Following own rule while investing in equities 'suicidal'

A couple of years ago, hopes were high that a large chunk of household savings, which account for nearly two-third of all domestic savings in India, will find its way to the stock market through mutual funds, insurance companies and banks.
Investments in shares and debentures by households grew at a rate of 149% a year during FY 2005-07 as mutual funds and unit-linked insurance policies made rapid inroads in urban India. In FY08 the stock market absorbed nearly 12% of all household savings in India, up from less than 1% in FY04.

The basic rule for investment in equities is to buy securities when the equity market is falling. But every time the market crashes,retail investors rush out of the market, creating a stampede and hurting themselves so badly that many wouldn’t want to return ever. This gives equities a bad name and restricts the upside potential for retail investors.
Take the case of the market turmoil in Jan’ 08 and the free fall since then. This induced individual investors to flee to the safety of traditional investment avenues like bank deposits, insurance polices and cash and household savings in shares and debentures declined by 78% in FY09 against the average growth of 71.5% in previous three years. But actually they had missed a golden opportunity.
The Sensex had stabilised at around 8000 in November 2008 and hovered around this level till mid-March .

The signs of recovery and improved global liquidity reversed the trend in equity market to northward since mid-March ’09. The Sensex nearly doubled in less than six months. And guess what, retail investors are back in Dalal Street. The rising retail participation is evident from the rising assets under management of the equity mutual funds, which have grown from Rs 1,01,000 crore in Feb ’09 to Rs 1,81,000 crore by the end of Aug ’09.
But now, most of stocks comprising Sensex and Nifty have nearly doubled in the last six months and their valuations look stretched. Obviously, with each rise in the market, the chances of making a loss is higher than making a gain. In contrast, during the 2008 meltdown, the chances of a bottoming out was greater than a further fall.

So, if one decides to enter the equity market now, the returns are likely to be at best modest given the fact that most stocks are near their year highs while some have touched all time highs.
Then there are concerns on account of underlying inflationary pressure and a strong likelihood of a monetary tightening by the central bank. This may drag the equity markets down. If this happens, retail investors may book a loss and equities will again get a bad name.
Investors should not forget that booms and busts cycles are an integral part of equity markets and if one plays these cycles smartly, she can generate long-term wealth and prosperity. Big corrections are actually a buying opportunity.

Source: http://economictimes.indiatimes.com/quickiearticleshow/5007798.cms

Lessons from the world financial crisis

(D. H. Pai Panandiker is President of RPG Foundation. The views expressed in this column are his own)
By D. H. Pai Panandiker
The collapse of Lehman triggered the world financial crisis this time last year. Stock markets crashed; credit was frozen and banks were scurrying for cash; crude oil prices dipped and gold prices shot up; investment shrank.
Finally, the financial crisis translated into recession with severe loss of employment and income. With the inter-linking of economies no country escaped these drastic consequences.
India was hit badly but avoided recession. Nevertheless growth dropped and is yet to recover. FIIs repatriated more than $13 billion and deepened the fall in stock prices.
Sensex plunged 62 per cent, much more than Dow Jones. The RBI had to draw down reserves. The rupee fell 20 per cent, industrial production declined and exports slumped.
Indian banks, except probably two, did not have exposure to sub-prime debt since they did not have much international business. Besides, the regulations of RBI did not permit excessive debt:equity ratio. Hence Indian banks were largely unaffected.
The international crisis prompted the Indian Government to act. That was more to avert recession than to back up the financial system.
Stimulus packages were introduced mainly aimed at increasing demand by reducing excise duties and increasing investment in infrastructure. The RBI did pump in liquidity with cuts in CRR, SLR, and the repo and reverse repo rates. Recovery has started but progress is slow.
There are lessons to learn from the crisis and new initiative to be taken.
First, with large infusion of cash by Federal Reserve, it is likely that the dollar will weaken in future against other currencies. RBI has a large part of its foreign exchange reserves in dollars and should therefore change the composition of reserves in favour of the euro and gold.
Second, although most banks are owned by Government, they should be financially sound on their own. Therefore the capital base of banks has to be sound and conform to the new Basel standards. Banks should be modernized and to attain economic size through mergers.
Third, financial supervision has to be strong. That also requires that there should be coordination among the concerned agencies like the RBI, fiscal authorities, Sebi, etc.
Fourth, regulation should go hand in hand with innovation of financial instruments. The financial crisis was to a large extent spurred by financial instruments like Collateralized debt obligations (CDO).
Fifth, RBI should keep constant watch on liquidity requirements. The financial system in the U.S. would have collapsed but for the timely release of cash by Federal Reserve. The measures taken by RBI were a little too late.
Sixth, Government should curb fiscal deficit to ease pressure on the market and continue to take steps to open up the economy, whether in respect of trade, convertibility of the rupee, external commercial borrowing and foreign investment, since the benefits would be much more than the safety of a closed system.
It appears that the worst is now over and the salvage operations are complete. It is time to reform the system to enable it function smoothly and efficiently under good supervision.

