt fund before three years.