The FIIs on Friday stood as net seller in equity and debt. The gross equity purchased was Rs4,235.50 Crore and the gross debt purchased was Rs207.70 Crore while the gross equity sold stood at Rs4,704.60 Crore and gross debt sold stood at Rs483.50 Crore. Therefore, the net investment of equity reported was (Rs49.00) Crore and net debt was (275.90) Crore
Monday, June 30, 2008
Saturday, June 28, 2008
The Intelligent Investor (or How to at least sound like one !)
The road to upward mobility is best traveled by name-droppers. While Page Three parties might be the epitome of air-kissing and social name dropping, the corporate world has its own special version. It's called Jargon Spewing. The more jargon you throw at colleagues, bosses, vendors, the more likely people will regard you as intelligent and well read and in-the-know.
So if you want to impress that snooty colleague in the next cubicle with a few well-chosen technical terms, make sense of all the jargon splashed across the pink papers, or most importantly, avoid having the blank I'm-too-dumb-to-write-my-own name kind of stare on your face when people around make complex-sounding statements at you, here's a primer:
I. Indian is expensive; Investors reconsider fresh investments
II. Inflation figures spook market
III. Advance tax numbers indicate robust quarterly corporate earnings
IV. Liquidity is tigh
V. Market is currently overbought
VI. Risk weight age on these assets is 150per cent.
VII. Market in a bear hug
VIII. There was some unwinding of long positions in the futures market.
That's a fair bit of jargon for anyone wanting to impress others. However if you are surrounded by the not-easy-to-impress types, you can atleast console yourself that reading the business papers now seems a far less formidable task than before. Happy reading.
I. India is expensive; Investors reconsider fresh investments; Valuations look attractive
Lesson 101 of Valuation comprises 4 words really - Buy Low, Sell High. Words we hear often and from people who seem unconnected to the stock markets - your grandma, the local grocer or even your family jeweler. Yet, behind this seemingly simple line, resides a very complex world. How do we know what is low, what is high and how do we measure it? The terms 'Low' and 'High' are relative terms - which means that for their value to be understood they need to be compared to something. But for that we need a common parameter of comparison. This is where P/E comes into the picture.
P/E ratios are typically used as a first-cut measure by investors to determine if a stock is overvalued or underpriced and whether it makes sense to invest in it. The P/E ratio or Price Earnings Multiple is calculated by dividing the price (of a share) by its earnings (EPS or earnings per share). It means that for a given level of performance by the company - EPS, the market has priced the stock at a particular level - P.
Take for instance a company, Xlerate, in the biotech space. Say, the company's stock price is Rs 240 and its EPS forecast for the year is Rs 8, then the PE for Xlerate is 30. However 30 per se means nothing; it doesn't signify if the P/E is high or low and whether one should buy Xlerate stock.
To take that decision, one needs to compare the P/E to other stocks in a comparable category or industry. So if most other stocks in the biotech industry have P/Es of around 40, then Xlerate could be undervalued - given its P/E is 30 and lower than the industry average, and hence its 'valuation seems attractive'
However there could be two reasons why the market has priced it lower than the rest of the companies in its category: Either the major local and global investors are unaware of the company and its performance and hence haven't been able to value it correctly, or they think the stock purposely ought to be priced lower than competitors due to reasons like bad management, expected slowdown in performance, inadequate ability to deal with future/competition, etc.
Similar to a stock, foreign institutional investors who have allocations for various countries also compare India (the major indices - Sensex and Nifty) to that of other emerging markets.
If most of the other emerging market indices P/E s are at around 12 and India's P/E is at 17, then India is considered 'expensive'
Hence P/Es of companies or countries should be compared to their industry/category average to understand if they are cheap and hence attractive, or overvalued and hence expensive.
II. Inflation figures spook market
When it comes to complaining about rising vegetable prices, we are in good company - even the Prime Minister's wife does it. That is not however the reason why the Reserve Bank of India aggressively monitors inflation. Inflation is basically a measure of prices in the country. It is measured by something called the WPI - wholesale price index, which factors in prices of basic goods and commodities in India. It is usually indicated in percentage terms. So if the WPI is 5.6%, then it means that wholesale prices have risen by 5.6% over the same date last year. But even if inflation sounds like yet another burden that common people have to deal with, for the banking and financial system players, inflation is the centre of their universe. The reason: inflation erodes the value of money and hence the return on investment. If inflation is 4%, it means that a lunch costing Rs 100 last year will cost your Rs 104 today. Hence your Rs 100 should have grown by Rs 4 in one year for you to enjoy the same standard of living. Hence for you to have a 'real' return on your investment of Rs 100, the interest rate should be more than 4%.
Hence when inflation rises, interest rates need to rise to ensure that investors get 'real returns'.
Rising interest rates means:
• the cost of loans for both companies and individuals increase
• falling asset prices thereby reducing the value of individual and corporate assets - be it land, homes, shares,
bonds, gold - almost immediately Hence rising inflation numbers tend to scare off investors in bonds and shares
since the value of their portfolio declines
III. Advance tax numbers indicate robust quarterly corporate earnings
Think of it as the old gypsy woman reading tea leaves to predict your future except that advance tax payments are a far more reliable tool of estimating the state of the country's corporate performance. Companies pay tax in four installments during the year. The four deadlines are the 15th of June, September, December and March. The tax paid in the first three installments is referred to as advance tax. Since companies pay tax on the profits they make, higher tax payments indicate that the company is performing well and on its way to recording higher profits. Hence advance tax payments indicate all is well with the corporate world. Typically market observers track advance tax payment this year vis-a-vis the last and if it registers a rise, it indicates that companies are going to post better results this year.
IV. Liquidity is tight
A favourite of the pink papers, this phrase is used generously by journalists across the stock, debt and commodities markets. Liquidity refers to amount of money floating in the system and which is available to corporates, government and individuals. The country's central bank, the Reserve Bank of India creates money in the system. It also reduces the amount of money in circulation by sucking up money from the system either by buying rupees from banks and selling them foreign currency, or by issuing government securities which banks and institutions subscribe to. The RBI is therefore the controller of liquidity. Liquidity can become 'tight' when there the demand for funds far exceeds the supply. This could happen due to a variety of reasons:
- Corporates are borrowing more to fund their business growth and for capital investments
- The Government of India is borrowing more to cover the gap between its expenses and income
- The value of the rupee is depreciating faster that the RBI would like and hence the RBI is 'buying rupees' to increase its value versus the dollar.
And the usual repercussion of tight liquidity is increasing interest rates
V. Market is currently overbought
How many times have we read the business papers and thought: Did all the players in the stock markets bunk English classes in school? Why else would they use words like overbought or oversold? Then it dawns on us; these are technical terms and we don't really understand them. It's not their English; it's our financial market knowledge that's at fault.
Simply put, the market being overbought means that the market has risen too much or too fast and is 'expensive' (refer issue #5 for understanding valuations). Likewise, oversold means that the prices have fallen too sharply.
The terms per se are used by technical analysts - analysts who chart price movements to predict what the future price of the stock is likely to be. Usually there is a fair degree of balance between buyers and sellers in the market. However sometimes certain imbalances are triggered and there might be too much buying or too much selling. These are unnatural conditions and often an indicator that one must take the contrary action. Hence if the market is considered overbought, the technical analyst will sell, and if the market is considered oversold, she will buy.
VI. Risk weight age on these assets is 150per cent
Risk is key to all investments. Banks are required by law to maintain a particular level of capital to ensure that if the bank's assets or loans go sour, there is enough capital to back it up and depositors' monies are protected. This level is called the Capital Adequacy Ratio (CAR) and the Reserve Bank of India (RBI) has set it currently at nine per cent of risk weighted assets for all commercial banks; which means that if the bank lends Rs 100, it has to maintain Rs 9 as capital.
Apparently, one jargon leads us to another. It definitely is the maze we've all come to expect of the world of investments and finance. First it was CAR and now Risk Weightage. So what does risk weightage mean?
The loans or investments a bank makes all carry a particular level of risk - the risk of default. RBI requires that banks classify their assets (loans and investments) according to the risk they carry.
So typically government securities carry zero default risk since they are backed by the government. Hence the risk weightage assigned them is zero. So technically if a bank had invested all its money in government bonds, it would not be required to maintain any capital since there is no risk. If a bank lends to corporates, then those loans need to carry 100 per cent weightage. So the bank will maintain 9 per cent of the value of the loan as capital. If risk weightage on assets is 150 per cent, then banks are required to maintain Rs 13.5 of the value of the loan/investment - calculated as 150 per cent of 9.
Banks which have low capital (equity and reserves) prefer to invest a significant portion of their money in gilts since any investments in risk weighted assets means that they would have to raise more money as capital to back up those assets.
VII. Market in a bear hug
Bears represent market players who keep prices down while a bullish market represents rising prices. This is easier to visualise and understand from a popular myth which says that the terms are derived from the way the animals attack a foe - bears attack by swiping their paws downward and bulls toss their horns upward. Though the imagery helps in understanding the terms, it is but mere myth.
According to the The Wall Street Journal Guide to Understanding Money and Markets, the story behind the terminology of Bears and Bulls is as follows:
'Bear skin jobbers' were known for selling bear skins that they did not own; i.e., the bears had not yet been caught. This was the original source of the term "bear." This term eventually was used to describe short sellers, speculators who sold shares that they did not own, bought after a price drop, and then delivered the shares. Because bull and bear baiting were once popular sports, "bulls" was understood as the opposite of "bears." i.e., the bulls were those people who bought in the expectation that a stock price would rise, not fall.
Hence if you read the markets are in a bear hug, you can be sure that your stocks are not going to be moving up in a hurry.
VIII. There was some unwinding of long positions in the futures market....
This statement contains far too much jargon for even us those of us with above average IQ, but no one said that the world of investment was anywhere close to being easy. It's probably easier to learn two foreign languages simultaneously than decipher finance's complexity. So baby steps on this one:
Futures market
This market refers to contracts where the buyer and seller agree to transact at a future date; the price and quantity for that future transaction is however fixed in the present. Think of a futures contract as an understanding you would get into with your local raddiwallah. You promise the raddiwallah that you will give him 5 kilos of newspapers every month over the next six months. The raddiwallah in turn promises to pay you Rs 5 per kilo. So basically the two of you'll have entered into a futures contract where the price and quantity has been pre-fixed regardless of what the price of second-hand newspapers will be in the coming months. Both the parties benefit: The raddiwallah is locking in a guaranteed supply of newspapers, whereas you are guaranteed you will get a good price for the next 6 months.
Similar such transactions take place in the stocks and commodities markets. People tend to enter into futures contracts if they think the markets will be volatile in the future. By agreeing to price and quantity now, they can control their risk.
Long positions: When an investor holds a long position, it means that he actually holds the share and intends to hold it for a while because he thinks prices will go up on the share. If prices go down, then the investor loses money. Similarly, a long position in a futures contract, means the person is required to buy the share at the future date. She will make money if the share price goes up at a later date.
Unwinding: This refers to the process of selling to liquidate long positions
Hence this apparently Greek sounding line 'There was some unwinding of long positions in the futures market' basically means that investors think the market is likely to go down in the future and hence are selling their underlying shares and offloading their long positions.
Where is the Bottom?
It's the same story again. The first two days of the week saw the bulls getting thrashed. They managed to regain some ground on Wednesday and Thursday. But by Friday there was blood on the street again. The Sensex ended the week below the 14,000 level to close at 13802.22. The Nifty closed at 4136.65.
There was a lot that happened this week. For one, it was a derivative settlement week. In what seemed to be a desperate political move to rein in inflation, the RBI hiked both the repo rate and the CRR by half a percentage point each. The heated political environment is also not making life any better for the bulls. Overall the bias remained negative, in the wake of the worsening global as well as local factors. Nothing it going to change unless crude oil (and local inflation) cools off sharply and FIIs turn net buyers.
The volatility even surfaced during intra-day trades. On Monday, the market nosedived in the morning but picked up in the afternoon. But, the momentum was short lived with a sudden bout of selling in the index heavyweights like Reliance Industries, Infosys and Tata Steel. Among the 50 Nifty stocks, 38 ended in negative terrain. Reliance Industries fell to its lowest since September 12. The scrip dropped to a low of Rs 1,984 before closing at Rs 2022.
On Tuesday, a highly volatile session ended in negative terrain for the fifth straight day. The fall could be attributed to heavy selling in index heavyweights like Infosys, L&T and Tata Steel. This time Reliance Industries bucked the negative trend along with HDFC and BHEL. Among the Nifty stocks, 41 ended in negative terrain. The BSE Metal index was the biggest loser, followed by BSE PSU, BSE FMCG and BSE IT.
Though the market snapped its losing streak on Wednesday and Thursday, it was not a reverse of sentiment, as Friday's fall would testify.
High inflation is leading to higher interest rate. Commodity and crude prices are rising resulting in higher input costs. Access to capital is becoming difficult whether it is equity or debt. A CLSA report stated that further rise in oil prices will continue to be particularly bad news for India. The report also stated that a re-test of 12000 Sensex levels cannot be ruled out.
There was a lot that happened this week. For one, it was a derivative settlement week. In what seemed to be a desperate political move to rein in inflation, the RBI hiked both the repo rate and the CRR by half a percentage point each. The heated political environment is also not making life any better for the bulls. Overall the bias remained negative, in the wake of the worsening global as well as local factors. Nothing it going to change unless crude oil (and local inflation) cools off sharply and FIIs turn net buyers.
The volatility even surfaced during intra-day trades. On Monday, the market nosedived in the morning but picked up in the afternoon. But, the momentum was short lived with a sudden bout of selling in the index heavyweights like Reliance Industries, Infosys and Tata Steel. Among the 50 Nifty stocks, 38 ended in negative terrain. Reliance Industries fell to its lowest since September 12. The scrip dropped to a low of Rs 1,984 before closing at Rs 2022.