Source: http://in.reuters.com/article/economicNews/idINIndia-42327820090909?sp=true

Mutual funds: When small is beautiful

Does fund size affect the performance of equity mutual funds? A recent working paper at the Yale School of Management involves an empirical study in the Indian context. It’s notable as the principle of ‘economies of scale’ is not an exception to the realm of finance and investment. The study aims to ascertain the degree or extent of relationship between fund size and actual performance when it comes to returns on asset management. The research reveals rather surprising results for Indian mutual funds.
The mutual funds industry in India had assets worth over Rs 7 lakh crore under management as of July 2009 with the bulk of it in debt funds. There are now 36 asset management companies (AMCs) in the MF ‘space’. Meanwhile the regulator, Sebi, has mandated doing away with the levy of ‘entry loads’ for MF investors. It is distributors who have traditionally pocketed the ‘load’ as commission. So, AMCs would need to figure out innovative marketing and perhaps also hand out “out of pocket” commissions for product distributors. The correlation between fund size and returns is seen as relevant because when a corpus is sufficiently large, the fund managers involved would likely have the necessary liquidity and flexibility for timing investment decisions and stock selection. Additionally, size has the added advantage of reducing transaction costs by resorting to bulk ‘buys’. The paper uses data of a three-year period: April, 2006 to April, 2009. Also, while the total number of open-ended equity/growth funds totalled 244, the sample size chosen was 22, with a mix of micro, small, medium and large-size funds. Next, the net asset values of the select equity funds were worked out for the first trading day of each quarter of the 3-year period for computing the return (CAGR), risk and return per unit of risk and risk adjusted return (Sharpe Ratio) of the funds.
The actual fund sizes varied from Rs 9.57 crore to Rs 2,472.36 crore. The funds labelled ‘micro’ had less than Rs 100 crore under management; those characterised ‘small’ had a corpus of less than Rs 500 crore; medium pertains to less than Rs 1,500 crore; and large-size funds were those with up to Rs 2,500 crore under management.
In the paper, the concept of momentum (mass*velocity), a popular concept in physics and mechanics, has been incorporated to engineer a new concept termed ‘fund momentum’ construed as the product of fund size and CAGR.
The results of the study suggest that all the performance parameters such as return, risk, return per risk, return per fund size and Sharpe Ratio were found to be negative. But then, overall the stock market returns for the period under study was negative. From econometrics testing of the hypothesis, it is clear that the correlation coefficient of fund size and performance variables are ‘not significant.’ So there’s no ‘conclusive evidence’ in the paper that fund size affects performance of equity/growth funds, whether they are micro-, small-, medium- and large-sized funds. Further, the variances between fund size and performance variables show that barring risk, the other three parameters–return, return/risk and Sharpe Ratio–move together in the same direction and the values are seen as ‘random’ and no conclusive evidence may be drawn about fund size and performance of equity/growth funds across the size range.
Besides, the small-sized funds seem to have performed better than micro-, medium- and large-sized funds in terms of return per risk and risk adjusted return. The Weighted Average Momentum (WAM) of the small-sized funds was found to be the second best after that for micro-sized funds which, anyway, added up to a mere 2.02% of the total fund size of equity/growth funds. Hence the paper considers the performance of small-sized funds as the best in terms of WAM. As for the medium- and large-sized equity/growth funds, they were quite unable to outperform the overall stock market in terms of returns. So when it comes to mutual funds in India, ‘small’ appears to be beautiful.

