How to review your mutual fund investment?

Arvind Bansal of ING Investment Management says the key to having a good 2009 is knowing when & how to review your mutual fund investment strategy:

If your mutual fund investment is yielding a lower return than you anticipated, you may be tempted to cash in your fund units and invest your money elsewhere. The rate of return of other funds may look enticing, but be careful: there are both pros and cons to the redemption of your mutual fund units. Let's examine the circumstances in which liquidation of your fund units would be most optimal and when it may have negative consequences.

Mutual Funds are not stocks

The first thing you need to understand is that mutual funds are not synonymous with stocks. So, a decline in the stock market does not necessarily mean that it is time to sell the fund. Stocks are single entities with rates of return associated with what the market will bear. Stocks are driven by the "buy low, sell high" rationale, which explains why, in a falling stock market, many investors panic and quickly dump all of their stock-oriented assets.
Mutual funds are not singular entities; they are portfolios of financial instruments, such as stocks and bonds, chosen by a fund manager in accordance with the fund's mandate. An advantage of this portfolio of assets is diversification. There are many types of mutual funds, and their degrees of diversification vary. Sector funds for instance, will have the least diversification, while balanced funds will have the most. Within all mutual funds, however, the decline of one or a few of the stocks can be offset by other assets within the portfolio that are either holding steady or increasing in value.
Because mutual funds are diverse portfolios rather than single entities, relying only on market timing to sell your fund may be an ineffective strategy since a fund's portfolio may represent different kinds of markets. Also, because mutual funds are geared toward long-term returns, a rate of return that is lower than anticipated during the first year is not necessarily a sign to sell.

When Your Fund Changes

Do keep in mind that even if your fund is geared to yielding long-term rates of returns, that does not mean you have to hold onto the fund through thick and thin. The purpose of a mutual fund is to increase your investment over time, not to demonstrate your loyalty to a particular sector or group of assets or a specific fund manager. Kenny Rogers once said, "The key to successful mutual fund investing is "knowing when to hold 'em and knowing when to fold 'em".

The following four situations are not necessarily indications that you should fold, but they are situations that should raise a red flag:

• Change in Fund Manager: When you put your money into a fund, you are putting a certain amount of trust into the fund house & fund manager’s expertise and knowledge, which you hope will lead to an outstanding return on an investment that suits your investment goals. 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. One should always invest in process-driven fund houses; this is a more reliable way of investing than betting on star fund managers.
• If the prospectus states that the fund's goal will remain the same, it may be a good idea to watch the fund's returns over the next year. For further peace of mind, you could also research the new manager's previous experience and performance.
• Change in Fund Strategy: If you researched your fund before investing in it, you most likely invested in a fund that accurately reflects your financial goals. If your fund manager changes the investment mandate that do not reflect the mutual fund's original goals, you may want to re-evaluate the fund you are holding. For example, if your small-cap fund starts investing in a few medium or large-cap stocks, the risk and direction of the fund may change. Note that funds are typically required to notify shareholders of any changes to the original prospectus.
• Additionally, some funds may change their names to attract more customers, and when a mutual fund changes its name, sometimes its strategies also change. Remember, you should be comfortable with the direction of the fund, so if changes bother you, 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).
• Change in Fund Performance: If the mutual fund returns have been poor over a period of less than a year, liquidating your holdings in the fund may not be the best idea since the mutual fund may simply be experiencing some short-term fluctuations. However, if you have noticed significantly poor performance over the last two or more years, it may be time to cut your losses and move on. To help your decision, compare the fund's performance to a suitable benchmark or to similar funds.
• 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).

When Your Personal Investment Portfolio Changes Besides changes in the mutual fund itself, other changes in your personal portfolio may require you to redeem your mutual fund units and transfer your money into a more suitable portfolio. Here are two reasons which might prompt you to liquidate your mutual fund units:

• The need to rebalance your portfolio - If you have a set asset allocation model to which you would like to adhere, you may need to rebalance your holdings at the end of the year in order to return your portfolio back to its original state. In these cases, you may need to sell or even purchase more of a fund within your portfolio to bring your portfolio back to its original equilibrium. You may also have to think about rebalancing if your investment goals change. For instance, if you decide to change your growth strategy to one that provides steady income, your current holdings in growth funds may no longer be appropriate.
• Need a tax break - If your fund has suffered significant capital losses and you need a tax break to offset realized capital gains of your other investments, you may want to redeem your mutual fund units in order to apply the capital loss to your capital gains.