On Tuesday, a highly volatile session ended in negative terrain for the fifth straight day. The fall could be attributed to heavy selling in index heavyweights like Infosys, L&T and Tata Steel. This time Reliance Industries bucked the negative trend along with HDFC and BHEL. Among the Nifty stocks, 41 ended in negative terrain. The BSE Metal index was the biggest loser, followed by BSE PSU, BSE FMCG and BSE IT.
Though the market snapped its losing streak on Wednesday and Thursday, it was not a reverse of sentiment, as Friday's fall would testify.
High inflation is leading to higher interest rate. Commodity and crude prices are rising resulting in higher input costs. Access to capital is becoming difficult whether it is equity or debt. A CLSA report stated that further rise in oil prices will continue to be particularly bad news for India. The report also stated that a re-test of 12000 Sensex levels cannot be ruled out.
Friday, June 27, 2008
Fund managers see ‘08 as ‘year of debt funds’
This calendar year is likely to be a good period for debt schemes as in the midst of high interest rates, these funds offer better returns compared to equity funds. The high inflationary pressure leading to tightening of the monetary policy has influenced mutual fund (MF) houses to file offer documents in debt segments and reduce its exposure drastically in the equity segment.
The interest rate scenario due to the high inflation rate presently at 11.05%, a 13-year high, has impacted the equity market.
More than a dozen MFs including Reliance, ICICI Prudential, Sundaram BNP Paribas, and HDFC have filed their offer documents with Sebi for the fixed maturity plans (FMPs), debt and liquid fund schemes. SBI has also filed a offer document for debt funds.
Another interesting apsect why debt is becoming the more preferred route for investment is that equity markets have begun to give negative returns amidst high volatility. The benchmark indices Sensex and S&P CNX Nifty have lost almost 30% from its peak in January 2008. The Sensex and Nifty have declined by 1,315 points and 391 points respectively.
Commenting on this trend, Waqar Naqvi, CEO of Taurus Mutual Fund, said, “This year, we have seen equity markets turning very volatile and more and more fund houses are selecting FMPs for their investors. In the last month, we have seen numerous fund houses filing offer documents for FMPs, as they assure a good return in the current market situation.”
The tilt of MFs towards the debt segment can be gauged with Sebi figures according to which the total investment in equity schemes stood at Rs 5,836.5 crore while investment in debt was at Rs 44,607.1 crore from January 1, 2008 .
Interestingly, the RBI has hiked repo rate and CRR by 50 basis points on Tuesday and the banking regulator may resort to further rate hike to arrest the spiraling inflation, MFs feel. In this backdrop, the MF industry thinks that the year 2008 will be the ‘year of debt funds.’
A market analyst said that the BSE Sensex dipped 29.95% or 6,080 points between January till date resulting in erosion of value of equity funds. Contrary to this, K. Ramkumar, head, fixed income, Sundaram BNP Paribas Mutual, said that the FMPs have posted return in the range of 8.5% to 9%.
The interest rate scenario due to the high inflation rate presently at 11.05%, a 13-year high, has impacted the equity market.
More than a dozen MFs including Reliance, ICICI Prudential, Sundaram BNP Paribas, and HDFC have filed their offer documents with Sebi for the fixed maturity plans (FMPs), debt and liquid fund schemes. SBI has also filed a offer document for debt funds.
Another interesting apsect why debt is becoming the more preferred route for investment is that equity markets have begun to give negative returns amidst high volatility. The benchmark indices Sensex and S&P CNX Nifty have lost almost 30% from its peak in January 2008. The Sensex and Nifty have declined by 1,315 points and 391 points respectively.
Commenting on this trend, Waqar Naqvi, CEO of Taurus Mutual Fund, said, “This year, we have seen equity markets turning very volatile and more and more fund houses are selecting FMPs for their investors. In the last month, we have seen numerous fund houses filing offer documents for FMPs, as they assure a good return in the current market situation.”
The tilt of MFs towards the debt segment can be gauged with Sebi figures according to which the total investment in equity schemes stood at Rs 5,836.5 crore while investment in debt was at Rs 44,607.1 crore from January 1, 2008 .
Interestingly, the RBI has hiked repo rate and CRR by 50 basis points on Tuesday and the banking regulator may resort to further rate hike to arrest the spiraling inflation, MFs feel. In this backdrop, the MF industry thinks that the year 2008 will be the ‘year of debt funds.’
A market analyst said that the BSE Sensex dipped 29.95% or 6,080 points between January till date resulting in erosion of value of equity funds. Contrary to this, K. Ramkumar, head, fixed income, Sundaram BNP Paribas Mutual, said that the FMPs have posted return in the range of 8.5% to 9%.
FIIs On Thursday - June 27, 2008
The FIIs on Thursday stood as net seller in equity. The gross equity purchased was Rs2,901.60 Crore and the gross debt purchased was Rs0.00 Crore while the gross equity sold stood at Rs3,005.20 Crore and gross debt sold stood at Rs187.40 Crore. Therefore, the net investment of equity reported was (Rs103.60) Crore and net debt was 0.00 Crore.
Thursday, June 26, 2008
Switching funds: The latest con
Stock markets are falling sharply. Your mutual fund portfolio is probably not doing as well as you expected. You want to make some adjustments to your portfolio, but you don’t know which mutual fund should be retained and which one must be redeemed. You approach the one person who you believe has the answers – your mutual fund agent/advisor.
Your mutual fund agent has played a critical role in helping you invest in the schemes that he believes are best placed to help you achieve your investment goals. So every time you feel the need to revamp your portfolio (in falling markets, for instance), it is natural for you to approach him for his views. The honest investment advisor will usually give you a frank assessment of where he believes he went wrong (if at all) and what steps must be taken to set aright the wrong investment decisions. If it’s in your best interests, he will advise you to redeem some of your funds and shift to a better fund regardless of how much commission he is making.
If you have an honest investment advisor, then you can consider yourself fortunate. However, if you are associated with the kind of investment advisor who is more likely to worry about his own commissions than the performance of your portfolio, then you have a problem. This advisor is more likely to recommend schemes that earn him a higher commission or at least a minimum commission that makes it worth his while to service you.
Your mutual fund agent has played a critical role in helping you invest in the schemes that he believes are best placed to help you achieve your investment goals. So every time you feel the need to revamp your portfolio (in falling markets, for instance), it is natural for you to approach him for his views. The honest investment advisor will usually give you a frank assessment of where he believes he went wrong (if at all) and what steps must be taken to set aright the wrong investment decisions. If it’s in your best interests, he will advise you to redeem some of your funds and shift to a better fund regardless of how much commission he is making.
If you have an honest investment advisor, then you can consider yourself fortunate. However, if you are associated with the kind of investment advisor who is more likely to worry about his own commissions than the performance of your portfolio, then you have a problem. This advisor is more likely to recommend schemes that earn him a higher commission or at least a minimum commission that makes it worth his while to service you.
Increasingly, we are hearing of cases where clients are advised to invest/redeem based on absurd premises. Recently we heard from a website visitor who was advised by his agent to redeem an equity fund that was not performing up to the mark by switching to another equity fund (which happened to be a mediocre performer as well, but marginally better than the first fund) from the same fund house. His rationale for this strange recommendation was that at least the investor would save on the entry load on the new scheme since switches within the same fund house do not attract an entry load (however, the investor has to pay 0.25% Securities Transaction Tax on redemption and bear the exit load). According to the advisor he was saving his client the 2.25% entry load that he would have paid if he had shifted to an equity fund from another fund house.
Clearly this recommendation is flawed on many counts. First and foremost, the investor needs to evaluate whether he really needs to switch. In a falling market, equity funds will fall. So if the investor’s fund is falling it is not a cause for concern per se. However, if he has been told that it is a conservative fund and but is still falling harder than the markets, then there could be a problem. However, if it’s falling lower than the markets then there is no real cause for worry, in fact it only establishes that it is a true blue conservatively managed equity fund.
The financial advisor is only exploiting a common investor weakness for something ‘new’. Under pressure to recommend something different, he recommends another fund from the same fund house.
But why does he recommend another fund from the same fund house? There could be several reasons for that, but two reasons are particularly noteworthy. Usually, mutual fund agents get varying commissions from various fund houses. If the agent gets a higher commission from a particular fund house then it’s in his best interests (financially) to ensure that his investors remain with that fund house. Hence the advice to switch to another scheme from the same fund house.
Another reason why investment advisors recommend that their clients remain with the same fund house is so that they can save on the entry load. While this advice appears to be in the investor’s favour, there is more to it than meets the eye. Since the time SEBI (Securities Exchange Board of India) has made it possible for investors to invest directly with fund houses (and bypass the distributor), the investor is increasingly getting intolerable about entry loads. So long as he is made to switch within the same fund house he does not have to pay an entry load. This makes him agreeable towards such a move. But if his advisor were to make him invest in another fund house, there’s a fair chance that the investor would rather invest directly and save on the entry load than route the transaction through the advisor.
The financial advisor is only exploiting a common investor weakness for something ‘new’. Under pressure to recommend something different, he recommends another fund from the same fund house.
But why does he recommend another fund from the same fund house? There could be several reasons for that, but two reasons are particularly noteworthy. Usually, mutual fund agents get varying commissions from various fund houses. If the agent gets a higher commission from a particular fund house then it’s in his best interests (financially) to ensure that his investors remain with that fund house. Hence the advice to switch to another scheme from the same fund house.
Another reason why investment advisors recommend that their clients remain with the same fund house is so that they can save on the entry load. While this advice appears to be in the investor’s favour, there is more to it than meets the eye. Since the time SEBI (Securities Exchange Board of India) has made it possible for investors to invest directly with fund houses (and bypass the distributor), the investor is increasingly getting intolerable about entry loads. So long as he is made to switch within the same fund house he does not have to pay an entry load. This makes him agreeable towards such a move. But if his advisor were to make him invest in another fund house, there’s a fair chance that the investor would rather invest directly and save on the entry load than route the transaction through the advisor.
Conclusion:
The investor must take an objective view on his investment portfolio. He must first evaluate whether his fund is as bad as he believes it is. For this, he must compare it with the broad market. If he is invested in a thematic fund because he has the risk appetite for it, then in a market fall his fund is likely to have fallen harder than the broad market. So there is no real cause for concern because this is how thematic funds are supposed to perform (they are also meant to rise faster than the broad market in a rally). In such a scenario, there is no reason to switch to another scheme.
However, if the fund’s performance is not upto the mark and the underperformance is consistent, then there is a case for considering a switch to another fund in its peer group that has performed as per expectations. While selecting this fund no consideration needs to be given for whether the fund is from the same fund house or a different one. The only consideration should be that it is right for the investor and makes an apt fit in his portfolio.
However, if the fund’s performance is not upto the mark and the underperformance is consistent, then there is a case for considering a switch to another fund in its peer group that has performed as per expectations. While selecting this fund no consideration needs to be given for whether the fund is from the same fund house or a different one. The only consideration should be that it is right for the investor and makes an apt fit in his portfolio.
Buffett: Today's Price Reflects The Shortage Of Oil On Earth
Billionaire Warren Buffett says he believes supply and demand, not market speculation, is what's driving oil prices to new heights.
Oil futures fell Wednesday after the Energy Department said the nation's supplies of fuel and oil were larger than expected last week, but prices remain above $130 a barrel.
Buffett told CNBC in a live interview that today's prices reflect a lack of oil in the world. Some people have suggested that curbing speculation in oil contracts could dramatically lower the price of oil.
And at least nine bills proposing limits on that oil speculation have been introduced in Congress in recent weeks.
Safe Harbor Statement:
Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
Nothing in this article is, or should be construed as, investment advice.
Oil futures fell Wednesday after the Energy Department said the nation's supplies of fuel and oil were larger than expected last week, but prices remain above $130 a barrel.
Buffett told CNBC in a live interview that today's prices reflect a lack of oil in the world. Some people have suggested that curbing speculation in oil contracts could dramatically lower the price of oil.
And at least nine bills proposing limits on that oil speculation have been introduced in Congress in recent weeks.
Safe Harbor Statement:
Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
Nothing in this article is, or should be construed as, investment advice.
FII Activity on 25-06-2008 - June 26, 2008
The FIIs on Wednesday stood as net buyer in equity and net seller in debt. The gross equity purchased was Rs3,366.20 Crore and the gross debt purchased was Rs0.00 Crore while the gross equity sold stood at Rs3,092.10 Crore and gross debt sold stood at Rs187.40 Crore. Therefore, the net investment of equity reported was Rs274.10 Crore and net debt was (Rs187.40) Crore.
Wednesday, June 25, 2008
Banking funds are good for every portfolio
In the past few years, the banking sector has given great returns. On January 14, 2008, it touched a high of 12,678.98. Four years ago it was hovering at around 3,000 levels. Over these years, the BSE Bankex has delivered an annual return of 35 per cent. Last year it impressed with a 61 per cent return, far ahead of the 47 per cent delivered by the Sensex.
From the turn of the century, the industry has been growing at 20 per cent per annum. And it is estimated that in the coming years, Indian banks are expected to grow at 35 per cent per annum.
In a growing economy, this sector is a direct beneficiary. What's even better is that its net non-performing assets (NPAs) have come down considerably from 8 (in the year 2000) to 1 per cent today.
To fund this growth, banks would need funding to the tune of $14 billion. This is one of the reasons the Reserve Bank of India (RBI) is opening up the sector to foreign players next year. From 2009 onwards, foreign banks would be allowed to acquire up to 74 per cent of any Indian bank.
The domestic players will benefit from the essential capital and expertise while the foreigners would get a foothold into this lucrative sector (for new players) and have the ability to reach a larger audience (for the existing ones).