Source: http://economictimes.indiatimes.com/Opinion/Jaideep-Mishra-Small-mutual-funds/articleshow/4956932.cms

Why fund investors didn’t get their timing right

“Buy low and sell high” is a lesson mutual fund investors in India continue to ignore, as trends in money flows into mutual funds over the past two years show. Flush with funds in a rising stock market until early 2008, equity funds saw new inflows dwindle in the bear market, reviving only in the recent rally.
However, the good news is that older fund investors held on patiently as NAVs fell, and reaped gains from the subsequent rally. Another key trend was some investors shifting attention to other asset classes when returns from equities fell. Gold ETFs and income funds saw steady inflows during periods marked either by uncertainty or poor performance by equities.
The tendency to chase returns rather than anticipate them appears to have taken hold of many equity fund investors over the past two years. Net inflows into equity funds (gross sales minus redemptions) peaked, with the stock market in January-2008 at Rs 12,717 crore, though some spillover effect remained with healthy inflows in the following months. However, from April onwards, fund flows dipped as the market’s free fall continued. Behind the curve

An analysis of trends in monthly equity fund flows between early 2007 and now shows that investors have been slow to react to market spikes as well as its falls. Though the equity market was buoyant from August 2007, the gush of inflows caught up only later in November. When the market corrected in January 2008, inflows continued for a few more months.
Net flows that had turned negative following the October 2008 crash, remained so till April 2009 (but for February, which reported net inflows). They resumed in full flow again in May 2009, two months into the recovery rally. These suggest that investments, more often than not, chased good performance from equity funds.
Investments picked up after equity funds put in an average holding period return of 32 per cent between August and November 2007, and 25 per cent in the two-month period between March 2009 and April 2009.
Herd mentality, the need for assurance that the investment value will not drop immediately after committing funds, and the fear of missing out on rallies appear to be the key motivating factors for retail investors in equity funds. Such a short-term approach to equities may also have limited investor participation in the current rally, as the monthly net inflows remained unimpressive throughout last year and the first quarter of the current year.
New fund offerings also garnered larger sums during bullish phases — equity NFOs in April-January 2008 saw inflows of Rs 33,191 crore — but investors appeared to have given them a wide berth during the bear phase.
Fund houses too should shoulder some of the blame for this; as new fund launches have peaked during good times. Triggered also by fewer offerings during the period, equity NFOs garnered only Rs 2,293 crore between April 2008 and March 2009.
The revival in equities since April 2009 has seen more new funds cropping up. With positive response from investors, these have collected over Rs 3,221 crore between April and July. Reluctant to pull out

However, what’s interesting is that while new money committed to funds dropped in 2008, the year did not see any significant pick-up in redemption activity. Investors preferred to remain invested in equity funds, despite a fall in, or poor performance of, the market.
While pullouts from equity funds did pick up a little after the January 2008 correction, they dwindled considerably in the months thereafter and remained low throughout 2008. Though the average NAV of diversified equity funds plunged by 55 per cent in 2008, average monthly redemption numbers stood at just Rs 3,375 crore.
Even in October, when the equity market nose-dived to new lows, investors refrained from pulling out a large chunk of their investments. Investors took out only Rs 2,652 crore in October, compared to Rs 7,536 crore in January 2008, the market peak. Another interesting sidelight is that some investors did cash out close to, though not exactly at, the market peak. Equity fund redemptions, which began to inch higher as early as May 2007, peaked in October 2007, well ahead of the market peak in January.
That the average monthly redemption stood at about Rs 6,905 crore between April-December 2007, even when equity funds notched up average holding period returns of 73 per cent, suggests that a section of investors does constantly monitor fund portfolios and book profits.
The trend appears to be gathering strength in the recent rally too. Following the broader market rally, the average monthly redemption between May and July 2009 went up to Rs 4,082 crore.

