http://www.slideshare.net/mschhajedmarkting/eou?from_action=save

Comparison of benefits to EOU SEZ and DTA Posted on February 22, 2014 by  indiataxfinWe have provided here comparison of benefits available to EOU SEZ  vis-a-vis DTA units.In case of any query please post it in comments section

Factor EOU/ STP Unit SEZ Unit DTA unit

Location Anywhere in India In the Zone Anywhere in India

Trading

Units Not Permitted Permitted No restrictions

NFE

requiremen

t +ve NFE over 5 years (cumulative) NA

DTA sales

50% of export value of services

allowed on payment of Service

tax/ Excise duty

No restriction on DTA

sale

Customs duty on goods/

Service tax on services

payable

No restrictions on DTA sale

Customs duty on goods/ Service

tax on services payable

Customs

Bonding Yes No NA

Income tax

holiday No

Yes

MAT still

payable No

Service tax Refund on export of services

Input services

exempt/refund Refund on export of services

CST

Reimbursement allowed as per

specified procedure Exemption available CST is always a cost

VAT

VAT exemptions not available to

service units

Exempt/Refund as per

State VAT laws

VAT available as credit – not a

cost

Customs

Duty

Exempt on inputs and capital

goods

Exempt on inputs,

capital goods

and construction

material

Exemption depends

on product/ industry

Exemption on raw

material/

consumables

available against

advance authorization

Exemption on capital

goods available

against EPCG

authorisation

If exemption not

available

For manufacturers-

CVD & SAD available

as credit

For service providers-

CVD available as

credit hence CVD is

cost

For traders- CVD &

SAD can be passed

on (refund of SAD

also available)

BCD is cost to every

one

Excise duty

Exempt on inputs and capital

goods

Exempt on inputs,

capital goods

and construction

material

Exemption depends

on product/ industry

If exemption not

available, credit of

Excise duty available  

Ease of

Customs

compliance

s

No routine examination of Export

Import Cargo by Customs

No routine examination

of Export Import Cargo

by Customs

Examination of Export Import

Cargo By Customs

Import /

export

restrictions

Restricted/ canalised goods (e.g.

petrol) can be imported without

import licence

Restricted/ canalised

goods (e.g. petrol) can

be imported without

import licence

Import licence needed for import

of restricted goods

Transfer of

existing

employees

from

existing

facilities Allowed Allowed NA

Used

capital

goods Allowed

Allowed upto 20% of

total investment in

capital goods.

In case limit of 20% is

breached, only income

tax exemption is denied Allowed

Investment

approvals

FIPB approval required as per

sectoral guideline

100% FDI in allowed

automatically for

Manufacturing SEZ

Units

FIPB approval required as per

sectoral guideline

Exit Remain where the unit is To move out of the Zone NA

situated

Abbreviations

STP Software Technology Park unit established under Chapter 6 of Foreign Trade of Policy of India

EOU Export Oriented unit established under Chapter 6 of Foreign Trade of Policy of India

SEZ Special Economic Zone established under SEZ Act, 2005

DTA Domestic Tariff Area means area which is not SEZ, EOU or STP

+NFE Positive Net Foreign Exchange Earner – Export in forex is more than imports in forex

MAT Minimum Alternate Tax

VAT

Value added tax- Levied on sale within the State. Rate of tax varies from 4% to 15% depending upon nature

of goods and State of sale

VAT

Central Sales Tax- Levied on inter State sale of goods- Rate equal to VAT rate in the State of sale; rate 2%

if statutory declaration in Form C is provided by buyer to seller

BCD Basic Customs duty

CVD

Additional duty of Customs in lieu of Excise duty – levied on import of goods- Rate is equal to Excise duty

on manufacture of goods in India  

SAD Additional duty of Customs in lieu of VAT/ CST – levied on import of goods- Rate is 4%

Credit Input credit in terms of CENVAT Credit Rules, 2004

The 100% EOUs fall into 3 categories:

(a) EOUs established anywhere in India and exporting 100% products except certain fixed percentage of

sales in the Domestic Tariff Area (DTA) as may be permissible under the Policy.

(b) Units in Free Trade Zones in Special Economic Zones (SEZs) and exporting 100% of their products.

(c) EOUs set up in Software Technology Parks (STPs) and Electronic Hardware Technology Parks (EHTPs)

of India for development of Software & Electronic Hardware.

Major Sectors in EOUsare:

1. Granite

2. Textiles / Garments

3. Food Processing

4. Chemicals

5. Computer Software

6. Coffee

7. Pharmaceuticals

8. Gem & Jewellery

9. Engineering Goods

10. Electrical & Electronics

11. Aqua & Pearl Culture

To set up an EOU for the following sectors, an EOU owner needs a special license. EOUs can be set up

anywhere in the country and may be engaged in the manufacture and production of software,

floriculture, horticulture, agriculture, aquaculture, animal husbandry, pisciculture, poultry and sericulture

or other similar activities. Apart from local zonal office and state government, setting up of an EOU is also

strictly guided by the environmental rules and regulations.

Brief Highlights about EOU

An EOU is basically an Export Oriented units which can be set up in the declared ‘warehouse stations’ in India. There are

almost 300 such warehouse stations. EOU units are very closely connected with Customs Law and Excise Law. Besides,

Foreign Trade Policy deals with EOUs at larger extent. Further, Income Tax Act and Foreign Exchange Management Act are

also very relevant for EOU units. EOU not availing direct tax benefit are entitled to Duty Credit Scrip of VKGUY, FMS, FPS and

SHIS.

