Thursday, August 6, 2009

How to minimize risk in the circle of wealth

Dhan Chakra, or the circle of wealth, is a system that gives one a mind map of a life cycle of money flows and the place of various financial products in it. We looked at an Income Box, that fills due to the conversion of our labour into money. 

The surplus over all living expenses from this fills the Wealth Box, which aims to swell in size such that once we stop working, the income from this box can keep us eating till we die and then leave something over for the squabbling siblings.

Last week, we were at the point when the savings from the Income Box were moving towards the Wealth Box. But before they enter, they need to transform from cash (that loses value due to inflation and taxes) to something that will generate a surplus or grow in value after inflation and taxes are taken into account. 

It is this decision of transforming the money in the bank into a mutual fund, a stock, an insurance plan, a pension plan, gold or a plot that is one of the toughest to make. This transformation is the key determinant to how big and steady the Wealth Box will be. How soon you can stop going to work just to fill the Income Box. And whether you will travel the world at 60 or count each note and coin.

The first rule when buying a product to convert cash into a Wealth Box product: don’t buy something that throws off income today. Our human capital is still getting converted to cash, through work, and we want to hoard such that the Wealth Box is big enough to see us through our non-working silver years. This leads to a need for products that build a corpus, or a large sum of money, rather than give an immediate return.

For example, instead of a Post Office Monthly Income Scheme that gives a guaranteed return each month, a large lump sum can be converted into an instrument that will grow over the years, like an equity mutual fund or if you are zero risk, a National Saving Certificate.

Divide up the products you buy into four buckets. These are called: No-Risk, Market-Linked, Real Estate and Gold. Into the No-Risk Bucket goes your provident fund contributions (that earn 8.5% tax-free currently), public provident fund contributions (8% tax-free), any other small saving products such as National Saving Certificates. 

It is easy to recognize a zero-risk product, just find out if the return is fixed in percentage terms and the time of the investment in months or years. In a No-Risk Bucket will go products that have no surprise at the end of their lives. The usual rate of such return is 1 percentage point higher than inflation. The function of this bucket is to provide the Wealth Box with stability.

Into the Market-Linked Bucket go products such as equity, balanced mutual funds and direct stocks. These have the ability to make the box grow much faster than the products in the No-Risk Bucket. But why do we want risk at all? Isn’t it safer to be safe? 

The average return from the Indian equity market has been around 15% a year over the last 30 years. The most misguided investor, who invested at the market peak of 3 April 1992 at the height of the Harshad Mehta bull rally, is up an average annual 8%, and this is not taking into account dividends. 

And a person who has regularly put in Rs1 lakh each year into the Sensex for the last 20 years is looking at a corpus of Rs1.3 crore today. But we got to hold our money and faith for at least 10-12 years for equity to give its return kicker. 

For direct stock pickers, the returns can be much higher or much lower. The safer way to fill the Market-Linked Bucket is to stick to broad index-linked products, so that the risk due to too few stocks is removed and since an index will always hold some of the best companies of a market, and the return stream is fairly predictable.

The Gold Bucket is small. It does not take more than 10% space in the Wealth Box. Its chief purpose is to keep a small liquid fund of money that is free from the risk of inflation. So you can add it to your Risk-Free Bucket, except that, for Indian families, this could be the pool that will fund the gold that our big fat weddings consume. Instead of gold coins or even chains, buy gold exchange-traded funds—they are cheaper, safer and much more liquid. 

The Real Estate Bucket remains tinted with black in India. The high transaction costs, understated property values and laborious legal system makes real estate as investment a messy asset to have in your box. Unless you are able to deal with the high transaction costs in terms of money and time, keep the bucket filled with the one house that you live in.

The size of the buckets and how steadily we fund them will determine the size of our Wealth Box when we quit working. At that point, the corpus is used to buy income-generating financial products that keep the Income Box tinkling and our cappuccinos coming. Maybe with no sugar now!

Source: http://www.livemint.com/2009/08/04222453/How-to-minimize-risk-in-the-ci.html?h=B

It's raining PSU funds

Govt's divestment plans encourage funds to bet big on state-owned firms.