In recent times there has been considerable investment by international banks like Citigroup, HSBC, Bank of America and Deutsche Bank to scale up their operations in India. Moreover, foreign institutional investors (FIIs) are also betting on this sector. As many as five public sector banks (PSB) have exhausted their limit of FII investment, with three more along with four private sector banks in the caution zone.
The only way out for FIIs is to now tap the banking exchange traded funds (ETFs) and sector funds focussed on the banking sector. This could explain why in the past 12 months the average monthly growth in the units of equity banking funds has been around 24 per cent.
At present, there are three open-ended equity banking funds in the market, while another two should be available for investment soon. Four more are still in the approval stage. But each of the existing three have their own character, the similarity begins and ends with the common sector.
Their investment strategy, market cap preference, choice of scrips and type of stocks vary. And these banking sector funds don't have a mandate limited to pure banking players. Financial institutions and brokerage stocks also find a place here.
While we look at the three equity funds in our analysis, there are also three ETFs available for investment. Like its cousins in the equity category, the Banking BeES, the largest ETF has rewarded its investors by giving a return of 36 per cent since inception.
So if none of the equity funds appeal to you, you could even look at this option. All said and done, this sector deserves a presence in any portfolio.
JM FINANCIAL SECTOR FUND – UP AND DOWN
The newest entrant to the pack got itself noticed in the very first year of its existence. Though it trounced the competition in 2007, its performance was not consistent all the year through. And while investors celebrated with a 95 per cent return in 2007, in the March 2008 quarter they had to grapple with negative returns of 33.36 per cent.
It can be argued that the fall was the logical outcome of the entire sector plummeting and the market going downhill, but JM Financial fell harder than its peers (Reliance fell by just 22.26 per cent).
This fund has always been very bullish on ICICI Bank. Soon after launch, this scrip cornered 32.49 per cent of the portfolio. It is the only stock in the portfolio that has been there continually since launch. Even now, it is the top-most holding at 11.57 per cent.
The fund manager chases growth so momentum stocks like Reliance Capital, Indian Infoline and Srei Infrastructure are more favoured than stocks like Bank of Baroda, Corporation Bank and Federal Bank which are prominent in the portfolios of the other two funds. It has more or less avoided public sector banking stocks like Maharashtra Bank, Jammu & Kashmir Bank and South Indian Bank.
Though the fund manager continuously held on to stocks like ICICI Bank, HDFC Bank, Yes Bank, IDFC, PFC and Mahindra & Mahindra Financial Services for fairly long periods of time, it does not indicate that he adheres to the buy-and-hold strategy. He has entered and exited stocks like Axis Bank, Bank of India, IDBI, Karnataka Bank, Kotak Mahindra Bank and
Reliance Capital only to once again get into them at a later date. Of course, the small size of the fund has given the fund manager the leeway to be a nimble player.
This investing style of chasing growth and selling once a price objective has been achieved, only to re-enter later, is typical of fund manager Sandeep Neema.
But what's also typical is that when his fund outperforms, it is streets ahead of the competition, but when it does not, it falls much lower than its peers. If you are considering this fund, get mentally prepared to ride the ups and downs.
RELIANCE BANKING FUND – STEADY RETURNS OVER TIME
As the oldest and largest banking sector fund, it has not disappointed investors. Over the past five years, it has delivered an annual return of 42 per cent. Historically too, this fund has been less volatile than its peers or its underlying index.
Despite being a good performer, the fund took second place to JM Financial in 2007. In the December 2007 quarter, Reliance Banking delivered 19.43 per cent as against 28.52 per cent of JM Financial. But in the following quarter (March 2008), Reliance Banking fell by just 22.26 per cent, as against JM Financial's fall of 33.36 per cent.
The reason was two-fold. Reliance Banking stayed away from high PE stocks — Axis Bank, HDFC Bank, Yes Bank, Cholamandalam DBS Finance and Srei Infrastructure. As a result it lagged in 2007 but fell much less when the market tanked.
Reliance Banking's high cash component also proved to be a buffer when the market fell. Like all the sector funds from Reliance AMC, this one too has the leeway to go fully into cash, should the need arise.
While it has not exercised that option, it does have the tendency to hold larger cash positions than its competitors. Its cash component had consistently increased from 14.52 per cent (November 2007) to 32 per cent (February 2008). Since January 2008, it has averaged at around 25 per cent.
In March 2008, when the prices fell and valuations looked to be more reasonable, the fund manager picked up Axis Bank and Kotak Mahindra Bank which he avoided earlier because they were too expensive.
What's interesting about this fund is its penchant for broking stocks — India Infoline, Indiabulls Financial Services, IL&FS Investsmart and Motilal Oswal Financial Services. But financial institutions stocks like IDFC and IFCI are not courted.
What we like about this fund is its consistency. The fund manager's strategy may not deliver headline grabbing returns but it has led to a solid record over the long haul.
UTI BANKING SECTOR – IN LINE WITH INDEX
UTI Banking Sector has been, by and large an average performer.
Fund manager Gautami Desai has not been an opportunistic investor and prefers to invest in large banking stocks. This fund has avoided brokerage stocks and prefers financial institutions like Power Finance Corporation, LIC Housing Finance and IDFC.
This strategy has certainly not resulted in the fund shooting out the lights and last year it was behind its peers in terms of returns. And what was even more disappointing was that in the recent bear run it fell by 30.16 per cent, compared to Reliance Banking Fund's -22.26 per cent and JM Financial Services -33.36 per cent returns (March 2008 quarter).
What's amazing is that when UTI Banking Sector is compared to a banking exchange traded fund Banking BeES - there has barely been any addition of alpha. The two-year annualised returns are around 32 per cent, while Banking BeES delivers a higher three-year return. So logically, why would an investor pay 2 per cent more as annual expenses (with this sector fund) when the return is virtually identical?
Risk-averse investors fancy capital-protection funds
The term ‘risk’ is slowly finding its way back into investor lexicon. This is evident from the rising demand for capital-protection products offered by brokerage houses in their portfolio management schemes (PMS). Of several such products, the one which uses bonds and the recently-introduced long-dated options, is the most sought after for now.
What differentiates this capital-protection product from others is the use of long-dated options, that SEBI introduced in January this year. The product has been structured in such a way that a major chunk of an investor’s capital is put into highly-rated bonds, while the rest is used to buy Nifty call options, which expire 1-3 years from now.
So, for instance, if a client puts in Rs 100 into such a product, the fund manager of the PMS would invest, say, Rs 90 in bonds at a fixed interest rate to protect the capital. Rest of the money is used to buy (pay the premium for) a long-dated Nifty call or put that expire in 2009, 2010 or 2011.
What differentiates this capital-protection product from others is the use of long-dated options, that SEBI introduced in January this year. The product has been structured in such a way that a major chunk of an investor’s capital is put into highly-rated bonds, while the rest is used to buy Nifty call options, which expire 1-3 years from now.
So, for instance, if a client puts in Rs 100 into such a product, the fund manager of the PMS would invest, say, Rs 90 in bonds at a fixed interest rate to protect the capital. Rest of the money is used to buy (pay the premium for) a long-dated Nifty call or put that expire in 2009, 2010 or 2011.
It is learnt that majority of fund managers are buying long-dated Nifty calls, mostly in 2011, an indication that they expect the bull rally to resume by 2011. When an investor buys a call option, he expects the market to rise. The advantage of buying options is that the risk of losing money is limited to the premium paid. By using long-dated options, an investor takes a longer-term bet on the direction of the market, which helps him ignore short-term losses. Here, the investor does not need to roll over his positions every month or quarter, thereby saving on rollover costs.
“The gaining acceptance of this capital-protection product is driving activity in long-dated options,” said JM Financial Mutual Fund’s fund manager-derivatives, Biren Mehta.
Industry officials said PMS arms of ICICI Prudential Asset Management, Kotak Securities PMS and Emkay Shares and Stockbrokers are among the few, which are offering such products. This could not be individually verified with these players. But, some in the industry said the existing market conditions have made it difficult for them to sell this product to potential clients. “When we approach clients with such a product, the product is designed in such a way to suit market conditions at this moment. When the client finally approves to buy it, the situation might have changed,” said a top official with a brokerage’s wealth-management arm.
“The gaining acceptance of this capital-protection product is driving activity in long-dated options,” said JM Financial Mutual Fund’s fund manager-derivatives, Biren Mehta.
Industry officials said PMS arms of ICICI Prudential Asset Management, Kotak Securities PMS and Emkay Shares and Stockbrokers are among the few, which are offering such products. This could not be individually verified with these players. But, some in the industry said the existing market conditions have made it difficult for them to sell this product to potential clients. “When we approach clients with such a product, the product is designed in such a way to suit market conditions at this moment. When the client finally approves to buy it, the situation might have changed,” said a top official with a brokerage’s wealth-management arm.
Equilibrium in MFs is in investor interest
As a kid, I had this toy that worked on the principle of balancing. It had two arms and no matter what contortions one subjected it to, it would sway, swing, wobble and come to a stop in the upright position.
It’s the same with the market — equilibrium would be reached as the various constituents act out their parts sensibly and the valuations are discovered, after factoring in all that is known - I have since realised.
Mutual funds are a very important component of the investment landscape. They act as a buffer between the investors and the stock market and reduce the risk by diversifying the investment, offering the services of a professional fund manager, ensuring liquidity at all times, etc.
But somehow, mutual funds have been portrayed as villains by the media and Sebi also seems to see the industry as fleecing the investors, which is unfortunate. The no-load-direct mode, introduced a few months back, was touted as a great step forward for the investors.
And now, there is this proposal to legitimise passback of commission, so they can legitimately get back some of the money their distributor earns. Also the investor may benefit.
But, that being the case, why are so many unit linked insurance plans (Ulips) being sold, where the first-year charges can be well over 70%? These schemes have so many charges, and are so well-packaged, that even people from financial services often fail to decipher them.
On top of it all, innovative handling of queries on charges and mis-selling are par for the course for insurance agents. After all, they earn double-digit commissions for a product that looks like a mutual fund scheme and offers insurance as an after thought.
Wouldn’t it be in the investors’ interest to be allowed to go direct in insurance plans, too? Clearly, that would allow them to save on a lot of costs. Also, unlike in MFs, one cannot change the agent easily in insurance.
When insurance companies are allowed a free run, why is the market regulator after the mutual fund industry? The question is pertinent because although these are competing products, there is no restriction on the charges on insurance.
Representations of the Association of Mutual Funds of India for a higher allowance of expenses to create a level playing field have been rebuffed. This is a problem with having multiple regulators rather than a single one for all financial services.
Given the disparity, MF distributors would gladly start selling Ulips, for they can earn a lot more there. The individual MF advisor earns 2-2.25% from selling MF schemes, on which he has to pay service tax, income tax and meet sales and operational costs. At the end, he may be left with barely 40% of the gross commission.
Intermediaries need to earn. An industry will remain healthy and vibrant only if the constituents are able to earn reasonable returns. Why else would be there in the first place?
But, clearly, the regulators do not think this applies to the mutual fund industry. Going by them, these players need to be controlled and disciplined as opposed to being just regulated. That’s a flawed premise.
Take the telecom industry. When it was government controlled, one had to register for a phone and wait endlessly. All that changed with the arrival of private operators and the ensuing competition. In a matter of years, the charges have come down from Rs 16 a minute to as low as 10 paise a minute.
This was achieved by creating an ecosystem with healthy competition, not by passing a diktat. Throttling the players with legislation would have killed what has grown into a vibrant industry and a major employer.
That’s precisely what the mutual funds industry needs, too. The regulator could look at other ways of deepening the market, broadening the reach and protecting investors’ interests.
The following constructive measures may be considered:
The regulator could look at ensuring that MF money stays invested longer, so people start participating in the growth story as investors, rather than buccaneers.
Introducing punitive exit loads, of say 5% for exits less than 12 months, could ensure that investors develop a long-term outlook, which is good for the industry and the economy at large. This will curb churning and ensure that investment in mutual funds is not 'hot money' that keeps moving in and out, such as those of the hedge funds.
This will bring stability in the market and give the fund manager the stability he needs to do his job properly, without constantly looking in the rear view mirror, for signs of redemption pressures.
Long-term investors can be incentivised. Lower expense ratios (of say, a maximum of 2.25% as opposed to 2.5%) for those staying invested for three years or more can be a tangible incentive.
Lastly, the anomalies should be corrected. When there were loads, the distributor was not expected to invest in his name and if he did, he had to inform that he was doing so to exclude those investments from commissions. Now that the no-load direct option is in, this system is redundant. Yet this continues.
It goes without a saying that equilibrium would eventually be reached, much like the toy I had. Only, whether it would be in the interests of the investor is another matter.
It’s the same with the market — equilibrium would be reached as the various constituents act out their parts sensibly and the valuations are discovered, after factoring in all that is known - I have since realised.
Mutual funds are a very important component of the investment landscape. They act as a buffer between the investors and the stock market and reduce the risk by diversifying the investment, offering the services of a professional fund manager, ensuring liquidity at all times, etc.
But somehow, mutual funds have been portrayed as villains by the media and Sebi also seems to see the industry as fleecing the investors, which is unfortunate. The no-load-direct mode, introduced a few months back, was touted as a great step forward for the investors.
And now, there is this proposal to legitimise passback of commission, so they can legitimately get back some of the money their distributor earns. Also the investor may benefit.
But, that being the case, why are so many unit linked insurance plans (Ulips) being sold, where the first-year charges can be well over 70%? These schemes have so many charges, and are so well-packaged, that even people from financial services often fail to decipher them.
On top of it all, innovative handling of queries on charges and mis-selling are par for the course for insurance agents. After all, they earn double-digit commissions for a product that looks like a mutual fund scheme and offers insurance as an after thought.
Wouldn’t it be in the investors’ interest to be allowed to go direct in insurance plans, too? Clearly, that would allow them to save on a lot of costs. Also, unlike in MFs, one cannot change the agent easily in insurance.