Setting Up of a new EOU

Initially the unit have to prepare detailed Project Report as these forms the basis of sanction of the scheme. The NFE should be

positive. Thereafter, the unit is required to obtain approval from the Unit Approval Committee (UAC) for automatic approval

scheme and from Board of Approval (BOA) for schemes other than under automatic approval scheme. The afore-said

authorities shall issue Letter of Approval after which a Legal Undertaking has to be submitted and Green Card shall be obtained

from him. A Licence has to be obtained u/s 58 and 65 of the Customs Act. B-17 bond has to be submitted with solvency

certificate or bank guarantee. CT-3 certificates have to be obtained.

Requirements of Positive NFE

The units should have a positive NFE (Net Foreign Exchange) which is A-B where A is FOB value of Exports and B is the sum

total of CIF value of all imported inputs and capital goods and all payments (like commission, royalty, fees, dividends, interest

on borrowings) made in FOREX. It is pertinent to note that the goods which are purchased on  high sea sale basis in Indian

rupees will be considered as imported goods for the purpose of calculation of NFE, even if payment is made in Indian Rupees

as mentioned in Para 14 of MF(DR) circular No. 12/2008-Cus dated 24-07-2008. NFE Earning shall be calculated in a block of

five years starting from commencement of production. Further, certain other aspects as mentioned in Para 6 of HBP Vol. 1

have to be kept in mind.

Failure to achieve NFE: It is worthwhile to mention that if NFE is not achieved then the unit is liable to pay duty and interest in

proportion to default will be payable as per MF(DR) Circular No. 29/2003-Cus dated 03-04-2003. Further, if the NFE is not

achieved then the EOU is not allowed to exit. A plethora of judicial pronouncements have dealt with the issue of failure to

achieve NFE by EOU some of which is mentioned here-in-below for ease of reference:

a)     In case of Natural Stone Exports (2006) 198 ELT 440, it has been held that duty is payable only at the time of de-

bonding even in case of failure to achieve NFE as EOU is a warehouse.

b)     In case of Suvarna Aqua Farm (2005) 190 ELT 284 it has been held that penalty cannot be imposed if export obligation

was not fulfilled as the circumstances were beyond the control of the assessee.

c)      In case of Noel Agritech (2011) 273 ELT 306, it has been held that in case of failure to meet export obligation, duty is

payable but confiscation of capital goods is not warranted.

Procurement of Inputs & Capital goods

An EOU is entitled to procure inputs and capital goods without payment of duty. Thus, All India Rate of Duty Drawback cannot

be taken by an EOU. Further, the EOU can procure inputs or capital goods under CT-3 from the manufacturer of such goods

without payment of duty. Otherwise, the EOU units can procure goods on payment of duty which can be used for DTA sales by

an EOU unit or refund can be claimed under Rule 5 of CENVAT Credit Rules, 2004 for the inputs &/or input services. The

matter is no longer res integra as it has been held in a plethora of cases that Rule 5 of CCR’04 is also available to an EOU.

Bonding Period for EOU

The EOU units are the bonded warehouses. The bonding period for an EOU is three years for raw materials, consumables &

spares and five years for capital goods. Bonding period means that the goods must be used by the EOU within the bonded

period. The same can be extended by the Commissioner without any upper limit if the same is not likely to deteriorate.

Warehouse licence is given to EOU for a period of five years which has to be renewed from time to time.

Exit of EOU (De-Bonding)

An EOU can opt out of the scheme only with the approval of Development Commissioner as per Provisions of para 6.18 of

FTP. Exit from EOU is not possible in case positive NFE is not achieved under Advance Authorisation scheme.

The requirement of positive NFE is mandatory in case EOU is applying for EPCG after exiting as NOC is required to be

obtained from the Development Commissioner. Export obligation for a unit which converts from EOU/SEZ scheme to EPCG

would be same as available to direct EPCG authorisation holder, i.e., 8 or 12 years from the issue of EPCG authorisation.

Further, it has been clarified that if a standalone EOU unit converts into EPCG scheme, the additional export obligation shall be

equivalent to six/eight times of depreciated value. Further, if the unit of a Firm/company opts to de-bond then the average

export obligation in respect of firm/company (other than debonding unit) shall remain unchanged. For the debonded unit, the

export obligation shall be fixed by excluding the exports made by such unit from the exports of the company/firm.

Unit can be ordered to be exited if it fails to achieve NFE or other requirements. Duty on raw material, capital goods is payable

at the time of debonding. It is pertinent to note that in case of  Premier Granites Limited (2000) 122 ELT 220,it has been held

that duty demand can only be raised after the order for exit has been issued. Further, in case of  Trans Freight Containers

(2012) 277 ELT 168, it has been held that even if export obligation is not fulfilled, duty can be demanded on inputs lying in

stock at the rate of duty prevalent at the time of payment of duty, on original value of importation. Duty cannot be demanded on

consumed inputs and final products were exported. Further, depreciation on capital goods (CG) is available even if export

obligation was partially fulfilled.

It is worthwhile to mention that Hon’ble CESTAT in case of Tecumseh Products (2011) 269 ELT 401 has held that CENVAT

Credit available with an EOU can be transferred to DTA unit on de-bonding. New IEC number will have to be taken at the time

of exit.

Customs duty will have to be paid on unused imported raw material and consumables lying in stock at the time of exit at the

rates as on date of clearance. In respect of excisable goods, excise duty is to be levied without depreciation at rates as on duty

of clearance –Pune Commissioner of Customs PN 131/99 dated 09-09-1999. At the time of exit, the unit has to pay customs

duty on the imported machinery on the basis of depreciated value or transaction value –  whichever ishigher. The depreciation

rate is 4% per quarter in the first year, 3% per quarter in the second year and third year, 2.5% per quarter in the fourth and fifth

year and 2% per quarter for subsequent years. The rates of depreciation for computer or computer peripherals are different

which can be referred in Para 6.36.2 of HBP Vol. 1.