Looking beyond equities

Spurred by the need to make up for the lack of returns in equities, a section of mutual fund investors appear to have ventured beyond equity funds too. A host of other dynamics, such as higher inflation and interest rates in 2008, may also have triggered the flow of funds into other assets.
Income funds, which primarily invest in debt securities with varying maturity periods, reported net outflows in November and December 2007 (coinciding with a rising equity market). However, following the crash in equities, fund flows into income funds turned positive and remained buoyant till the Lehman Brothers collapse in September.
While it can be argued that income funds usually see participation only from the well-informed investors (such as banks and other financial institutions), retail participation in other assets is also evident from fund flows into other categories.
For instance, net inflows into gold ETFs have been rising steadily since the January 2008 crash and 2008 saw gold ETF assets expand by about 54 per cent. Investors also appear to have taken temporary shelter in low-risk gilt and liquid funds in October 2008 following the collapse of equities worldwide. Flight to safer avenues following a liquidity crunch, both domestic and global, may explain the changed stance, especially since the asset classes saw poor inflows in the earlier months.
ELSS funds too saw a change in fund patterns. Being tax-saving instruments, these funds generally tend to report peak flows toward the end of a fiscal year.
In keeping with this, while ELSS funds did report higher net flows in the four-month period between December 2007 and March 2008 (peaked in March with Rs 2,071 crore net inflows), the risk-appetite of investors appears to have fallen sharply since.
The downward spiral in equities in 2008 led to a lower quantum of net flows between January-March 2009 (Rs 547 crore in March 2009). That these funds, notwithstanding the lock-in, saw a pick-up in redemption activity in October 2008 and more recently in June 2009 also points to the reluctance of investors to lock in funds for the long term.
Overseas investing too appears to have lost its charm, what with these funds recording net outflows since October 2008. What’s more, the funds reported a significant jump in net outflows (Rs 127 crore) in May 2009, which also coincided with a broader equity rally.

Source: http://www.thehindubusinessline.com/iw/2009/08/30/stories/2009083050650700.htm

No More Entry Loads for Mutual Funds: What does it mean for you?

Changing Regulations
The recent ruling by the Securities and Exchange Board of India, SEBI, on the removal of entry load on mutual fund (MF) investments has brought appreciation as well as criticism from different corners. Last year SEBI had already done away with entry loads in cases where the investors directly invested in mutual funds without going through an agent or a distributor.
Changing regulations is not a new trend in the mutual fund industry; we have had previous rulings which seemed difficult and cumbersome to implement at the time but have been adopted by all affected parties over time. In 2001, SEBI made AMFI (Association of Mutual Funds in India) certification compulsory to sell Mutual Funds which was accepted after initial protest from distributors. Similarly, a PAN (Permanent Account Number) was made compulsory for all Mutual Fund investments in 2007 and KYC (Know Your Customer) compliance was made mandatory last year. In spite of all the objections, over time everyone has accepted the changes, adapted to them and moved on.

What does it mean financially?
With the new ruling in place, investors will be free to negotiate the commission with their distributor. Good news for some, not so good news for others. Let us have a look as to who stands to benefit ,who stands to lose and the implications of SEBI's decision for investors and financial advisors.
The below mentioned table gives an indication of the effect of the no entry load ruling on your investments:

Why do investors need help with investing decisions?
The above table is based on the assumption that there will be no loads on MFs which would be the case only if one decides to invest directly through a fund house and not through an advisor.
However, it may not be advisable for investors to go direct as:
- There are vast numbers of products/mutual fund companies/asset classes available in the market to choose from. Making the choice merits advice from a qualified professional to avoid making mistakes and be sure to be invested with products compatible with one’s goals, timeframe and risk appetite.
- Many do not have the time, expertise or inclination to research and identify the appropriate investment avenues based on his/her requirements.
- When investing on your own, it becomes difficult to take the emotion out of your investment decisions. A financial advisor would take investment decisions which would be research driven and will not involve emotion. With thousands of schemes, volatile markets (necessitating buy/sell/hold decisions) and servicing issues, investors will need the help of an advisor.

Benefits to the Industry and Investors
This new rule should be welcomed by investors and financial advisors as it reiterates the view that the Investor-Advisor relationship should be increasingly focused on the services the advisor provides through better execution, better research, and customization . It calls for bringing transparency and knowledge output into the system. Needless to say, instances of investors being misled into a transaction would decrease considerably as a result of the SEBI decision if investor education is also implemented. On the part of distributors, the decision underlines the importance to disseminate quality advice, which is in sync with the life goals of an individual. Here, financial planning gets merit over other similar services. This is a paradigm shift in the services rendered , from transaction-driven to process-oriented, and from product-centric to client-centric.
The proposed format of services is practiced by financial planners worldwide. The immediate demand on distributors is to improve their skills by understanding the impact of different mutual fund product categories based on risk, return and taxation. Recommendations need to be made from the viewpoint of an investor's goals and must be carefully analysed. The asset allocation prior to and post investing in a product should be in line with the financial goals of a client. The investment product should match the cash flow needs of a client.
These are accepted criteria, among others, that a Certified Financial Planner, certified by FPSB India, employs while recommending a product to clients. Thus, the SEBI decision calls for a complete overhaul in the way financial advisory will be delivered in future.
Charging fees directly from the client might have been looked as an obscure concept, however SEBI has dispelled all myths. The SEBI directive would also initiate other global certifications in the discipline to be established. A suitable code of ethics as well as practice guidelines should drive the relationship between investors and advisors.