Conclusion:

Selling a mutual fund isn't something you do impulsively, without a great deal of thought and consideration. Remember that you originally invested in your mutual fund because you were confident in it, so make sure you are clear on your reasons for letting it go. However, if you have carefully considered all the pros and cons of your fund's performance and you still think you should sell it, do it and don't look back. Before you press the sell button, take stock of the tax implications and exit loads, if any. And given that market movement are random and not in the hands of the investors, don't try to time your exit.

Source: http://www.indiainfoline.com/news/innernews.asp?storyId=110537&lmn=1

Investors put in over Rs 1.23 lakh crore, mostly in fixed plans

Mutual fund investors put in more than Rs 1.23 lakh crore into various schemes in July -- the second biggest infusion in a month this fiscal -- mainly in fixed income plans.
The Association of Mutual Funds of India (AMFI)in a monthly report said at the end of July, investors had put in funds worth Rs 1,23,679 crore. The maximum of infusion of funds was in fixed income plans.
This is the second biggest inflow in the fiscal 2009-10 after the Rs 1,54,192 crore investment in April.
The MF industry had witnessed outflows worth Rs 83,937 crore in June, after two consecutive months of inflows, which analysts believe was mainly on the back of a heavy pull-out by banks.
At the end of July, fixed income plans with assured annual returns, saw a maximum investment of Rs 95,764 crore, followed by liquid or money market funds which have a higher liquidity and a short maturity period, that saw inflows worth Rs 24,698 crore.
Besides, equity funds investing in stocks attracted investments worth Rs 4,232 crore.
"The banks can better anticipate the interest rate scenario in the country and accordingly they change their investment strategy," Taurus Mutual Fund Managing Director RK Gupta said.

Source: http://economictimes.indiatimes.com/Investors-put-in-over-Rs-123-lakh-crore-mostly-in-fixed-plans/articleshow/4877326.cms

For small investor, has golden age arrived or is it still waiting in wings?