It is pertinent to note that if the unit is unable to achieve positive NFE, then the duty forgone at the time of import shall be paid

on such goods in proportion to the non-achieved portion of NFE in terms of para 3 of MF(DR) Circular No. 12/2008-Cus dated

24-07-2008. In case of Solitaire Machine Tools (2003) 152 ELT 384, it has been held that depreciation should be allowed

upto date of payment of duty and not only till date of application for de-bonding. In case of  Business Process Technologies

(2010) 249 ELT 248, it has been held that rate of duty is at the time of filing ex-bond bill of entry for de-bonding and not rate

prevalent at the time of procurement of goods.

 - See more at: http://taxguru.in/custom-duty/synopsis-export-oriented-units.html#sthash.nAfDttQD.dpuf

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Fidelity® Balanced Fund Symbol:FBALX

 

   No Transaction Fee 1 

   Fidelity Fund Pick  2

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Summary

Performance & Risk- current selection Ratings Composition Fees and Distributions Commentary

View All Tabs

Average Annual Total Returns

 3, 4, 5 

AS OF 9/30/2015; FUND INCEPTION 11/6/1986

-10%0%10%20%

1 Yr 3 Yr 5 Yr 10 Yr Life

Fidelity® Balanced Fund -0.70% 8.65% 9.47% 6.30% 9.11%

S&P 500 -0.61% 12.40% 13.34% 6.80% 9.80%

Fid Bal Hybrid Comp Idx 0.95% 8.14% 9.33% 6.23% 8.95%

Moderate Allocation -2.51% 6.41% 7.33% 5.08% --

Rank in Morningstar Category 21% 11% 7% 12% --

# of Funds in Morningstar Category 929 838 722 481 --

Yield

 

10/19/2015 9/30/2015

Glossary definition opens in new

window. 30-Day Yield  6 1.66% 1.67%

Hypothetical Growth of $10,000

 4, 7 

AS OF 09/30/2015; MORNINGSTAR CATEGORY: MODERATE ALLOCATION

 Fidelity® Balanced Fund

 S&P 500

 Fid Bal Hybrid Comp Idx

 Moderate Allocation

6k9k12k16k19k22k

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

This Fund10.68% 11.65% 8.99% -31.31% 28.05% 13.76% 1.68% 12.90% 20.50% 10.37% -3.75%

Benchmark4.91% 15.79% 5.49% -37.00% 26.46% 15.06% 2.11% 16.00% 32.39% 13.69% -5.29%

Benchmark-24.95% 12.96% 4.13% -21.51% 18.40% 12.13% 4.69% 11.31% 17.56% 10.62% -2.62%

Category5.13% 11.29% 5.99% -28.00% 24.13% 11.83% -0.11% 11.72% 16.48% 6.21% -4.44%

+/- Benchmark 5.77% -4.14% 3.50% 5.69% 1.59% -1.30% -0.43% -3.10% -11.89% -3.32% 1.54%

+/- Benchmark-2 5.73% -1.31% 4.86% -9.80% 9.65% 1.63% -3.01% 1.59% 2.94% -0.25% -1.13%

+/- Category 5.55% 0.36% 3.00% -3.31% 3.92% 1.93% 1.79% 1.18% 4.02% 4.16% 0.69%

Compare Chart  |   Fund Facts Search

The performance data featured represents past performance, which is no guarantee of future results. Investment return and principal value of an

investment will fluctuate; therefore, you may have a gain or loss when you sell your shares. Current performance may be higher or lower than the

performance data quoted.

Quarter-End Average Annual Total Returns

 4, 5 

AS OF 9/30/2015; FUND INCEPTION 11/6/1986 GLOSSARY DEFINITION OPENS IN NEW WINDOW.

EXPENSE RATIO (GROSS): 0.56% AS OF 10/30/2014

1 Yr 3 Yr 5 Yr 10 Yr Life

Glossary definition opens in new window. Before Taxes

Fidelity® Balanced Fund -0.70% 8.65% 9.47% 6.30% 9.11%

S&P 500 -0.61% 12.40% 13.34% 6.80% 9.80%

Fid Bal Hybrid Comp Idx 0.95% 8.14% 9.33% 6.23% 8.95%

Moderate Allocation -2.51% 6.41% 7.33% 5.08% --

Glossary definition opens in new window. After Taxes on Distributions

Fidelity® Balanced Fund -3.47% 6.86% 8.22% 5.17% --

Moderate Allocation -5.36% 4.65% 5.98% 3.81% --

Glossary definition opens in new window. After taxes on distributions and sale of fund shares

Fidelity® Balanced Fund 0.88% 6.38% 7.28% 4.83% --

Moderate Allocation -1.37% 4.32% 5.27% 3.63% --

Cumulative Total Returns

 5 

AS OF 9/30/2015

YTD (Daily)* YTD (Monthly) 1 Month 3 Months 6 Months

Fidelity® Balanced Fund 0.18% -3.75% -2.60% -5.97% -5.86%

S&P 500 -- -5.29% -2.47% -6.44% -6.18%

Fid Bal Hybrid Comp Idx -- -2.62% -1.21% -3.39% -3.87%

Moderate Allocation -- -4.44% -2.13% -5.60% -6.11%

*AS OF 10/20/2015

Fund Risk and Return

 

AS OF 9/30/2015; MORNINGSTAR CATEGORY: MODERATE ALLOCATION

Return of this Fund within Morningstar Category

LOW AVG HIGH

Risk of this Fund within Morningstar Category

LOW AVG HIGH

Risk of this Category

LOWERHIGHER

RiskStock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or

economic developments. Fixed income investments entail interest rate risk (as interest rates rise bond prices usually fall), the risk of issuer default,

issuer credit risk and inflation risk. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks. Lower-quality

bonds can be more volatile and have greater risk of default than higher-quality bonds. Leverage can increase market exposure and magnify

investment risk.