When insurance companies are allowed a free run, why is the market regulator after the mutual fund industry? The question is pertinent because although these are competing products, there is no restriction on the charges on insurance.
Representations of the Association of Mutual Funds of India for a higher allowance of expenses to create a level playing field have been rebuffed. This is a problem with having multiple regulators rather than a single one for all financial services.
Given the disparity, MF distributors would gladly start selling Ulips, for they can earn a lot more there. The individual MF advisor earns 2-2.25% from selling MF schemes, on which he has to pay service tax, income tax and meet sales and operational costs. At the end, he may be left with barely 40% of the gross commission.
Intermediaries need to earn. An industry will remain healthy and vibrant only if the constituents are able to earn reasonable returns. Why else would be there in the first place?
But, clearly, the regulators do not think this applies to the mutual fund industry. Going by them, these players need to be controlled and disciplined as opposed to being just regulated. That’s a flawed premise.
Take the telecom industry. When it was government controlled, one had to register for a phone and wait endlessly. All that changed with the arrival of private operators and the ensuing competition. In a matter of years, the charges have come down from Rs 16 a minute to as low as 10 paise a minute.
This was achieved by creating an ecosystem with healthy competition, not by passing a diktat. Throttling the players with legislation would have killed what has grown into a vibrant industry and a major employer.
That’s precisely what the mutual funds industry needs, too. The regulator could look at other ways of deepening the market, broadening the reach and protecting investors’ interests.
The following constructive measures may be considered:
The regulator could look at ensuring that MF money stays invested longer, so people start participating in the growth story as investors, rather than buccaneers.
Introducing punitive exit loads, of say 5% for exits less than 12 months, could ensure that investors develop a long-term outlook, which is good for the industry and the economy at large. This will curb churning and ensure that investment in mutual funds is not 'hot money' that keeps moving in and out, such as those of the hedge funds.
This will bring stability in the market and give the fund manager the stability he needs to do his job properly, without constantly looking in the rear view mirror, for signs of redemption pressures.
Long-term investors can be incentivised. Lower expense ratios (of say, a maximum of 2.25% as opposed to 2.5%) for those staying invested for three years or more can be a tangible incentive.
Lastly, the anomalies should be corrected. When there were loads, the distributor was not expected to invest in his name and if he did, he had to inform that he was doing so to exclude those investments from commissions. Now that the no-load direct option is in, this system is redundant. Yet this continues.
It goes without a saying that equilibrium would eventually be reached, much like the toy I had. Only, whether it would be in the interests of the investor is another matter.
Only the nature of equity market had changed, not its potential
Most people would view the current situation of the Indian economy as the beginning of a horror story for investors – the inflation rates are soaring rather uncontrollably, global cues are dismal and the equity markets are plummeting.
No cause for panic, say investment experts. Those with the qualifications and the technical know-how to assess the present situation assert that this is just the beginning of a new phase and investors will have to change their habits and attitudes accordingly.
Experts refuse to see the recent decline as a bear market. They rather term it as a correction in a bull market. They are confident that once the inflation concerns and the political uncertainty are past – and they will be sooner than later – the Indian equities will regain their flavour.
Their confidence stems from the facts that amidst all the gloom Indian businesses have continued to display very strong fundamentals. What’s needed to stabilize the proceedings is a stable government. Everyone is waiting for the first bit of good news to set the markets on an upward path.
Until that happens, though, experts say the markets will be range bound in the 10 to 15 percent band. The growth will be slow as compared to previous times. There are not too many positive triggers in the market at present. In the past, investors (read speculators) have become used to making a lot of money. There is no quick-money to be made in the market now. Investors will have to stay invested for the long-term to make fairly reasonable returns.
Over the last four years, there was a combination of positive factors working for the economy. Those fundamental factors have now changed. It will take time for the fundamentals to stabilise and people will have to patient during this phase. From now on, at least in the foreseeable future, there will be no instant money. The gains will certainly be there, but for those with an investment horizon of at least two to three years.
Wisdom therefore lies not in shying away from the market but entering it in small calculated steps. One good way to do this is through mutual funds.
With the booming stock market remaining volatile in the recent times, more and more investors are seeking mutual fund (MF) route to invest in the market. This can be seen from the number of investor folios rising faster than the growth in asset under management (AUM) of the MF industry. The Indian MF industry has grown at the compounded Annual Growth Rate (CAGR) of 47 percent between 2003-08, which is next only to Russia at 97 percent and China at 67 percent during the same period. There are reports to say that in the next 2-3 years, the MF sector will grow at 35-40 percent.
A report from McKinsey & Company titled “Indian Asset Management: Achieving Broad-based Growth,” suggests that by 2012, the total money managed by mutual fund houses in India will be between $350bn and $440 bn. That’s a growth of 26-33 percent every year for the next four years.
McKinsey believes that the penetration of mutual funds is very low as compared to other markets. The current AUM amounts to 8 percent of GDP in India compared to 79 percent in the US and 39 percent in Brazil, according to the report. “About 3-4 percent of Indian households have invested in mutual funds and 42 percent of these households are located in the top eight cities,” it further elaborates, underscoring the underpenetration.
To capitalise on this growth opportunity, many new players have recently entered the fray, and at least 10 more are in various stages of launching their mutual fund businesses.
According to Lipper, an international fund tracking firm, Gulf investors earned substantial gains last year from both debt and equity funds.
Funds registered for sale in the Gulf region recorded an average gain of 19.26 percent in 2007, with equity funds from India emerging as the second best performing category after equity funds from China, said a recent Lipper report. Nineteen Among the top 20 GCC-registered funds were Indian. These included six funds from the Reliance Mutual Fund stable, four schemes each of UTI Mutual Fund and Birla Sun Life, three DSP-Merrill Lynch schemes and two HDFC Mutual Fund schemes.
Among the Indian funds, the rupee-dominated bond funds were the best performers in the bond category with about 20 percent return while equity funds gave an average return of 71.08 percent, against the overall average of 26.40 for all the equity funds.
Returns from the rupee-denominated general bond funds and government bond funds stood at 21.56 percent and 19.79 percent respectively. This, compared with an overall average return of 9.94 percent for the bond funds. Investors from the Gulf region were aggressively betting on the Indian market, the study said.
One must remember that the best time to enter the market is when the Sensex plunges. This may be a good time to buy stocks as most scrips are trading at very low prices. But the bigger question is whether you want to enter the equity market directly or opt for the mutual funds’ route.
According to one expert, investing directly in the stock market is good. You should look at splitting your money among 5-6 blue chip companies. However, if (and it’s a big if) you don’t have the expertise, then a diversified equity fund will be a safe bet. It’s better for new investors to enter the market in tranches. If you enter the market today and it falls by another 10 percent tomorrow, it will pinch you. So it’s better to spread your moves when the stock market looks bearish.
No cause for panic, say investment experts. Those with the qualifications and the technical know-how to assess the present situation assert that this is just the beginning of a new phase and investors will have to change their habits and attitudes accordingly.
Experts refuse to see the recent decline as a bear market. They rather term it as a correction in a bull market. They are confident that once the inflation concerns and the political uncertainty are past – and they will be sooner than later – the Indian equities will regain their flavour.
Their confidence stems from the facts that amidst all the gloom Indian businesses have continued to display very strong fundamentals. What’s needed to stabilize the proceedings is a stable government. Everyone is waiting for the first bit of good news to set the markets on an upward path.
Until that happens, though, experts say the markets will be range bound in the 10 to 15 percent band. The growth will be slow as compared to previous times. There are not too many positive triggers in the market at present. In the past, investors (read speculators) have become used to making a lot of money. There is no quick-money to be made in the market now. Investors will have to stay invested for the long-term to make fairly reasonable returns.
Over the last four years, there was a combination of positive factors working for the economy. Those fundamental factors have now changed. It will take time for the fundamentals to stabilise and people will have to patient during this phase. From now on, at least in the foreseeable future, there will be no instant money. The gains will certainly be there, but for those with an investment horizon of at least two to three years.
Wisdom therefore lies not in shying away from the market but entering it in small calculated steps. One good way to do this is through mutual funds.
With the booming stock market remaining volatile in the recent times, more and more investors are seeking mutual fund (MF) route to invest in the market. This can be seen from the number of investor folios rising faster than the growth in asset under management (AUM) of the MF industry. The Indian MF industry has grown at the compounded Annual Growth Rate (CAGR) of 47 percent between 2003-08, which is next only to Russia at 97 percent and China at 67 percent during the same period. There are reports to say that in the next 2-3 years, the MF sector will grow at 35-40 percent.
A report from McKinsey & Company titled “Indian Asset Management: Achieving Broad-based Growth,” suggests that by 2012, the total money managed by mutual fund houses in India will be between $350bn and $440 bn. That’s a growth of 26-33 percent every year for the next four years.
McKinsey believes that the penetration of mutual funds is very low as compared to other markets. The current AUM amounts to 8 percent of GDP in India compared to 79 percent in the US and 39 percent in Brazil, according to the report. “About 3-4 percent of Indian households have invested in mutual funds and 42 percent of these households are located in the top eight cities,” it further elaborates, underscoring the underpenetration.
To capitalise on this growth opportunity, many new players have recently entered the fray, and at least 10 more are in various stages of launching their mutual fund businesses.
According to Lipper, an international fund tracking firm, Gulf investors earned substantial gains last year from both debt and equity funds.
Funds registered for sale in the Gulf region recorded an average gain of 19.26 percent in 2007, with equity funds from India emerging as the second best performing category after equity funds from China, said a recent Lipper report. Nineteen Among the top 20 GCC-registered funds were Indian. These included six funds from the Reliance Mutual Fund stable, four schemes each of UTI Mutual Fund and Birla Sun Life, three DSP-Merrill Lynch schemes and two HDFC Mutual Fund schemes.
Among the Indian funds, the rupee-dominated bond funds were the best performers in the bond category with about 20 percent return while equity funds gave an average return of 71.08 percent, against the overall average of 26.40 for all the equity funds.
Returns from the rupee-denominated general bond funds and government bond funds stood at 21.56 percent and 19.79 percent respectively. This, compared with an overall average return of 9.94 percent for the bond funds. Investors from the Gulf region were aggressively betting on the Indian market, the study said.
One must remember that the best time to enter the market is when the Sensex plunges. This may be a good time to buy stocks as most scrips are trading at very low prices. But the bigger question is whether you want to enter the equity market directly or opt for the mutual funds’ route.
According to one expert, investing directly in the stock market is good. You should look at splitting your money among 5-6 blue chip companies. However, if (and it’s a big if) you don’t have the expertise, then a diversified equity fund will be a safe bet. It’s better for new investors to enter the market in tranches. If you enter the market today and it falls by another 10 percent tomorrow, it will pinch you. So it’s better to spread your moves when the stock market looks bearish.
How have fund flows shaped up this year?
The markets are continuing to trade weak and lacklustre. So, how are flows- local and global - looking like?
Foreign institutional investors have sold Rs 8,430 crore this month. The outflows amount to nearly 10% of total FII inflows to India till date.
Fund outflows, at Rs 13,036, were the highest in January this year. This was followed by June at Rs 8,430, Rs 7,770 crore in August 2007, and Rs 7,354 crore in March 2006.
There were negative fund inflows this year in four out of the six months. Fund inflows in 2008 stood at negative Rs 13,063 crore in January, Rs 1,733 crore in February, negative Rs 130 crore in March, Rs 1,075 in April, negative Rs 5,012 in May, and negative Rs 8,430 in June.
Year-to-date, FIIs have sold USD 6.2 billion in equities in the cash market. They were net purchasers to the tune of USD 10.4 billion in futures and options. In total, they net purchased USD 3.76 billion year-to-date. Of this, around USD 3.55 billion has been sold since May 20.
However, domestic institutional investors were net buyers to the tune of Rs 41,246 crore year-to-date. Mutual funds invested Rs 8,178 crore while banks, domestic financial institutions, and insurance companies invested Rs 33,068 crore.
Reliance Mutual Fund has about 16% market share and is sitting on USD 1.5 billion cash. On the other hand, there is extremely selective buying coming in from bigger fund houses like DSP Merrill Lynch, SBI and HDFC.
We are not really seeing a break in the 13-15% average cash level in the fund portfolios. But if we take a look at the numbers, there is selective buying coming from fund managers that has led to buying of about Rs 2,000 crore worth of shares in this month and Year-To-Date we have seen about Rs 8,000 crore worth of shares bought by fund managers.
So, it is clearly not the kind of cash one would expect from mutual funds that would add any support levels to the markets. But on the other hand, on the investors’ side, fund managers are not facing any redemption pressures.
But if this volatility continues to sustain for a longer period of time, there is a possibility that fund managers will have to face a lot of redemption. At this point, they aren’t even seeing any inflows coming in. So, on the investor side, there is panic but no redemption pressures as such.
Foreign institutional investors have sold Rs 8,430 crore this month. The outflows amount to nearly 10% of total FII inflows to India till date.
Fund outflows, at Rs 13,036, were the highest in January this year. This was followed by June at Rs 8,430, Rs 7,770 crore in August 2007, and Rs 7,354 crore in March 2006.
There were negative fund inflows this year in four out of the six months. Fund inflows in 2008 stood at negative Rs 13,063 crore in January, Rs 1,733 crore in February, negative Rs 130 crore in March, Rs 1,075 in April, negative Rs 5,012 in May, and negative Rs 8,430 in June.
Year-to-date, FIIs have sold USD 6.2 billion in equities in the cash market. They were net purchasers to the tune of USD 10.4 billion in futures and options. In total, they net purchased USD 3.76 billion year-to-date. Of this, around USD 3.55 billion has been sold since May 20.
However, domestic institutional investors were net buyers to the tune of Rs 41,246 crore year-to-date. Mutual funds invested Rs 8,178 crore while banks, domestic financial institutions, and insurance companies invested Rs 33,068 crore.