The countdown to India’s 63rd Independence Day has begun and what could be a better time than this to get into retrospection mode. We at SundayET have always been a step ahead when it comes to the small investor’s interest - in other words your interest. And this time, we decided to try and figure out if the small investor in India had really arrived big time, as is sometimes made out to be, or are some of the myths around Dalal Street more hype and hoopla? Has the golden age actually started for the Indian small investor - or is it waiting in the wings? How far away are we from financial freedom?
At first sight, it surely seems that retail investors have things cut out for them and life was never so good. From mutual fund investments to putting money in stocks, buying an insurance policy, buying or investing in real estate or filing tax returns, all the deals that one can possibly think of are simple and painless. However, the flip side is that this is just the beginning and a lot remains to be done. In fact, investors can and should expect better facilities and new products for investment and risk management going forward.
Looking for landmarks that have helped play out the freedom theme for Indian investors - the recently launched new pension scheme (NPS) immediately comes to mind. It has brought cheer to many private sector employees, since now they too can avail themselves of pension facilities, which were earlier available only to government employees.
In fact, one of the most important reasons for seeking out jobs in the government sector was the assured pension that would come after retirement. But now, any citizen of India can invest in this product to help secure their old age. There were several pension funds in the market such as public provident fund (PPF) and employee provident fund (EPF) and numerous other schemes offered by mutual funds and insurance companies.
But the problem with those was that the returns from PPF and EPF are relatively lower and schemes offered by mutual fund and insurance companies are costlier than NPS. NPS is a more efficient product and gives the freedom to investors to participate both in equity and debt markets depending on their risk profile. The flip side to it is that the returns are taxable and since, there is not much incentive for distributors, the benefit may remain confined to a few informed investors only.
Moving to the stock market - there’s been a sea change there in the last few decades, which is all about more power to the investors. Now there’s freedom from floor trading and physical share certificates. In fact, the very hallmark of Dalal Street - where brokers bought and sold shares by out crying - is, as we all know, a thing of the past.
Flashback to those days - the major difficulty that investors faced was to sell or buy at a particular price. The prices kept changing and one couldn’t sell all shares at a given price. Brokers used to take a long time to execute the complete trade in case the quantity was big - due to lack of liquidity. After the execution of trade, investors had to wait for a month for the share certificate. And then they also faced hassles regarding the transfer of ownership as investors needed to affix transfer stamps and then had to send them to the respective registrar & share transfer agents.
Investors had no option but to wait for around a month again for ownership transfer to happen. So surprise really that many investors, preferred to put money in fixed deposits rather than investing in shares. The average transaction time was more than a fortnight. Investors could not buy single shares as the lot sizes were higher and generally, used to be in the range of 50 to 100 shares.
Of course all that is history, today it’s electronic trading. National Stock Exchange was first one to go electronic. Investors have the freedom to buy or sell from anywhere with the help of the Internet. In fact, the impact cost has also come down substantially. Investors no longer need to struggle with share certificates as all the shares are in electronic form. And best of all, overall cost of transaction in India is probably the lowest in the world. Welcome to the world of demat!
Why is it then that every small investor is not jumping into the equity bandwagon. More than 3/4th of the trading is done by corporates and high net worth individuals and there is not much participation from retail investors. There is need for more depth and more participation from retail investors. While the move to bring down promoters’ holding to at least 75% will increase the float, it is not yet clear when that will actually happen.
According to Anup Bagchi, ED at ICICI Securities, investors have got freedom in terms of available instruments and easy and convenient transaction. The overall cost has also come down. Going forward many new instruments will come, which will help in better risk management.
While equity has become a buzzword among small investors, the Indian debt market remains shallow. Although, government bonds are liquid to a great extent but there is not enough trading volume as far as the corporate debt market is concerned. The total turnover of the Indian corporate debt market in the Bombay Stock Exchange was merely around Rs 6 cr on August 6, 2009, against a turnover of around Rs 7,000 in the equity category.
In fact, there is no direct participation from retail investors in the debt market as the ticket size is very high. Most of the time bonds are issued though private placement and in general participants are either high net worth individuals or institutional investors. Thanks to the debt mutual funds, retail investors have the freedom to participate in the debt market, however, indirectly. Going forward more debt instruments have to be launched to ensure direct participation of retail investors.
Remember the days of the stranglehold over the market by UTI Mutual Fund? MF investors have surely come a long way. They have seen the journey from a monopoly to more than a dozen asset management companies today. It was only in the 1990s, when private sector companies were allowed to set up shop to provide services, that the monopoly of UTI ended after more than two decades.
In the latter half of the 90s, mutual fund companies started giving account statements, these statements used to take months to reach to investors. Also, it used to take a fortnight for a dividend cheque to come to the investor. Investor awareness about the scheme was very limited as there was no offer document and periodic portfolio disclosure. Thanks to the Securities & Exchange Board of India (Sebi), which later made it mandatory to disclose the portfolios regularly.
In fact, the current move by Sebi - that mutual fund investors are not required to pay an entry load but have the freedom to decide the commission of distributor based on the quality of service that distributors give - has given more freedom to mutual fund investors. According to Jaideep Bhattacharya, chief marketing officer at UTI Mutual Fund, investors have got a lot of freedom during the last few years in terms of transparency and cost, however, such independence is only available in the mutual fund industry.
Going forward, experts think that there are lot many things to be done in the mutual fund industry. According to Piyush Surana, CEO at Shinsei Asset Management Company, the industry needs to grow from just selling products to selling solutions. It has to be a need based solution provider.
Like mutual fund, the life Insurance industry has scripted a similar story. Until recently it was a one-company industry. Life Insurance Company was the only player. Now investors are spoilt for choice and have options to buy an insurance policy from 22 insurance companies. According to G V Nageswara Rao, MD & CEO at IDBI Fortis Life Insurance, there has been drastic reduction in the cost.
The recent move of Insurance and Regulatory Development Authority on capping the total cost in ULIP to 300 basis points of the gross return will further make the industry cost competitive and beneficial for customers. Going forward investors can expect more simplified and convenient operational and sales process and hence the cost will be even cheaper.
As far as tax planning is concerned, although it is difficult to get freedom from paying taxes, but over a period of time rates have come down and exemption limits have gone up. For instance, now income up to Rs 1.5lakh is exempt, which was merely Rs 1lakh a couple of years back. Also, no longer its just investments in insurance and public provident fund give tax benefit but investors have several other options, such as equity linked saving schemes, ULIPs, NPS and FDs, to choose from.
No longer does one need to stand in queue but can file their tax returns online through e-filing. However, the system has to improve further as it takes a long time in getting the money back in case someone has paid more than the actual tax liability.
Buying and investing in real estate was also not so easy before. In fact, the focus on affordable segment by real estate developers and government has ensured there must be a house in every range. Until a year back, housing prices were starting from Rs 15 to 20 lakh, currently there are several projects, which assure to provide home at a price, which is as low as Rs 5 to 7 lakh.
Also, with many Internet sites coming into play it is easier to get virtual tours of the residences. The transaction time has also come down. While over the years investors have been empowered and given more freedom, yet a lot remains to be done, to give them full financial freedom.

Source: http://economictimes.indiatimes.com/articleshow/4872906.cms?flstry=1