Volatility Measures

 

Beta0.69

AS OF 9/30/2015

A measure of a portfolio's sensitivity to market movements (as represented by a benchmark index). The benchmark index has a beta of 1.0. A beta of

more (less) than 1.0 indicates that a fund's historical returns have fluctuated more (less) than the benchmark index. Beta is a more reliable measure of

volatility when used in combination with a high R2 which indicates a high correlation between the movements in a fund's returns and movements in a

benchmark index.

R20.94

AS OF 9/30/2015

A measurement of how closely the portfolio's performance correlates with the performance of the fund's primary benchmark index or equivalent.

R2 is a proportion which ranges between 0.00 and 1.00. An R2 of 1.00 indicates perfect correlation to the benchmark index, that is, all of the

portfolio's fluctuations are explained by performance fluctuations of the index, while an R2 of 0.00 indicates no correlation. Therefore, the lower the

R2, the more the fund's performance is affected by factors other than the market as measured by that benchmark index. An R2 value of less than 0.5

indicates that the Annualized Alpha and Beta are not reliable performance statistics.

Sharpe Ratio1.24

AS OF 9/30/2015

The Sharpe ratio is a measure of historical risk-adjusted performance calculated by dividing the fund's excess returns (fund's average annual return for

the period minus the average annual return for the period of the Salomon Smith Barney 3-Month T-Bill Index) by standard deviation of the fund

returns. The higher the ratio, the better the fund's return per unit of risk.

Standard Deviation6.95

AS OF 9/30/2015

Statistical measure of how much a return varies over an extended period of time. The more variable the returns, the larger the standard deviation.

Investors may examine historical standard deviation in conjunction with historical returns to decide whether an investment's volatility would have

been acceptable given the returns it would have produced. A higher standard deviation indicates a wider dispersion of past returns and thus greater

historical volatility. Standard deviation does not indicate how an investment actually performed, but it does indicate the volatility of its returns over

time. Standard deviation is annualized. The returns used for this calculation are not load-adjusted.

Historical Fund Performance

 5 

Current year's data as of: 9/30/2015

Year Total Returns Capital Gains Dividends Glossary definition opens in new window. Share Class Net Assets ($M)

2015 -3.75% $1.215 $0.282 $19,620.86

2014 10.37% $1.862 $0.366 $20,043.90

2013 20.50% $1.134 $0.342 $17,916.15

2012 12.90% -- $0.347 $14,826.99

2011 1.68% -- $0.349 $14,861.70

2010 13.76% $0.008 $0.351 $17,287.94

2009 28.05% $0.01 $0.379 $18,108.33

2008 -31.31% $0.03 $0.386 $16,459.65

2007 8.99% $1.18 $0.42 $27,227.22

2006 11.65% $1.04 $0.4 $22,439.29

Characteristics & AttributionFund characteristics and performance attribution information provides a framework for examining performance of a fund vs. its benchmark based on

relative asset weightings. Click here to see Fund Characteristics and Attribution.The "Mutual Funds" area at the top of each page allows access to mutual fund holdings with individual and joint Fidelity non-retirement

accounts. Individual stock positions, ETFs and 529 funds are not available through this view. For the full list of your holdings

visitPortfolio Summary.

Mutual Funds are priced as of the previous business day's market close when the market is open. Mutual fund positions are priced as

of the official market close (typically 4p.m.) and prices are generally available between 5 p.m. and 6p.m.

The performance data featured represents past performance, which is no guarantee of future results. Investment return and principal value of an

investment will fluctuate; therefore, you may have a gain or loss when you sell your shares. Current performance may be higher or lower than the

performance data quoted.

Watch a brief video to learn about using the new mutual fund library to evaluate funds

© 2015 Morningstar, Inc. All rights reserved. The Morningstar information contained herein: (1) is proprietary to Morningstar and/or its content

providers; (2) may not be copied or redistributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content

providers are responsible for any damages or losses arising from any use of this information. Fidelity does not review the Morningstar data and,

for fund performance, you should check the fund's current prospectus or other product materials for the most up-to-date information concerning

applicable loads, fees and expenses.

1. No Transaction Fee Fidelity funds are available without paying a trading fee to Fidelity or a sales load to the fund. However, the fund may

charge a short-term trading or redemption fee to protect the interests of long-term shareholders of the fund. Shares are subject to the fund's

management and operating expenses. See Expenses & Fees for more information.

2. The funds on the Fund Picks From Fidelity® list are selected based on certain selection criteria. Fund Picks From Fidelity is not a personalized

recommendation or endorsement of any fund for an investor's individual circumstances.

3. Percent Rank in Category is the fund's total-return percentile rank relative to all funds that have the same Morningstar Category. The highest

(or most favorable) percentile rank is 1 and the lowest (or least favorable) percentile rank is 100. The top-performing fund in a category will always

receive a rank of 1. % Rank in Category is based on total returns which include reinvested dividends and capital gains, if any, and exclude sales

charges.

4. The Morningstar Category Average is the average return for the peer group based on the returns of each individual fund within the group, for

the period shown. This average assumes reinvestment of dividends.

5. Total returns are historical and include change in share value and reinvestment of dividends and capital gains, if any. Cumulative total returns

are reported as of the period indicated. Life of fund figures are reported as of the commencement date to the period indicated and are cumulative

if the fund is less than one year old. Total returns do not reflect the fund's [%] sales charge. If sales charges were included, total returns would

have been lower.