Reliance Mutual Fund has about 16% market share and is sitting on USD 1.5 billion cash. On the other hand, there is extremely selective buying coming in from bigger fund houses like DSP Merrill Lynch, SBI and HDFC.
We are not really seeing a break in the 13-15% average cash level in the fund portfolios. But if we take a look at the numbers, there is selective buying coming from fund managers that has led to buying of about Rs 2,000 crore worth of shares in this month and Year-To-Date we have seen about Rs 8,000 crore worth of shares bought by fund managers.
So, it is clearly not the kind of cash one would expect from mutual funds that would add any support levels to the markets. But on the other hand, on the investors’ side, fund managers are not facing any redemption pressures.
But if this volatility continues to sustain for a longer period of time, there is a possibility that fund managers will have to face a lot of redemption. At this point, they aren’t even seeing any inflows coming in. So, on the investor side, there is panic but no redemption pressures as such.
Mutual funds play it safe with cash
Equity schemes biding time for value picks in falling market
Even as the benchmark index, Sensex, breached 14,000 intra-day, on Tuesday, mutual funds with huge cash in their kitty, appear to be waiting for the market to fall further to pick up stocks at lower levels.
Analysts say lack of positive signals and fears of possible redemption pressure in the near future seem to be keeping mutual funds from making investment decisions.
“Mutual funds seem to be sitting on huge cash as they might need some liquidity to service redemptions which might happen in volatile times. On the other hand, there is lack of good opportunity to deploy funds," said Mr Srinivas Jain, Chief Marketing Officer and Senior Vice-President, SBI Mutual Fund.
However, there are select funds cherrypicking at lower levels on Tuesday, with domestic institutions including mutual funds buying sticks worth (net) Rs 476 crore.
BSE Sensex fell 1.31 per cent to close at 14106.58.
Mutual funds are waiting to invest at lower levels, as there are chances of the markets falling further, said Mr Alex Matthew, Head of Research, Geojit Financial Services.
By May-end, over 292 equity schemes that were in operation had a total cash position of close to Rs 23,240 crore according to data from NAV India. At the end of April, equity schemes had cash levels of Rs 15,615 crore.
The assets under managements for the month ended May was Rs 6,00,266 crore, while the same for April was Rs 5,69,686 crore.
Around 40-50 per cent of the total assets under management of the industry are in equity schemes. Out of this, if the industry is holding around 10-15 per cent in cash, it is not very high considering the turbulence in markets, he added.
According to a research report by Sharekhan Securities, for June 2008, the top 10 cash-rich funds, include UTI Spread Fund, Kotak Equity Arbitrage Fund, Reliance Natural Resources Fund, Birla Sun Life Pure Value Fund, Reliance Quant Plus Fund, ICICI Prudential Blended Plan, IDFC Fixed Maturity Arbitrage Fund-s1 and ING Dynamic Asset Allocation Fund.
These are some of the cash rich equity diversified funds waiting for right valuations to invest, the report said.
In fact, fund houses sitting in cash will reduce their mark-to-market losses, and the larger the sums of cash, the more insulated they are, said an analyst. Sensex lost more than 30 per cent since January 2008.
Analysts say lack of positive signals and fears of possible redemption pressure in the near future seem to be keeping mutual funds from making investment decisions.
“Mutual funds seem to be sitting on huge cash as they might need some liquidity to service redemptions which might happen in volatile times. On the other hand, there is lack of good opportunity to deploy funds," said Mr Srinivas Jain, Chief Marketing Officer and Senior Vice-President, SBI Mutual Fund.
However, there are select funds cherrypicking at lower levels on Tuesday, with domestic institutions including mutual funds buying sticks worth (net) Rs 476 crore.
BSE Sensex fell 1.31 per cent to close at 14106.58.
Mutual funds are waiting to invest at lower levels, as there are chances of the markets falling further, said Mr Alex Matthew, Head of Research, Geojit Financial Services.
By May-end, over 292 equity schemes that were in operation had a total cash position of close to Rs 23,240 crore according to data from NAV India. At the end of April, equity schemes had cash levels of Rs 15,615 crore.
The assets under managements for the month ended May was Rs 6,00,266 crore, while the same for April was Rs 5,69,686 crore.
Around 40-50 per cent of the total assets under management of the industry are in equity schemes. Out of this, if the industry is holding around 10-15 per cent in cash, it is not very high considering the turbulence in markets, he added.
According to a research report by Sharekhan Securities, for June 2008, the top 10 cash-rich funds, include UTI Spread Fund, Kotak Equity Arbitrage Fund, Reliance Natural Resources Fund, Birla Sun Life Pure Value Fund, Reliance Quant Plus Fund, ICICI Prudential Blended Plan, IDFC Fixed Maturity Arbitrage Fund-s1 and ING Dynamic Asset Allocation Fund.
These are some of the cash rich equity diversified funds waiting for right valuations to invest, the report said.
In fact, fund houses sitting in cash will reduce their mark-to-market losses, and the larger the sums of cash, the more insulated they are, said an analyst. Sensex lost more than 30 per cent since January 2008.
Not much redemptions
Investors too seem to be playing it safe, having understood that mutual fund investments are for the long term, and so there is not much redemption happening, say analysts.
“Also in most cases where the NAVs of schemes have fallen by around 50 per cent, the investors will not want to exit at such low levels”, observed Mr Rakesh Goyal, Head-Distribution, Bonanza Portfolio.
Investors too seem to be playing it safe, having understood that mutual fund investments are for the long term, and so there is not much redemption happening, say analysts.
“Also in most cases where the NAVs of schemes have fallen by around 50 per cent, the investors will not want to exit at such low levels”, observed Mr Rakesh Goyal, Head-Distribution, Bonanza Portfolio.
Mr Sanjay Sinha, Chief Investment Officer, SBI Mutual Fund Management Private Ltd
SBI Funds Management Ltd. is the investment manager of SBI Mutual Fund. SBI Mutual Fund is a joint venture between the State Bank of India and Société Générale Asset Management, one of the world’s leading fund management companies that manages over US$500bn worldwide. Today, the fund manages over Rs317.94bn of assets and has a diverse profile of investors actively parking their investments across 36 active schemes with an investor base of over 5.4mn.
Sanjay Sinha, Chief Investment Officer, SBI Mutual Fund Management Private Limited, he joined SBI Mutual Fund in November 2005 as Head of Equities. He has over 19 years of experience in the mutual fund industry. Prior to joining SBI Mutual Fund, he had a stint with UTI Mutual Fund and was managing a corpus of over Rs28bn (over US$600 mn). He is a graduate from IIM Kolkatta.
Speaking with Anil Mascarenhas and Fahima Shaikh of India Infoline, Sanjay Sinha says, “FIIs have behaved in a logical manner and we are sure they will not stay away from the Indian market for too long.”
Inflation has been skyrocketing and oil prices have been soaring. How do you read the situation?
Speaking with Anil Mascarenhas and Fahima Shaikh of India Infoline, Sanjay Sinha says, “FIIs have behaved in a logical manner and we are sure they will not stay away from the Indian market for too long.”
Inflation has been skyrocketing and oil prices have been soaring. How do you read the situation?
We are set to face more hardships as far as oil prices are concerned. However, I don’t see it sustaining at higher levels for too long time. Oil was trading at around US$80 per barrel, before it spiked to $120 in a short span of time. A demand spurt from India and China has been cited as a reason. This is surprising, as these economies have been growing their GDP at a strong pace now for the last three to four years. Therefore this is not a logical justification for the spike in oil price by around 50% in a short span of time. Secondly, if you look at history, oil price spikes were caused due to supply interruptions on account of various global events. I therefore expect the surge in oil prices to be temporary in nature. Whenever prices have sharply moved higher, the shrinkage in demand has been far more structural. The demand could start coming down resulting in cooling of prices. In the longer term, oil prices will start moving down because of this. Supply side constraints are not the cause for rise in prices this time around. Any commodity, which moves at a very fast pace without any fundamental attribute definitely comes to a sustainable level. By the later part of calendar year 2008, we see prices of oil and other commodities cooling down from their highs and settling at sustainable levels. Inflation, which is at record highs, would moderate and consequently interest rates are also expected to soften putting into motion the entire virtuous cycle.
The rupee has been volatile. How do you see it moving ahead?
Rupee weakness is coinciding with a spurt in oil price. However, we cannot be sure that if crude falls, rupee may appreciate by the same extent. The proposition that oil prices may come down is also based on the assumption that dollar will strengthen. This may get triggered by the expectations of a Fed rate hike in September 2008. At the same time rupee might also see some appreciation, as oil prices cool. It is difficult to get a clear view regarding the rupee on account of these conflicting factors.
To what extent could these factors impact corporate earnings?
If one believes that advance tax numbers are a genuine reflection then the coming quarter appears to be set for above expectation results. I think the true test will lie in seeing the actual quarterly results because many a times the advance numbers are a little deceptive.
If the first quarter results are relatively positive then the bane of high prices may pass on to the second quarter. High interest rates and inflation could be a dampener in the second quarter. But the third and fourth quarter results may be much better compared to the earlier quarters as companies would have a positive effect of cooling of oil prices and softening interest rates.
Even after a correction, global investors see India as expensive compared to other emerging economies. What kind of FII inflows are you expecting?
Equity as an asset class remains a risky proposition. Emerging economies are even riskier. To that extent, FIIs have reacted in very logical pattern and have behaved in a similar manner worldwide. They have sold 2.5% of their total holding in India, which is not a significant proportion. We are sure they will not stay away from the Indian market for too long. In April 2008, when markets were moving up from its lower levels, we saw some positive response from FIIs. They too look at the trend and act accordingly. Post the new P-note guidelines; there was a fear of FIIs slowing down their activities in India. However, the number of FIIs investing in India is on the rise and around 1400 FIIs have registered with SEBI.
Mutual funds have been sitting on large amount of cash. Yet they have been slow in deployment. Are the current levels still comfortable for investment?
Mutual fund participation has been higher this calendar year. In 2007, MF houses were net buyers of Rs67bn of equities whereas this year till mid of June 2008, mutual funds have bought equities worth Rs75bn. Yes, we are sitting on a cash pile of around 13% of our average equity assets, which is much higher than the normal levels.
We had built a cushion to absorb the shocks of redemption, which is normal during a downturn. However, this time, we were surprised that there was no outflow. On the contrary, almost everyday we are witnessing net inflows even in these turbulent times. As part of our investment strategy, we are looking into moving into new sectors and stocks. We have been a little slow in deploying this cash in a falling market and that explains the reason why our funds are sitting on cash for a longer time.
Which sectors do you expect to outperform and under-perform in the coming months?
Opinion on this can be divided. One choice would be the sectors which are the flavour of the day like IT, pharma and FMCG, that are considered to be defensive sectors. Other choice for investment would be contrarian bets in the present scenario. Though these funds would not give an immediate result, disciplined investors can get fruitful gains for their patience. Currently, sectors one can look at need not be just the ones which have corrected sharply. Investors should look at stocks which have corrected and at the same time hold good promise when the situation turns benign.In such a scenario, sectors like banking, financial services, engineering and capital goods could be contrarian bets.
Last calendar year contra fund delivered outstanding returns of 65%. Would it be wrong to make a comparison for the short term as the contra funds have been underperforming in recent months?
Our SBI Magnum Contra fund has been in line with its objective. It was in the first quartile among its peers last year. In terms of five and three years’ returns, it is among the top five performing funds. This is an indication of a typical contrarian fund behavior, which is supposed to unfold its story over a longer period of time. Hence one should stay invested over a long term period in a contrarian fund. Short term gains can not be expected from contrarian bets.
In two of your funds, Contra & Tax Gain you have seen to be liberal and constant in declaring dividends. However, in Comma, Index and Pharma funds you have not been rewarding investors with dividends in the last two years?
In case of index funds, which are passive in nature, getting distribution surplus is less likely.
We have a practice to declare at least one dividend in actively managed funds every year. In case of sectoral funds, if we are able to capture any event in the industry, we would definitely part the surplus with our investors in terms of dividends.
We have a practice to declare at least one dividend in actively managed funds every year. In case of sectoral funds, if we are able to capture any event in the industry, we would definitely part the surplus with our investors in terms of dividends.
Recent guidelines on REMF (Real Estate Mutual Fund) by SEBI expanded the asset class for investment. Any plans in the near future to launch such funds?
Mutual fund industry is at its inflection point. To move into a new phase, the industry has to first spread geographically. Secondly, the investor should be offered a wide range of innovative products. At present, our industry offers broadly two classes of assets i.e. equity and debt. Hence, real estate mutual funds can offer a completely new set of asset class to the retail investors. We are very positive and excited about REMF. As this industry has its own dynamics and complications, we are first putting in place an infrastructure to suitably manage this asset class. Once we set up the entire plan, we would definitely launch products in REMF.
Why are pension funds in India not gaining popularity?
Pension funds are least popular in India. The last time a fund decided to raise money for a pension fund, the corpus collected was very low. A sporadic savings plan alone may not be able to satisfy an individual’s retirement need. Secondly, investors are not very conscious about planning for their retirement. Investors can actually go for life stage financial planning. This is where the mutual fund industry can play a vital role to offer products that suit investors and retirement needs. Here, the SIP route would be most preferred and suitable in building a diversified asset allocation for retirement.
Issue like bringing down the cost in fund houses has been in limelight in recent days. What is your suggestion on this issue?
There have been suggestions of creating a common platform so that mutual fund investors can be given a consolidated statement, where all the holdings with different funds are captured in one statement. Currently, paper work contributes a large extent to the cost pie. Any common platform or standardization will bring down costs to that extent. This would be another investor-friendly reform in the industry.
What is your advice to retail investors?