The government’s plan to divest its stake in public sector undertakings (PSUs) is encouraging fund houses to launch PSU funds. Some mutual funds have already launched and some others are in the process of launching PSU-dedicated schemes.

For instance, Shinsei Mutual Fund has recently launched a PSU Bond Fund, which will invest in a portfolio of debt and money-market securities issued by PSUs and nationalised banks.

Similarly, Religare Mutual Fund has filed its offer document with the Securities and Exchange Board of India (Sebi) to launch Religare PSU Equity Fund, an open-ended scheme. SBI Mutual Fund is planning to launch a similar fund by the end of this financial year.

“Our plan to launch a PSU fund was based on the proposed disinvestment plan as well as investments in the core sector, as most of the bank, energy and infrastructure stocks were of PSUs. While in the last five years, PSU stocks have underperformed, over a 10-year period, they have outperformed the index,” said Saurabh Nanavati, CEO, Religare Mutual Fund.

Religare’s PSU Equity Fund will have the Bombay Stock Exchange (BSE) PSU index as its benchmark. It will invest in companies in which the Central or state governments have a majority stake, or the management control. The scheme, which is expected to be launched by September, will invest a minimum of 65 per cent of assets in the stocks of PSU Index, and a maximum of 35 per cent in PSU companies outside the index. The maximum exposure to non-PSU companies will be 20 per cent, while 35 per cent will be in debt and money-market instruments.

SBI Mutual Fund is also drawing up plans for a PSU-focused fund, and hopes to launch it this financial year. “We are working on a PSU fund, and hope to launch it this financial year after we have internal and Sebi approvals,” said an SBI Mutual Fund official.

UTI Mutual Fund was the first fund house to launch a scheme in the PSU space –UTI Mastergrowth Unit Scheme – in January 1993. It was renamed as UTI Top 100 Fund.

The government is expected to kick-start its disinvestment programme with the initial public offer (IPO) of National Hydroelectric Power Corporation (NHPC) in August, followed by Oil India and other PSUs.

In June, a Morgan Stanley report said if the government reduced its stake across all PSUs, both listed and unlisted, to 51 per cent, it could potentially raise $163 billion. “We expect divestments of around $4-5 billion in FY10, which would give the government some flexibility on the fiscal front,” the Morgan Stanley report pointed out.

According to the latest Economic Survey, the government should sell a minimum 10 per cent stake each in all unlisted public sector enterprises. The Survey recommended a disinvestment target of Rs 25,000 crore annually.

Source: http://www.business-standard.com/india/news/its-raining-psu-funds/365931/

MF assets rise 2.8% in July, slowest in 4 months

The mutual fund industry’s growth in July was the lowest in the last four months. Average asset under management (AAUM) of the industry grew a mere 2.8 per cent, or Rs 19,000 crore, to Rs 6.9 lakh crore in the month, according to data from the Association of Mutual Funds in India (Amfi).

Lack of fresh inflows into equity schemes led to the slowdown, felt industry experts. The growth in the AAUM of equity funds was mainly because of the rise in stock markets. There were hardly any inflows into new fund offerings (NFOs), which were launched to pre-empt the ban on entry load from August 1. The Sensex rose 8 per cent in June.

Among the top five funds, HDFC Mutual Fund witnessed the highest growth rate of 6.6 per cent. ICICI Mutual Fund’s and Birla Sunlife Mutual Fund’s grew 4.5 per cent and 1.9 per cent, respectively.

Reliance Mutual Fund, the largest fund house, saw a marginal growth of Rs 202 crore to Rs 1,08,334 crore. HDFC Mutual Fund’s assets rose to Rs 83,366 crore, ICICI Prudential Mutual Fund’s AAUM rose to Rs 73,328.56 crore and Birla Sunlife’s rose to Rs 57,331.78 crore.

UTI Mutual Fund was the only fund house to register a decline in AAUM. Its assets fell by 1 per cent to Rs 67,251 crore.

Among the total of 38 funds, Edelweiss Mutual Fund registered the sharpest growth of 51.63 per cent to Rs 67.91 crore, whereas Religare Mutual Fund’s assets jumped 22 per cent to Rs 12,239 crore.

source: http://www.business-standard.com/india/news/mf-assets-rise-28-in-july-slowest-in-4-months/365936/