6. A standard yield calculation developed by the Securities and Exchange Commission for bond funds. The yield is calculated by dividing the net

investment income per share earned during the 30-day period by the maximum offering price per share on the last day of the period. The yield

figure reflects the dividends and interest earned during the 30-day period, after the deduction of the fund's expenses. It is sometimes referred to

as "SEC 30-Day Yield" or "standardized yield".

7. This chart illustrates the performance of a hypothetical $10,000 investment made in this investment product (and a benchmark or category

average, if shown) from the beginning date shown or on the inception date of the product (whichever is later). The inception date used for

products with underlying funds, or multiple shares classes, or are offered as a separate account, strategy or sub account, may be the inception

date of the underlying fund, the earliest share class of the product, or the date composite performance for the product was first made available.

The product's returns may not reflect all its expenses. Any fees not reflected would lower the returns. Benchmark returns include reinvestment of

capital gains and dividends, if any, but do not reflect any fees or expenses. It is not possible to invest in an index. Past performance is no

guarantee of future results. This chart is not intended to imply any future performance of the investment product.

Generally, data on Fidelity mutual funds is provided by FMR, LLC, Morningstar ratings and data on non-Fidelity mutual funds is provided by

Morningstar, Inc. and data on non-mutual fund products is provided by the product's investment manager, trustee or issuer or the plan sponsor

whose plan is offering the product to participants. Although Fidelity believes the data gathered from these third-party sources is reliable, it does

not review such information and cannot warrant it to be accurate, complete or timely. Fidelity is not responsible for any damages or losses arising

from any use of this third-party information.

Before investing, consider the investment objectives, risks, charges and expenses of the fund or annuity and its investment options. Contact Fidelity for a free prospectus and, if available, summary prospectus containing this information. Read it carefully.

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vThe discussion on investment objectives would not be complete without a discussion on the risks that investing in a mutual fund

entails. 

At the cornerstone of investing is the basic principle that the greater the risk you take, the greater the potential reward. Remember that the value of all financial investments will fluctuate. 

Typically, risk is defined as short-term price variability. But on a long-term basis, risk is the possibility that your accumulated real capital will be insufficient to meet your financial goals. And if you want to reach your financial goals, you must start with an honest appraisal of your own personal comfort zone with regard to risk. Individual tolerance for risk varies, creating a distinct "investment personality" for each investor. Some investors can accept short-term volatility with ease, others with near panic. So whether you consider your investment temperament to be conservative, moderate or aggressive, you need to focus on how comfortable or uncomfortable you will be as the value of your investment moves up or down. 

Recognizing the type of investor you are will go a long way towards helping you build a meaningful portfolio of investments that you can live with. Take the test "Tolerance Questionnaire" to determine where your preferences lie. 

 

Managing risksMutual funds offer incredible flexibility in managing investment risk. Diversification and Automatic Investing (SIP) are two key techniques you can use to reduce your investment risk considerably and reach your long-term financial goals. 

Diversification

When you invest in one mutual fund, you instantly spread your risk over a number of different companies. You can also diversify over several different kinds of securities by investing in different mutual funds, further reducing your potential risk. Diversification is a basic risk management tool that you will want to use throughout your lifetime as you rebalance your portfolio to meet your changing needs and goals. Investors, who are willing to maintain a mix of equity shares, bonds and money market securities have a greater chance of earning significantly higher returns over time than those who invest in only the most conservative investments. Additionally, a diversified approach to investing -- combining the growth potential of equities with the higher income of bonds and the stability of money markets -- helps moderate your risk and enhance your potential return.

Systematic Investment Plan (SIP)

The Unitholders of the Scheme can benefit by investing specific Rupee amounts periodically, for a continuous period. Mutual fund SIP allows the investors to invest a fixed amount of Rupees every month or quarter for purchasing additional units of the Scheme at NAV based prices.

Here is an illustration using hypothetical figures indicating how the SIP can work for investors: 

Suppose an investor would like to invest Rs.1,000 under the Systematic Investment Plan on a quarterly basis.

Amount Invested (Rs.) Purchase Price (Rs.) No. of Units Purchased

Initial Investment 1000 10 100

1 1000 8.20 121.95

2 1000 7.40 135.14

3 1000 6.10 163.93

4 1000 5.40 185.19

5 1000 6.00 166.67

6 1000 8.20 121.95

7 1000 9.25 108.11

8 1000 10.00 100.00

9 1000 11.25 88.89

10 1000 13.40 74.63

11 1000 14.40 69.44

TOTAL 12,000 - 1,435.90

Average unit cost Rs 12,000/1,435.9 = Rs 8.36 

Average unit price 109.6/12 = Rs 9.13

Unit price at beginning of next quarter Rs 14.90

Market value of investment 1435.9 * 14.90= Rs 21,395/-

The investor liquidates his units and gets back Rs 21,395/-

Using the SIP strategy the investor can reduce his average cost per unit. The investor gets the advantage of getting more units when the market is turned down.

Types of risksAll investments involve some form of risk. Even an insured bank account is subject to the possibility that inflation will rise faster than your earnings, leaving you with less real purchasing power than when you started (Rs. 1000 gets you less than it got your father when he was your age). Consider these common types of risk and evaluate them against potential rewards when you select an investment.

Market RiskAt times the prices or yields of all the securities in a particular market rise or fall due to broad outside influences. When this happens, the stock prices of both an outstanding, highly profitable company and a fledgling corporation may be affected. This change in price is due to "market risk".

Inflation RiskSometimes referred to as "loss of purchasing power." Whenever inflation sprints forward faster than the earnings on your investment, you run the risk that you'll actually be able to buy less, not more. Inflation risk also occurs when prices rise faster than your returns.