Currently, average income levels in the country have gone up. Investors have a wider choice of investments options as compared to old saving avenues like bank deposits and National Saving Certificates. The higher pool of money has to be judiciously saved and invested. This is where investors need to pay more attention to financial planning. Once a proper plan is made, investors have to choose a suitable approach to fulfill that financial plan with different asset classes. Investors should be disciplined and regular in investing. This will save them from the trap of timing the market which is not part of any proper financial planning process.
FII Activity on 24-06-2008 - June 25, 2008
The FIIs on Tuesday stood as net seller in equity and debt. The gross equity purchased was Rs2,273.90 Crore and the gross debt purchased was Rs0.00 Crore while the gross equity sold stood at Rs2,894.70 Crore and gross debt sold stood at Rs132.70 Crore. Therefore, the net investment of equity reported was (Rs620.80) Crore and net debt was (Rs132.70) Crore.
Fidelity to launch a distribution agency
Fidelity India is set to enter the mutual fund distribution business in India, a senior official at the fund house said. It will be the first fund house in the country to launch a separate agency of its own to distribute MF schemes of all fund houses in the country. The existing distribution companies like ones from Birla and HDFC are a part of the financial group, rather than set up by the fund house. Many other MF houses are now expected to follow the Fidelity example.
“Setting up the asset management company was the first step and we are now working on this new business initiative of distribution of third party mutual funds,” Ashu Suyash, managing director and country head, Fidelity Fund Management, told ET.
“The setting up of a platform to make available third party funds is a natural extension of our belief to help in customer choice that helps customers in meeting their lifetime goals,” she added.
The rapid growth of assets in the MF industry and the fact that the money is coming from primarily a few cities is prompting many fund houses to expand their network. While many fund houses are setting up their own offices, others are using the services of independent distributors for the same. Fidelity India seems to have taken a cue from ‘FundsNetwork,’ — Fidelity’s online investment supermarket, operational in the US and UK. It brings together over 1,100 funds from over 60 different fund management companies, offering varied choice to investors and their advisers.
The Boston Consulting Group forecasts that the industry could more than triple assets to $520 billion by 2015, a prospect that has attracted global players such as American International Group and JPMorgan and prompting many more like Japan’s Shinsei Bank and UBS to queue up for MF licence. Fund distribution was always a lucrative business due to the commissions that a seller earns while selling a scheme to a customer.
Recently, financial services behemoth Merrill Lynch invested a sizeable stake in Bluechip Corporate Investment Centre, a Mumbai-headquartered financial products distribution house. Bajaj Capital, Way2 Wealth, RR Finance and banks like Citibank and HDFC Bank control a large part of the distribution business in India.
“Setting up the asset management company was the first step and we are now working on this new business initiative of distribution of third party mutual funds,” Ashu Suyash, managing director and country head, Fidelity Fund Management, told ET.
“The setting up of a platform to make available third party funds is a natural extension of our belief to help in customer choice that helps customers in meeting their lifetime goals,” she added.
The rapid growth of assets in the MF industry and the fact that the money is coming from primarily a few cities is prompting many fund houses to expand their network. While many fund houses are setting up their own offices, others are using the services of independent distributors for the same. Fidelity India seems to have taken a cue from ‘FundsNetwork,’ — Fidelity’s online investment supermarket, operational in the US and UK. It brings together over 1,100 funds from over 60 different fund management companies, offering varied choice to investors and their advisers.
The Boston Consulting Group forecasts that the industry could more than triple assets to $520 billion by 2015, a prospect that has attracted global players such as American International Group and JPMorgan and prompting many more like Japan’s Shinsei Bank and UBS to queue up for MF licence. Fund distribution was always a lucrative business due to the commissions that a seller earns while selling a scheme to a customer.
Recently, financial services behemoth Merrill Lynch invested a sizeable stake in Bluechip Corporate Investment Centre, a Mumbai-headquartered financial products distribution house. Bajaj Capital, Way2 Wealth, RR Finance and banks like Citibank and HDFC Bank control a large part of the distribution business in India.
Tuesday, June 24, 2008
FII Activity On 23-06-2008 - June 24, 2008
The FIIs on Monday stood as net seller in equity and debt. The gross equity purchased was Rs2,501.50 Crore and the gross debt purchased was Rs0.00 Crore while the gross equity sold stood at Rs3,454.00 Crore and gross debt sold stood at Rs56.00 Crore. Therefore, the net investment of equity reported was (Rs952.50) Crore and net debt was (Rs56.00) Crore.
Sunday, June 22, 2008
5 reasons to say goodbye to your mutual fund
Advice on when you must invest in a mutual fund is available dime a dozen. But it takes a certain degree of expertise and proficiency to redeem your mutual fund investment at the right time. Since this is the dilemma that many investors grapple with, we have outlined the five most critical reasons for redeeming your mutual fund investment.
At the outset, it is important to note that the ‘right time to redeem’ does not mean that there is a timing element involved over here. Rather the right time to redeem means when the time is up on your mutual fund investment and it is no longer prudent to hold on to it.
While there may be several occasions to redeem your mutual fund investment, we have narrowed it down to the five most pervasive reasons.
1. When you have achieved your investment objective
At the outset, it is important to note that the ‘right time to redeem’ does not mean that there is a timing element involved over here. Rather the right time to redeem means when the time is up on your mutual fund investment and it is no longer prudent to hold on to it.
While there may be several occasions to redeem your mutual fund investment, we have narrowed it down to the five most pervasive reasons.
1. When you have achieved your investment objective
A mutual fund investment is made with the intent of achieving a specific investment objective. Some of these investment objectives include, among others, planning for child’s education, planning for retirement, saving for a house/car. If you haven’t achieved your investment goal, there is no reason to redeem your mutual fund (assuming, of course, that it is performing on expected lines). When you have achieved or are close to achieving your investment objective, you should stagger your mutual fund redemptions so that you are completely liquid (i.e. in cash) when it is time to realise the investment objective (i.e. pay your child’s college fees or buy the house).
2. When your mutual fund revises its mandate
2. When your mutual fund revises its mandate
Mutual funds have an investment mandate. The mandate sets the ‘guidelines’ for fund managers about how they should manage their funds. Since the mandate is formally stated, investors know about this beforehand and invest in the fund if they believe that it will enable them to achieve their investment goals. Mutual funds are known to revise their mandates if they believe that the existing mandate does not serve the mutual fund’s interests anymore. For instance, in the recent past a leading private sector fund house converted its index fund into an actively managed fund.
From your perspective, you will have to evaluate whether the mutual fund with a revised mandate merits a place in your portfolio. If it doesn’t, then its time to redeem it. In the event of a revision in the mandate, regulations require that investors be given the option to redeem the mutual fund without an exit load, so you can redeem the investment without worrying about the exit load (if any).
3. When the star fund manager quits
From your perspective, you will have to evaluate whether the mutual fund with a revised mandate merits a place in your portfolio. If it doesn’t, then its time to redeem it. In the event of a revision in the mandate, regulations require that investors be given the option to redeem the mutual fund without an exit load, so you can redeem the investment without worrying about the exit load (if any).
3. When the star fund manager quits
A category of investors track the fund managers more than they track the fund house and its schemes. These investors invest in a mutual fund relying mainly on the star fund manager’s investment prowess and skills. While the domestic mutual fund industry does not have many star fund managers, the few who can be considered stars have a committed fan base. At Personalfn, we discourage investors from falling prey to this trend; investing in process-driven fund houses is a more reliable way of investing than betting on star fund managers. Nonetheless, if you have invested in a fund based on the star fund manager appeal, then your investment decisions should correspond with the fund manager’s migration (across fund houses). If he quits the present fund house, then there is a case for you to redeem your investments because it is unlikely that the rest of the fund management team will be able to replicate the performance in the star fund manager’s absence.
4. When your mutual fund is not performing
4. When your mutual fund is not performing
We often hear of investors complaining about the below par performance of their mutual fund investments. Our advice to them is to be patient and evaluate their investments over an appropriate time frame and with the right perspective. For instance, equity funds should ideally be evaluated over the long-term (at least 3 years). Taking a decision in haste without understanding the investment proposition of the mutual fund could prove counterproductive and expensive (if there is an exit load). However, all points considered, if you and your financial planner are convinced that your mutual fund is a dud, then its best that you redeem it.
5. When you have invested in a thematic fund
5. When you have invested in a thematic fund
We recommend that investors avoid thematic funds, the reality is that thematic funds are a feature in the portfolios of many investors. Some of these investors are well-informed and have a view on the underlying theme/sector. However, for a vast majority of investors, thematic funds are an unknown entity simply because they do not have the necessary skills and resources to track the underlying sector/theme. They only got invested in them either because everyone they knew was investing in them or their agent made a compelling marketing pitch for the fund. Either ways they are invested in the fund and want to know when they can redeem. If you are one of them, then the right time to redeem your thematic fund is when the stock markets give you the opportunity. Since a rising tide lifts all boats, it is likely that the performance of the underlying theme/sector will improve in a stock market rally. That is an opportunity for you to sell that thematic/sector fund that you always wanted to redeem but could not because of unsuitable market conditions.
Another mutual fund investment that you can redeem in a stock market rally is the dud that you invested based on a ‘hot tip’ and have regretted ever since. These funds are like deadwood in your portfolio, which you should never have invested in, in the first place. But having invested in them, make the most of a stock market rally to either redeem at a profit or to minimise losses.
Another mutual fund investment that you can redeem in a stock market rally is the dud that you invested based on a ‘hot tip’ and have regretted ever since. These funds are like deadwood in your portfolio, which you should never have invested in, in the first place. But having invested in them, make the most of a stock market rally to either redeem at a profit or to minimise losses.
Dont stop your SIP
Mr . Mitesh started to invest through SIP in two proven equity diversified funds last June. He started of with a aim to keep investing for five years. ( a very good long term plan indeed). He was an happy man till Jan'08, as he was seeing his funds growing. Now after the downward run in the stock market, he is thinking whether he should discontinue his SIP. He is not happy because his portfolio has moved into negative territory.
Mr. Mitesh should actually be happy for the fall now because he is able to get more units at these lower prices. Instead of stopping- a better strategy would be increase the SIP , if possible. The amount you SIP in equity MF during bearish phases would yield more returns when the market turns around.
Don't stop your SIP , if you are baffled by the downturn!!!
Mr. Mitesh should actually be happy for the fall now because he is able to get more units at these lower prices. Instead of stopping- a better strategy would be increase the SIP , if possible. The amount you SIP in equity MF during bearish phases would yield more returns when the market turns around.
Don't stop your SIP , if you are baffled by the downturn!!!
Comment on investing
Recently there were a lot of comments from other blogs. They all talked about how the investors (??) have lost money lost in the market in the recent past.
These were a sort of advertising comments having links to the respective blogs.The comments were not published not because of this reason, but all along they did talk about traders as investors.
If one does trading and calls it an investing, its like calling an engineer ..a doctor...!!. If someone is buying and selling stocks just for a price increase/ decrease that he expects in a short term ( period of one day to a couple of years), he is a trader.
The best way to create wealth is to stay invested in the market for a longer time horizon. Mutuals funds are the best way as most of us are not experts in picking up stocks.
1) Never get swayed by any articles/comments which calls trading as investing.
2) Believe in long term investing in equity through SIP route in proven diversified MF.
Shying away from Mutual Fund New Fund Offers
After some trouble days in the stock markets, investors seems to have lost confidence a bit and trying to stay away from New Fund Offers from Mutual Funds. This is because of the fact that almost all recently launched NFOs are in the negative NAV. Of course, even the senior fund schemes too are tasting trouble times after the recent correction in both the domestic and the global markets. With the US economy in a possible recession, crude oil touching newer highs every day, just few months of Indian Elections, the stock markets, it seems, wont go in for a huge rallies at least for some time now. Needless to stay, even the most cautious Mutual Fund investor too is trying to stay cautious and this is appearing from the inflow of the Mutual Fund NFOs. Are the good days for the NFOs over for some time now? or aren’t the marketing campaigns of the mutual fund houses not looking that savvy? Let’s wait and see..
Ansal Properties’ arm gets investment of $ 55 million from HDFC AMC
HDFC Asset Management Co (HDFC AMC) has informed that it has made an investment worth US$ 55 million in Ansal Hi-Tech Townships, a subsidiary of the New Delhi-based property developer, Ansal Properties & Infrastructure (API), for a minority stake in the project.
Ansal Hi-Tech Townships, a special purpose vehicle (SPV), is building a 2,500- acre modern township with a developable area of 75 million sq ft in Greater Noida in the National Capital Region.
Presently, the project is in the land acquisition stage and is expected to be completed in the next 6-7 years. Ansal is expecting a turnover of Rs 26,000 crore from the project and expects to invest over Rs 12,000 crore in the project.
Ansal Hi-Tech Townships, a special purpose vehicle (SPV), is building a 2,500- acre modern township with a developable area of 75 million sq ft in Greater Noida in the National Capital Region.
Presently, the project is in the land acquisition stage and is expected to be completed in the next 6-7 years. Ansal is expecting a turnover of Rs 26,000 crore from the project and expects to invest over Rs 12,000 crore in the project.
RBI may step in to contain inflation rate
Indian inflation shot above 11 per cent in early June to a 13-yearhigh following a rise in state-set fuel prices, rattling markets andprompting the finance minister to warn of stronger anti-inflationmeasures ahead.
Inflation is on the rise globally and has also reached double digitsin other countries, including Indonesia, Vietnam, Sri Lanka andPakistan as oil, food and other commodity prices soar.
What experts say about inflation Inflation rate surges to 13-yr highat 11.05%
India government bond yields jumped to their highest in nearly sevenyears after Friday's data and the finance minister's warning, whileshares fell to their lowest levels in 2008 on concern that interestrates will move up.
Traders said the central bank, which raised rates just last week,stepped in to support the weakening rupee after the release of India'swholesale price index (WPI), the country's most widely watchedinflation measure.
The index showed annual inflation jumped to 11.05 per cent in the 12months to June 7, its hottest pace since May 1995 and much higher thanforecasts for 9.82 per cent.
It also marked a big jump from 8.75 per cent in the week-earlierdata.
"The number is quite intimidating and it will require some responsefrom the fiscal authorities and the Reserve Bank of India," saidAbheek Barua, chief economist at HDFC Bank.
"So I wouldn't be surprised if there is another monetary measure onits way in the next fortnight or so, and this is likely to be a reporate hike of about 25 basis points."
The double-digit inflation figure -- inflamed by a fuel price hike ofabout 10 per cent early this month when India cut subsidies, will alsoheap more pressure on a ruling coalition, which faces state andnational elections in coming months.
The coalition is already struggling to unify behind a controversialnuclear energy deal with the United States.
The central bank surprised financial markets last week by raisinginterest rates, its first increase in more than a year. It boosted itsrepo rate by 25 basis points to 8 per cent.
Economists said with inflation running significantly higher thananticipated, another increase was likely.
Reflecting such expectations, the benchmark 10-year government bondyield jumped 10 basis points to 8.64 per cent, while the benchmarkstock index was down just over 3 per cent in mid-afternoon.
Political fallout
Political worries have already rattled markets this week, fuellinglosses on Wednesday and Thursday, while surging food bills havecontributed to a string of defeats for the ruling Congress party atstate elections over the last few months.
Now the coalition's communist allies have renewed threats to withdrawsupport for the government over the nuclear deal. The government hasjust a week or so to decide if it wants to risk early polls -- atwhich rising prices will be a key battleground -- by going ahead withthe agreement.
Earlier this month, India joined a stable of Asian countries no longerable to afford big fuel subsidies in the face of rising prices,sparking street protests and calls for industrial strikes.
Where to next?
India's inflation rate was last this high in the week of May 6, 1995,when it stood at 11.11 per cent. In the latest figures, inflation forthe week of April 12 was revised up to 7.95 per cent from 7.33 percent.
Energy costs account for 14.2 per cent of the WPI index and Friday'sdata showed the index for fuel, power, light and lubricants rose 7.8per cent in the week of the price rise.
Finance Minister Palaniappan Chidambaram promised action.
"This is indeed a very difficult time and we will have to takestronger measures both on the demand side and monetary side," he toldreporters.
Food prices have been a source of concern for the Congress party-ledcoalition as these impact the poor the hardest, but the food articlesindex fell 1.1 per cent in the June 7 data.
Nonetheless, Indranil Pan, chief economist at Kotak Mahindra Bank,said inflation could go towards 12 per cent. "The next 3 to 5 monthsare going to be very crucial."
Robert Prior-Wandesforde, economist at HSBC in Singapore, saw both therepo rate and the cash reserve ratio (CRR), used by the central bankto drain surplus cash from the money market, rising by 50 and 75 basispoints respectively by year-end.
Inflation is on the rise globally and has also reached double digitsin other countries, including Indonesia, Vietnam, Sri Lanka andPakistan as oil, food and other commodity prices soar.
What experts say about inflation Inflation rate surges to 13-yr highat 11.05%
India government bond yields jumped to their highest in nearly sevenyears after Friday's data and the finance minister's warning, whileshares fell to their lowest levels in 2008 on concern that interestrates will move up.
Traders said the central bank, which raised rates just last week,stepped in to support the weakening rupee after the release of India'swholesale price index (WPI), the country's most widely watchedinflation measure.
The index showed annual inflation jumped to 11.05 per cent in the 12months to June 7, its hottest pace since May 1995 and much higher thanforecasts for 9.82 per cent.
It also marked a big jump from 8.75 per cent in the week-earlierdata.
"The number is quite intimidating and it will require some responsefrom the fiscal authorities and the Reserve Bank of India," saidAbheek Barua, chief economist at HDFC Bank.
"So I wouldn't be surprised if there is another monetary measure onits way in the next fortnight or so, and this is likely to be a reporate hike of about 25 basis points."
The double-digit inflation figure -- inflamed by a fuel price hike ofabout 10 per cent early this month when India cut subsidies, will alsoheap more pressure on a ruling coalition, which faces state andnational elections in coming months.
The coalition is already struggling to unify behind a controversialnuclear energy deal with the United States.
The central bank surprised financial markets last week by raisinginterest rates, its first increase in more than a year. It boosted itsrepo rate by 25 basis points to 8 per cent.
Economists said with inflation running significantly higher thananticipated, another increase was likely.
Reflecting such expectations, the benchmark 10-year government bondyield jumped 10 basis points to 8.64 per cent, while the benchmarkstock index was down just over 3 per cent in mid-afternoon.
Political fallout
Political worries have already rattled markets this week, fuellinglosses on Wednesday and Thursday, while surging food bills havecontributed to a string of defeats for the ruling Congress party atstate elections over the last few months.
Now the coalition's communist allies have renewed threats to withdrawsupport for the government over the nuclear deal. The government hasjust a week or so to decide if it wants to risk early polls -- atwhich rising prices will be a key battleground -- by going ahead withthe agreement.
Earlier this month, India joined a stable of Asian countries no longerable to afford big fuel subsidies in the face of rising prices,sparking street protests and calls for industrial strikes.
Where to next?
India's inflation rate was last this high in the week of May 6, 1995,when it stood at 11.11 per cent. In the latest figures, inflation forthe week of April 12 was revised up to 7.95 per cent from 7.33 percent.
Energy costs account for 14.2 per cent of the WPI index and Friday'sdata showed the index for fuel, power, light and lubricants rose 7.8per cent in the week of the price rise.
Finance Minister Palaniappan Chidambaram promised action.
"This is indeed a very difficult time and we will have to takestronger measures both on the demand side and monetary side," he toldreporters.
Food prices have been a source of concern for the Congress party-ledcoalition as these impact the poor the hardest, but the food articlesindex fell 1.1 per cent in the June 7 data.
Nonetheless, Indranil Pan, chief economist at Kotak Mahindra Bank,said inflation could go towards 12 per cent. "The next 3 to 5 monthsare going to be very crucial."
Robert Prior-Wandesforde, economist at HSBC in Singapore, saw both therepo rate and the cash reserve ratio (CRR), used by the central bankto drain surplus cash from the money market, rising by 50 and 75 basispoints respectively by year-end.
Contrarian Investing
Contrarian investment strategy can be defined as acting in a manner contrary to the conventional stock market wisdom at any particular time. It is a preference for fundamental analysis in picking individual stocks, while ignoring the overall trends in the market.
George Soros is among the most famous contrarian investors of our time. Along with Jim Rogers, he created the Quantum Fund based on a contrarian philosophy. The fund went on to give returns of about 4000% over a period of 30 years. The most famous contrarian move that George Soros made was going short on the British pound and earning US$1 billion in a single day in 1992. Rogers's famous contrarian bets were getting into the equity market in the early 1980s when most of investors avoided them and into the commodity markets in 1990s at the peak of the dot com boom.
In the conventional model, investors look favorably upon stocks that are rising in price and shy away from those stocks that are falling. This approach causes investors to overlook quality companies with prices that have fallen because of events or perceptions that are temporary in nature. Contrarians behave in a manner opposite to the majority and buy when stocks are falling in price. The philosophy behind it is that out of favor companies involve less risk, since purchase are usually made at the low end of valuation cycles.
Contrarian investment encompasses several themes such as picking up neglected stocks with strong asset values, under-owned sectors with high growth prospects, companies with latent earnings potential etc.
How to apply contrarian investment strategy
By focusing on stock selection: An investor should focus on fundamental analysis of a company rather than following the market trends. He should look for value hidden in the company and try to pick them up before others realise the potential locked in the company.
By changing the diversification strategy: A contrarian investor should reduce his over diversification and commit a large amount to few stocks where the odds weigh heavily in his favor.
By accepting market volatility: A contrarian needs to accept the volatility of equity markets. By maintaining plenty of cash through bull and bear markets, he can deploy funds during price drops.
By concentrating over absolute return than relative returns: A contrarian investor should not worry about index. An investor should plan how much cash he needs at the end of his investment time horizon and should try to perform in line with that strategy. By doing so, the investor will be more focused on his individual portfolio instead of worrying about the index performance.
A word of caution Contrary thinking is emotionally demanding. It requires courage to stand alone when there is a great deal of pressure to follow the majority. The key to contrarian investing is making independent decisions and believing in them. And finally, it requires patience.
George Soros is among the most famous contrarian investors of our time. Along with Jim Rogers, he created the Quantum Fund based on a contrarian philosophy. The fund went on to give returns of about 4000% over a period of 30 years. The most famous contrarian move that George Soros made was going short on the British pound and earning US$1 billion in a single day in 1992. Rogers's famous contrarian bets were getting into the equity market in the early 1980s when most of investors avoided them and into the commodity markets in 1990s at the peak of the dot com boom.
In the conventional model, investors look favorably upon stocks that are rising in price and shy away from those stocks that are falling. This approach causes investors to overlook quality companies with prices that have fallen because of events or perceptions that are temporary in nature. Contrarians behave in a manner opposite to the majority and buy when stocks are falling in price. The philosophy behind it is that out of favor companies involve less risk, since purchase are usually made at the low end of valuation cycles.
Contrarian investment encompasses several themes such as picking up neglected stocks with strong asset values, under-owned sectors with high growth prospects, companies with latent earnings potential etc.
How to apply contrarian investment strategy
By focusing on stock selection: An investor should focus on fundamental analysis of a company rather than following the market trends. He should look for value hidden in the company and try to pick them up before others realise the potential locked in the company.
By changing the diversification strategy: A contrarian investor should reduce his over diversification and commit a large amount to few stocks where the odds weigh heavily in his favor.
By accepting market volatility: A contrarian needs to accept the volatility of equity markets. By maintaining plenty of cash through bull and bear markets, he can deploy funds during price drops.
By concentrating over absolute return than relative returns: A contrarian investor should not worry about index. An investor should plan how much cash he needs at the end of his investment time horizon and should try to perform in line with that strategy. By doing so, the investor will be more focused on his individual portfolio instead of worrying about the index performance.
A word of caution Contrary thinking is emotionally demanding. It requires courage to stand alone when there is a great deal of pressure to follow the majority. The key to contrarian investing is making independent decisions and believing in them. And finally, it requires patience.
ING Latin America Equity Fund
Theme:
Open-Ended fund of fund scheme that would primarily invest in ING Latin America Investment Fund. Generally FoF schemes returns are average and secondly when Indian secondary market has declined so much then why would I go all the way to Latin America?
Issue Open: 19-Jun-08
Issue Close: 10-Jul-08
Entry Load: 2.25%
Exit Load: 1% within 6 months
Min Amount: INR 5000
Open-Ended fund of fund scheme that would primarily invest in ING Latin America Investment Fund. Generally FoF schemes returns are average and secondly when Indian secondary market has declined so much then why would I go all the way to Latin America?
Issue Open: 19-Jun-08
Issue Close: 10-Jul-08
Entry Load: 2.25%
Exit Load: 1% within 6 months
Min Amount: INR 5000
The Investment Game Plan
A little insight into how you should invest.
1. Figure out where you are
The first thing to do is to prepare a personal balance sheet of sorts. Describe your assets - which is what you would call anything you own that is of real value. That means a house is an asset, money in the bank is an asset and stocks/mutual funds are assets. Your TV is not an asset. Your car should not be considered an asset (unless it's less than 3 years old, in which case consider the value declared to insurance).
So add all the values up and you get a list of assets, like so: Assets
Cash in bank: Rs. 50,000
Fixed Deposits: Rs. 200,000
Stocks: Rs. 150,000
Mutual Funds: Rs. 70,000
Gold: Rs. 20,000
Current value of house: Rs. 25,00,000
EPF: Rs. 8,500
TOTAL: Rs. 29,98,500
Underdeclare values of stocks, gold etc. by at least 25% since these are variable commodities.
Now figure out your liabilities. Meaning, how much do you owe other people? Liabilities
Oustanding housing loan: Rs. 20,00,000
Personal Loan: Rs. 100,000
TOTAL: Rs. 21,00,000
Don't include things you intend to pay back immediately, like credit card bills, or phone bills etc.
Subtract your LIABILITIES from your ASSETS to find out your NETWORTH: meaning, how much are you worth today. In the example above, NETWORTH = Rs. 8,98,500.
2. What's your "cash flow"?
Now find out how much you spend. Include all standard expenses (in fact, keep a record of this for about six months, and find out the real average) and also amortize your annual payments (like insurance) into the monthly amount.
Add the total income you earn (minus taxes and any other deductions) Expenditure:
Apartment Maintenance: Rs. 2,000
Phone bills: Rs. 3,000
Petrol: Rs. 2,500
Credit Cards: Rs. 5,000
Internet connection: Rs. 1,000
Interest payment on housing loan: Rs. 11,000
Insurance Amortised: Rs. 3,000
House taxes etc. amortised: Rs. 1,000
Cash expenses: Rs. 8,000
Total: Rs. 36,500
Income:
Salary: Rs. 45,000
Dividend: Rs. 2,500
Total : Rs. 47,000
Cash Flow: Rs. 10,500 per month.
If your cash flow is not positive, i.e. Expenditure is greater than Income, STOP RIGHT HERE. Go back to the drawing table and figure out how to reduce your expenses or increase your income - there is no other way around. Investments are only for cash flow positive people!
3. What and when do you need money? And How Much?
1. Figure out where you are
The first thing to do is to prepare a personal balance sheet of sorts. Describe your assets - which is what you would call anything you own that is of real value. That means a house is an asset, money in the bank is an asset and stocks/mutual funds are assets. Your TV is not an asset. Your car should not be considered an asset (unless it's less than 3 years old, in which case consider the value declared to insurance).