Credit RiskIn short, how stable is the company or entity to which you lend your money when you invest? How certain are you that it will be able to pay the interest you are promised, or repay your principal when the investment matures?

Inflation RiskChanging interest rates affect both equities and bonds in many ways. Investors are reminded that "predicting" which way rates will go is rarely successful. A diversified portfolio can help in offseting these changes. 

Effect of loss of key professionals and inability to adaptAn industries' key asset is offen the personnel who run the business i.e. intellectual properties of the key employees of the respective companies. Given the ever-changing complexion of few industries and the high obsolescence levels, availability of qualified, trained and motivated personnel is very critical for the success of industries in few sectors. It is, therefore, necessary to attract key personnel and also to retain them to meet the changing environment and challenges the sector offers. 

Failure or inability to attract/retain such qualified key personnel may impact the prospects of the companies in the particular sector in which the fund invests. 

Exchange RiskA number of companies generate revenues in foreign currencies and may have investments or expenses also denominated in foreign currencies. Changes in exchange rates may, therefore, have a positive or negative impact on companies which in turn would have an effect on the investment of the fund. 

Investment RiskThe sectoral fund schemes, investments will be predominantly in equities of select companies in the particular sectors. Accordingly, the NAV of the schemes are linked to the equity performance of such companies and may be more volatile than a more diversified portfolio of equities. 

Change in the Government PolicyChanges in Government policy especially in regard to the tax benefits may impact the business prospects of the companies leading to

an impact on the investments made by the fund. The discussion on investment objectives would not be complete without a discussion on the risks that investing in a mutual fund entails. 

At the cornerstone of investing is the basic principle that the greater the risk you take, the greater the potential reward. Remember that the value of all financial investments will fluctuate. 

Typically, risk is defined as short-term price variability. But on a long-term basis, risk is the possibility that your accumulated real capital will be insufficient to meet your financial goals. And if you want to reach your financial goals, you must start with an honest appraisal of your own personal comfort zone with regard to risk. Individual tolerance for risk varies, creating a distinct "investment personality" for each investor. Some investors can accept short-term volatility with ease, others with near panic. So whether you consider your investment temperament to be conservative, moderate or aggressive, you need to focus on how comfortable or uncomfortable you will be as the value of your investment moves up or down. 

Recognizing the type of investor you are will go a long way towards helping you build a meaningful portfolio of investments that you can live with. Take the test "Tolerance Questionnaire" to determine where your preferences lie. 

 

Managing risksMutual funds offer incredible flexibility in managing investment risk. Diversification and Automatic Investing (SIP) are two key techniques you can use to reduce your investment risk considerably and reach your long-term

financial goals. 

Diversification

When you invest in one mutual fund, you instantly spread your risk over a number of different companies. You can also diversify over several different kinds of securities by investing in different mutual funds, further reducing your potential risk. Diversification is a basic risk management tool that you will want to use throughout your lifetime as you rebalance your portfolio to meet your changing needs and goals. Investors, who are willing to maintain a mix of equity shares, bonds and money market securities have a greater chance of earning significantly higher returns over time than those who invest in only the most conservative investments. Additionally, a diversified approach to investing -- combining the growth potential of equities with the higher income of bonds and the stability of money markets -- helps moderate your risk and enhance your potential return.

Systematic Investment Plan (SIP)

The Unitholders of the Scheme can benefit by investing specific Rupee amounts periodically, for a continuous period. Mutual fund SIP allows the investors to invest a fixed amount of Rupees every month or quarter for purchasing additional units of the Scheme at NAV based prices.

Here is an illustration using hypothetical figures indicating how the SIP can work for investors: 

Suppose an investor would like to invest Rs.1,000 under the Systematic Investment Plan on a quarterly basis.

Amount Invested

(Rs.)Purchase Price

(Rs.)No. of Units Purchased

Initial Investment

1000 10 100

1 1000 8.20 121.95

2 1000 7.40 135.14

3 1000 6.10 163.93

4 1000 5.40 185.19

5 1000 6.00 166.67

6 1000 8.20 121.95

7 1000 9.25 108.11

8 1000 10.00 100.00

9 1000 11.25 88.89

10 1000 13.40 74.63

11 1000 14.40 69.44

TOTAL 12,000 - 1,435.90

Average unit cost Rs 12,000/1,435.9 = Rs 8.36 

Average unit price 109.6/12 = Rs 9.13

Unit price at beginning of next quarter Rs 14.90

Market value of investment 1435.9 * 14.90= Rs 21,395/-

The investor liquidates his units and gets back Rs 21,395/-

Using the SIP strategy the investor can reduce his average cost per unit. The investor gets the advantage of getting more units when the market is turned down.

Types of risksAll investments involve some form of risk. Even an insured bank account is subject to the possibility that inflation will rise faster than your earnings, leaving you with less real purchasing power than when you started (Rs. 1000 gets you less than it got your father when he was your age). Consider these common types of risk and evaluate them against potential rewards when you select an investment.

Market RiskAt times the prices or yields of all the securities in a particular market rise or fall due to broad outside influences. When this happens, the stock prices of both an outstanding, highly profitable company and a fledgling corporation may be affected. This change in price is due to "market risk".

Inflation RiskSometimes referred to as "loss of purchasing power." Whenever inflation sprints forward faster than the earnings on your investment, you run the risk that you'll actually be able to buy less, not more. Inflation risk also occurs when prices rise faster than your returns.

Credit RiskIn short, how stable is the company or entity to which you lend your money when you invest? How certain are you that it will be able to pay the interest you are promised, or repay your principal when the investment matures?

Inflation RiskChanging interest rates affect both equities and bonds in many ways. Investors are reminded that "predicting" which way rates will go is rarely successful. A diversified portfolio can help in offseting these changes. 

Effect of loss of key professionals and inability to adaptAn industries' key asset is offen the personnel who run the business i.e. intellectual properties of the key employees of the respective companies. Given the ever-changing complexion of few industries and the high obsolescence levels, availability of qualified, trained and motivated personnel is very critical for the success of industries in few sectors. It is, therefore, necessary to attract key personnel and also to retain them to meet the changing environment and challenges the sector offers. 

Failure or inability to attract/retain such qualified key personnel may impact the prospects of the companies in the particular sector in which the fund invests. 

Exchange RiskA number of companies generate revenues in foreign currencies and may have investments or expenses also denominated in foreign currencies. Changes in exchange rates may, therefore, have a positive or negative impact on companies which in turn would have an effect on the investment of the fund. 

Investment RiskThe sectoral fund schemes, investments will be predominantly in equities of select companies in the particular sectors. Accordingly, the NAV of the schemes are linked to the equity performance of such companies and may be more volatile than a more diversified portfolio of equities. 

Change in the Government PolicyChanges in Government policy especially in regard to the tax benefits may impact the business prospects of the companies leading to an impact on the investments made by the fund. The discussion on investment objectives would not be complete without a discussion on the risks that investing in a mutual fund entails. 

At the cornerstone of investing is the basic principle that the greater the risk you take, the greater the potential reward. Remember that the value of all financial investments will fluctuate. 

Typically, risk is defined as short-term price variability. But on a long-term basis, risk is the possibility that your accumulated real capital will be insufficient to meet your financial goals. And if you want to reach your financial goals, you must start with an honest appraisal of your own personal comfort zone with regard to risk. Individual

tolerance for risk varies, creating a distinct "investment personality" for each investor. Some investors can accept short-term volatility with ease, others with near panic. So whether you consider your investment temperament to be conservative, moderate or aggressive, you need to focus on how comfortable or uncomfortable you will be as the value of your investment moves up or down. 

Recognizing the type of investor you are will go a long way towards helping you build a meaningful portfolio of investments that you can live with. Take the test "Tolerance Questionnaire" to determine where your preferences lie. 

 

Managing risksMutual funds offer incredible flexibility in managing investment risk. Diversification and Automatic Investing (SIP) are two key techniques you can use to reduce your investment risk considerably and reach your long-term financial goals. 

Diversification

When you invest in one mutual fund, you instantly spread your risk over a number of different companies. You can also diversify over several different kinds of securities by investing in different mutual funds, further reducing your potential risk. Diversification is a basic risk management tool that you will want to use throughout your lifetime as you rebalance your portfolio to meet your changing needs and goals. Investors, who are willing to maintain a mix of equity shares, bonds and money market securities have a greater chance of earning significantly higher returns over time than those who invest in only the most conservative investments.

Additionally, a diversified approach to investing -- combining the growth potential of equities with the higher income of bonds and the stability of money markets -- helps moderate your risk and enhance your potential return.

Systematic Investment Plan (SIP)

The Unitholders of the Scheme can benefit by investing specific Rupee amounts periodically, for a continuous period. Mutual fund SIP allows the investors to invest a fixed amount of Rupees every month or quarter for purchasing additional units of the Scheme at NAV based prices.

Here is an illustration using hypothetical figures indicating how the SIP can work for investors: 

Suppose an investor would like to invest Rs.1,000 under the Systematic Investment Plan on a quarterly basis.

Amount Invested

(Rs.)Purchase Price

(Rs.)No. of Units Purchased

Initial Investment

1000 10 100

1 1000 8.20 121.95

2 1000 7.40 135.14

3 1000 6.10 163.93

4 1000 5.40 185.19

5 1000 6.00 166.67

6 1000 8.20 121.95

7 1000 9.25 108.11

8 1000 10.00 100.00

9 1000 11.25 88.89

10 1000 13.40 74.63

11 1000 14.40 69.44

TOTAL 12,000 - 1,435.90

Average unit cost Rs 12,000/1,435.9 = Rs 8.36 

Average unit price 109.6/12 = Rs 9.13

Unit price at beginning of next quarter Rs 14.90

Market value of investment 1435.9 * 14.90= Rs 21,395/-

The investor liquidates his units and gets back Rs 21,395/-

Using the SIP strategy the investor can reduce his average cost per unit. The investor gets the advantage of getting more units when the market is turned down.

Types of risksAll investments involve some form of risk. Even an insured bank account is subject to the possibility that inflation will rise faster than your earnings, leaving you with less real purchasing power than when you started (Rs. 1000 gets you less than it got your father when he was your age). Consider these common types of risk and evaluate them against potential rewards when you select an investment.

Market RiskAt times the prices or yields of all the securities in a particular market rise or fall due to broad outside influences. When this happens, the stock prices of both an outstanding, highly profitable company and a fledgling corporation may be affected. This change in price is due to "market risk".

Inflation RiskSometimes referred to as "loss of purchasing power." Whenever inflation sprints forward faster than the earnings on your investment, you run the risk that you'll actually be able to buy less, not more. Inflation risk also occurs when prices rise faster than your returns.

Credit RiskIn short, how stable is the company or entity to which you lend your money when you invest? How certain are you that it will be able to pay the interest you are promised, or repay your principal when the investment matures?

Inflation RiskChanging interest rates affect both equities and bonds in many ways. Investors are reminded that "predicting" which way rates will go is rarely successful. A diversified portfolio can help in offseting these changes. 

Effect of loss of key professionals and inability to adaptAn industries' key asset is offen the personnel who run the business i.e. intellectual properties of the key employees of the respective companies. Given the ever-changing complexion of few industries and the high obsolescence levels, availability of qualified, trained and motivated personnel is very critical for the success of industries in few sectors. It is, therefore, necessary to attract key personnel and also to retain them to meet the changing environment and challenges the sector offers. 