So add all the values up and you get a list of assets, like so: Assets
Cash in bank: Rs. 50,000
Fixed Deposits: Rs. 200,000
Stocks: Rs. 150,000
Mutual Funds: Rs. 70,000
Gold: Rs. 20,000
Current value of house: Rs. 25,00,000
EPF: Rs. 8,500
TOTAL: Rs. 29,98,500
Underdeclare values of stocks, gold etc. by at least 25% since these are variable commodities.
Now figure out your liabilities. Meaning, how much do you owe other people? Liabilities
Oustanding housing loan: Rs. 20,00,000
Personal Loan: Rs. 100,000
TOTAL: Rs. 21,00,000
Don't include things you intend to pay back immediately, like credit card bills, or phone bills etc.
Subtract your LIABILITIES from your ASSETS to find out your NETWORTH: meaning, how much are you worth today. In the example above, NETWORTH = Rs. 8,98,500.
2. What's your "cash flow"?
Now find out how much you spend. Include all standard expenses (in fact, keep a record of this for about six months, and find out the real average) and also amortize your annual payments (like insurance) into the monthly amount.
Add the total income you earn (minus taxes and any other deductions) Expenditure:
Apartment Maintenance: Rs. 2,000
Phone bills: Rs. 3,000
Petrol: Rs. 2,500
Credit Cards: Rs. 5,000
Internet connection: Rs. 1,000
Interest payment on housing loan: Rs. 11,000
Insurance Amortised: Rs. 3,000
House taxes etc. amortised: Rs. 1,000
Cash expenses: Rs. 8,000
Total: Rs. 36,500
Income:
Salary: Rs. 45,000
Dividend: Rs. 2,500
Total : Rs. 47,000
Cash Flow: Rs. 10,500 per month.
If your cash flow is not positive, i.e. Expenditure is greater than Income, STOP RIGHT HERE. Go back to the drawing table and figure out how to reduce your expenses or increase your income - there is no other way around. Investments are only for cash flow positive people!
3. What and when do you need money? And How Much?
Find out any longer term requirements to fund a large one time requirement. The way to do this is: Ongoing: Liabilities, Rs. 21,00,000
After 5 years: School Donation for Child, Rs. 100,000
After 10 years: House repairs and upgrades, Rs. 10,00,000
After 15 years: College fees for Child, Rs. 10,00,000
After 20 years: Marriage costs, Rs. 10,00,000
After 25 years: Potential medical expenses, Rs. 10,00,000
After 30 years: Retirement, Need to have corpus of Rs. 30,00,000
Discount all these amounts by inflation of 6% a year.
4. The Investment Plan Recipe
Now's the time to act. You need to increase your network every single year to reach your goals. Your immediate goals for the next ten years are to build up a corpus for your child's education, and to clear out your loans. Always pay out your first house loan - that is the house you live in, so you must attempt to make that debt free. Further real estate can be financed by loans etc.
To finance the above goals, you have a sum of Rs. 10,500 a month, of which you invest Rs. 3,000 per month (say) in the principal of your housing loan. The remaining Rs. 7,500 must be invested.
What do you need? Here's an illustration:
After 5 years: School Donation for Child, Rs. 100,000
After 10 years: House repairs and upgrades, Rs. 10,00,000
After 15 years: College fees for Child, Rs. 10,00,000
After 20 years: Marriage costs, Rs. 10,00,000
After 25 years: Potential medical expenses, Rs. 10,00,000
After 30 years: Retirement, Need to have corpus of Rs. 30,00,000
Discount all these amounts by inflation of 6% a year.
4. The Investment Plan Recipe
Now's the time to act. You need to increase your network every single year to reach your goals. Your immediate goals for the next ten years are to build up a corpus for your child's education, and to clear out your loans. Always pay out your first house loan - that is the house you live in, so you must attempt to make that debt free. Further real estate can be financed by loans etc.
To finance the above goals, you have a sum of Rs. 10,500 a month, of which you invest Rs. 3,000 per month (say) in the principal of your housing loan. The remaining Rs. 7,500 must be invested.
What do you need? Here's an illustration:
The idea is that:
1) You get 20% on the first 10 years of investment and you increase the quantum of investment per month every five years.
2) After ten years you move money to less risky investments and get lesser return, and this goes on.
3) Every five years you withdraw the amount of money needed to finance your needs.
4) After thirty years you are left with about 3 crores, which will most likely be just enough for your current expenditure for a while.
This is an investment goal. You can see where your goals like and try to achieve them. Update your networth statement once a month, and estimate your free cash flows every three months. That way you are aware of how close you are to your immediate goals and whether you are making it or not.
1) You get 20% on the first 10 years of investment and you increase the quantum of investment per month every five years.
2) After ten years you move money to less risky investments and get lesser return, and this goes on.
3) Every five years you withdraw the amount of money needed to finance your needs.
4) After thirty years you are left with about 3 crores, which will most likely be just enough for your current expenditure for a while.
This is an investment goal. You can see where your goals like and try to achieve them. Update your networth statement once a month, and estimate your free cash flows every three months. That way you are aware of how close you are to your immediate goals and whether you are making it or not.
Are you saving or investing?
There are two kinds of people, really - those who have extra money left over at the end of the month, and those who don't.
I'm assuming you're one of the former, otherwise you shouldn't even be here. So what do you do with what's left over?
1) Do you put it in a bank account, and spend it whenever you have a big purchase like an LCD TV, an iPod, a camera?
I'm assuming you're one of the former, otherwise you shouldn't even be here. So what do you do with what's left over?
1) Do you put it in a bank account, and spend it whenever you have a big purchase like an LCD TV, an iPod, a camera?
2) Do you make a fixed deposit every month (or once you have a large sum)?
3) Do you buy mutual funds, shares, or other investments?
1) is a Saving. 3) is an Investment. 2) is "saving" according to me (but others will think of it as an investment) There's a difference.
An Investment is where you can grow your money significantly above inflation, after tax is applied. Remember that quoted inflation is around 5% but for real terms, it's around 6.5% a year. That means your money needs to grow ABOVE That for any real returns. An investment MUST carry some amount of risk; assured returns are usually negative post-tax and post-inflation.
Savings are everything else. Money in the bank, in a fixed deposit, hidden in your pillow etc. Even bonds and debt mutual funds, in my opinion, are "savings" - they hardly return more than inflation post tax.
You might think "No! A fixed deposit can grow at 8% a year!" Reduce tax on that amount at 30%, you'll get 5.6% left over. That's still less than inflation of 6.5%.
Shares and equity/balanced mutual fund units are investments. They carry a large amount of risk, but have the potential to grow much more than inflation. Gold and other commodities are investments too, and so is real estate, paintings (art) etc.
Within investments you have two types: cash-flow and value-appreciation. Cash-flow means you get money ever so often; royalties from books, dividends, rent (from real estate) etc. Cash-flow income is usually called "passive income"; meaning you don't have to work for it.
Value appreciation is growth in the intrinsic value of what you buy. (Note: Cars, iPods etc. are not investments. They lose value from the minute you buy them!)
Most people usually buy for value appreciation, since there are limited cash-flow options available. In India for instance, both dividends and rents are around 3% post-tax, and that's no fun. But there are a few companies that consistently give 10% dividends, and places where you can get upto 7% as rents. You just have to look harder.
Investments are your future. Savings are your present. Straddle the two - keep around 40-60% of your money in investments and the rest in savings. You need your savings to build up your purchases and pay extraordinary bills (like a pregnancy or hospitalisation), but don't forego your investments either.
If you want to ensure a stable future, invest more.
1) is a Saving. 3) is an Investment. 2) is "saving" according to me (but others will think of it as an investment) There's a difference.
An Investment is where you can grow your money significantly above inflation, after tax is applied. Remember that quoted inflation is around 5% but for real terms, it's around 6.5% a year. That means your money needs to grow ABOVE That for any real returns. An investment MUST carry some amount of risk; assured returns are usually negative post-tax and post-inflation.
Savings are everything else. Money in the bank, in a fixed deposit, hidden in your pillow etc. Even bonds and debt mutual funds, in my opinion, are "savings" - they hardly return more than inflation post tax.
You might think "No! A fixed deposit can grow at 8% a year!" Reduce tax on that amount at 30%, you'll get 5.6% left over. That's still less than inflation of 6.5%.
Shares and equity/balanced mutual fund units are investments. They carry a large amount of risk, but have the potential to grow much more than inflation. Gold and other commodities are investments too, and so is real estate, paintings (art) etc.
Within investments you have two types: cash-flow and value-appreciation. Cash-flow means you get money ever so often; royalties from books, dividends, rent (from real estate) etc. Cash-flow income is usually called "passive income"; meaning you don't have to work for it.
Value appreciation is growth in the intrinsic value of what you buy. (Note: Cars, iPods etc. are not investments. They lose value from the minute you buy them!)
Most people usually buy for value appreciation, since there are limited cash-flow options available. In India for instance, both dividends and rents are around 3% post-tax, and that's no fun. But there are a few companies that consistently give 10% dividends, and places where you can get upto 7% as rents. You just have to look harder.
Investments are your future. Savings are your present. Straddle the two - keep around 40-60% of your money in investments and the rest in savings. You need your savings to build up your purchases and pay extraordinary bills (like a pregnancy or hospitalisation), but don't forego your investments either.
If you want to ensure a stable future, invest more.
Key check:
1) It should "appreciate" in value (either through cash flow of value appreciation)
2) It should have an element of risk.
3) It should have the ability to grow more than inflation.
The fundamentals of Asset Allocation
Doesn't Asset Allocation (AA) sound sophisticated? It assumes you have an asset to allocate and gives a boost to your ego. It's a smart and sexy word for something as drab and dreary as planning your personal finances. Asset allocation also gives you a feeling that you are holding some aces up in your sleeves. It specially applies to the Financial Planners or Advisors.
But seriously, asset allocation is a useful concept to know. And it's very simple too. Once you get your fundamentals clear about AA, you can use it to your advantage. It is the first step of adding value to your money or putting your money to good use.
Asset allocation is the percentage distribution of your money into equity, debt and liquid instruments. Equity, as you know, gives the highest growth but comes with the highest risk. Debt instruments are more or less guaranteed but give you a lesser return. Liquid money is your money in your savings account.
Let’s start with the thumb rule of AA. Your allocation to debt should be equal to your age. And as you age, the percentage in debt should increase too. In other words, your investments in equity should be (100 - your age).But AA should be much more dynamic than the above thumb rule. I feel that it should depend on your age and your risk appetite. Guys at 20-25 years of age may want to invest everything into equities and I think that is the right strategy.
And before you set off to do some AA for yourself, I would like you to ask the following questions to yourself:
What is your risk appetite? I mean if you are jittery with the slightest tremor in the stock market, you better be away from the stock market. Even though, stocks give the best returns on a longer run.
What are your financial goals? For example, if you believe in frugal approach to life and give a thumbs up to "Simple living, High thinking", you don't need to set very high goals with your money. In the other case, you may have to align the allocation to your goals.
When do you need the money? Is it for the car you want to buy in another 2-3 years? Or is it for the dream house 10 years from now? Ask yourself and then decide your asset allocation.
And if you love ready made formulas, here's some allocation strategies from John Bogle:Older investor in distribution phase: 50% equity; 50% debtYoung investor in distribution phase: 60% equity; 40% debtOlder investor in accumulation phase: 70% equity; 30% debtYoung investor in accumulation phase: 80% equity; 20% debt
The accumulation phase means the period when you have no use for the money and are focussed on building it on. In the distribution phase, you are also using your assets for your goals.
All said and done, AA can contribute to your financial prosperity in a big way. Studies have pointed out that the asset allocation decision is more important than the process of choosing the actual stocks, funds and even market timing. In other words, if you just replace active picks with simple asset allocation decisions, it will work just as well as, if not even better than, professional fund managers.
Do your allocations now.
But seriously, asset allocation is a useful concept to know. And it's very simple too. Once you get your fundamentals clear about AA, you can use it to your advantage. It is the first step of adding value to your money or putting your money to good use.
Asset allocation is the percentage distribution of your money into equity, debt and liquid instruments. Equity, as you know, gives the highest growth but comes with the highest risk. Debt instruments are more or less guaranteed but give you a lesser return. Liquid money is your money in your savings account.
Let’s start with the thumb rule of AA. Your allocation to debt should be equal to your age. And as you age, the percentage in debt should increase too. In other words, your investments in equity should be (100 - your age).But AA should be much more dynamic than the above thumb rule. I feel that it should depend on your age and your risk appetite. Guys at 20-25 years of age may want to invest everything into equities and I think that is the right strategy.
And before you set off to do some AA for yourself, I would like you to ask the following questions to yourself:
What is your risk appetite? I mean if you are jittery with the slightest tremor in the stock market, you better be away from the stock market. Even though, stocks give the best returns on a longer run.
What are your financial goals? For example, if you believe in frugal approach to life and give a thumbs up to "Simple living, High thinking", you don't need to set very high goals with your money. In the other case, you may have to align the allocation to your goals.
When do you need the money? Is it for the car you want to buy in another 2-3 years? Or is it for the dream house 10 years from now? Ask yourself and then decide your asset allocation.
And if you love ready made formulas, here's some allocation strategies from John Bogle:Older investor in distribution phase: 50% equity; 50% debtYoung investor in distribution phase: 60% equity; 40% debtOlder investor in accumulation phase: 70% equity; 30% debtYoung investor in accumulation phase: 80% equity; 20% debt
The accumulation phase means the period when you have no use for the money and are focussed on building it on. In the distribution phase, you are also using your assets for your goals.
All said and done, AA can contribute to your financial prosperity in a big way. Studies have pointed out that the asset allocation decision is more important than the process of choosing the actual stocks, funds and even market timing. In other words, if you just replace active picks with simple asset allocation decisions, it will work just as well as, if not even better than, professional fund managers.
Do your allocations now.
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