Failure or inability to attract/retain such qualified key personnel may impact the prospects of the companies in the particular sector in which the fund invests. 

Exchange RiskA number of companies generate revenues in foreign currencies and may have investments or expenses also denominated in foreign currencies. Changes in exchange rates may, therefore, have a positive or negative impact on companies which in turn would have an effect on the investment of the fund. 

Investment RiskThe sectoral fund schemes, investments will be predominantly in equities of select companies in the particular sectors. Accordingly, the NAV of the schemes are linked to the equity performance of such companies and may be more volatile than a more diversified portfolio of equities. 

Change in the Government PolicyChanges in Government policy especially in regard to the tax benefits may impact the business prospects of the companies leading to an impact on the investments made by the fund.

What are ratios to measure mutual fund risks For a mutual fund, it becomes more difficult when it entails investment in equity instruments in general. There are number of ratios which mutual fund investors should consider before making their investments. JUZER GABAJIWALA Director, Ventura Securities Expertise : Mutual Funds More about the Expert...  17 0Google +0 0 Juzer Gabajiwala Ventura Securities Every investor has a tendency to focus only on returns. However, it is very important to also consider the risk aspect of the investment since risk and return are two sides of the same coin. ADVERTISING For a mutual fund, it becomes more difficult when it entails investment in equity instruments in general. There are number of ratios which mutual fund investors should consider before making their investments. We attempt to demystify some of the popular ratios used in this regard. This is not a foolproof tool but can be used in conjunction with other analysis as well. Among the most commonly used ratios to measure risk, there are 3 ratios; we come across these very often but fail to understand their importance. These are: 1. Standard Deviation 2.  Beta 3.  Sharpe ratio 1. Standard Deviation (SD): • It tells how much the return of a particular fund is deviating from the expected returns based on its historical performance. In other words, it can be said that it evaluates the volatility of the fund. • The standard deviation of a fund measures this risk by measuring the degree to which the fund fluctuates in relation to its average return of a fund over a period of time. • High standard deviation denotes high volatility. For example : a fund with standard deviation of 10% will have a tendency to deviate 10% from its average return. Let us look at an example, Fund Name 1-yr Returns (%) SD (%) Fund A- UTI Top 100 Fund 19 18 Fund B- Reliance Top 200 Fund 19 20     Source: ACE MF, Data as on 27th March 2014 In the above case both are equity diversified large

cap funds, we can see that both have similar returns but fund B's SD is 20 which is more risky or volatile than fund A. In such cases, one should prefer fund A since its returns are comparable to fund B and are more predictable. 2. Beta: • It is a measure of volatility or systematic risk of a security or a portfolio compared to the market as whole. A fund with a beta greater than 1 is considered more volatile than the market; less than 1 is less volatile. Funds with higher beta signifies greater volatility and are considered to carry a higher risk. •  If Beta is more than 1: It means fund moves up / down with the market with greater proportionate. E.g. if market goes up by 10%, then fund with beta 1.2 will move up by 12% and vice versa. However, whether a high beta is good or bad depends upon the state of the market. If the market sentiments are bullish, then a high beta stock is better and if the market sentiments are bearish then, low beta stock is better. 3. Sharpe ratio: • This is one of the most widely used performance tracker in the mutual fund industry. It evaluates the return that a fund has generated relative to the risk taken. It shows whether the returns from investments are due to smart investment decisions or the result of excess risk taken by the Fund Manager. • Sharpe Ratio depicts what is the return earned at what level of risk. Fund Name Beta SD Sharpe 1-yr Returns (%) HDFC Capital builder Fund   18   24 Reliance Vision Fund   21   24       Source: ACE MF, Data as on 27th March 2014 • In the above example, both funds have given absolute return of 24% each in last one year period. Reliance's  fund with an SD of 21 was more volatile than HDFC's (SD of 18). This implies that HDFC’s fund carried less risk compared to Reliance. • Which fund is better among the two, given the situation? • Obviously, HDFC Capital Builder Fund is better, as it is offering same return at a lower risk (represented by standard deviation) • Higher ratio depicts a high return with lower risk. (Here, Sharpe ratio of HDFC's fund is higher than Reliance's Fund). Let us consider another example, where risk measures - Beta and Std. Dev are same and returns generated by them are different for the same period. Fund Name Beta SD Sharpe 1-yr Returns (%) Principal Large Cap Fund  0.91 20  0.07 22 Franklin India Bluechip Fund  0.91 20  0.05 15       • From the above table, we can see that if the investor was faced with the same levels of risk, he should have gone for Principal large cap fund which gave 22% returns, whereas Franklin India Bluechip fund posted only 15% returns for the same tenure. Thus, if one has to choose between two funds with the same level of risk, then he should go for a fund which generated higher returns. • The above interpretation is only for analytical purposes; both the funds have similar characteristics and belong to the same category. In a nutshell, Ratio Name Significance Standard Deviation The lower this figure, the better the fund is, as a higher figure means more inconsistency and a higher risk of a downslide in return. Beta Gives an idea of how much a fund is likely to move compared to movements of the benchmark. Thus, if you are Bullish; you should opt for a high beta funds and go in for a low beta if you are bearish. Sharpe Funds that post a higher-than-market Sharpe are preferable. And a ratio that does not beat the risk free rate of return is worth ignoring.           Conclusion: These ratios are just raw numbers which are meaningless unless compared with ratios of other investments over the same time frame with similar objectives and features. These ratios should not be looked at in isolation but with other parameters like fund performance, long term objective, etc. 

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