Summary of Benefits
To summarize, the benefits of this ruling to investors are:

• Distributors will get a fee for their advice and hence distributors will be forced to give the right advice rather than promoting schemes, which offer them superior brokerage commissions (is it true that taking a fee will make them give right advice, is there any way to guarantee this?)
• No more churning of investors’ portfolios which many distributors used to indulge in, especially when a New Fund Offer (NFO) would be announced to earn hefty commissions without any care for your money. (However, there is a possibility of increase in churning to earn by way of the exit loads when selling is done. We’ll need to keep an eye on this)
• The relationship between the advisor and investor becomes more process-driven and customer-centric rather than transaction-based. Increase in demand for professional advice would increase competition in the advisory business and improve the quality of investment advice offered, thereby benefiting investors.
• Certification will become increasingly important in the advisory business which would mean more regulations to protect consumers & standardization of advice across the board.
  

Source: http://www.investmentyogi.com/cs/blogs/planning/archive/2009/08/21/no-more-entry-loads-for-mutual-funds-what-does-it-mean-for-you.aspx

9 mutual fund terms you should know

Many of us might know what is mutual fund, but for the interest of beginners mutual fund is an investment avenue which collects the money from the retail investors like us and then they invest that money in stocks on behalf of us by dedicated professional managers for to achieve the maximum returns. Gain or loss from the money they invested in stocks shares proportionately to all the investors. The mutual fund industry is controlled by the SEBI (Securities and Exchange Board of India).

If you have the money and willing to invest in mutual funds to gain better returns hence you can achieve your financial goals, you should know the below jargon before invest in any fund.

AMC:
Asset management company is mutual fund company that manage and invest the money collected from retail investors that match its declared financial objectives.
The beauty/advantage of investing in mutual fund is, Asset management companies provide investors with more diversification and investing options than they would have by themselves.

NFO:
New fund offer, which means new mutual fund scheme launched by the mutual fund house and asking the investors to invest in that scheme.

NAV:
The Net Asset Value is the price of a unit of a mutual fund. When fund launches , it decides the unit price of a fund. In future NAV of the fund can increase or decrease based on the fund performance. Generally NAV per unit is computed once a day based on the closing market prices of the securities/stocks in the fund’s portfolio.

Corpus:
The amount of money collected by mutual fund company from investors is nothing but corpus.
Every mutual fund start with NFO( New Fund Offer ) to collect the money from investors and fixed each unit value as 10 rupees. For example 100 investors bought 10 units each. So total money got by mutual fund company from investors is 1000 * 10 * 10 = Rs. 1,00,000.
So, here mutual fund corpus is Rs. 1,00,000. In future this corpus amount can increase or decrease as and when investor buy the units or sell the units respectively.

Portfolio:
A list of the financial assets held by mutual fund house. Take an example of SBI mutual fund to explain it in better way. SBI mutual fund collects the money from the public and invest in stocks on behalf of us. For instance, this fund collected 100 crore rupees from public and invested 50 crore rupees in stocks, 25 crore rupees in debt funds and remaining 25 crore rupees in government bonds.
So, SBI mutual fund portfolio is 50 crore rupees in stocks + 25 crore rupees in debt funds + 25 crore rupees in government bonds, which is equal to total money (i.e. 100 crore rupees) maintaining by SBI fund.

Load:
The transaction fee charged by the fund company on you when you buy or sell the units of a mutual fund.

Entry load, is the transaction fee charged on you when you buy the mutual fund units. Let’s say you are investing Rs 10,000 and the entry load is 2% and unit value is Rs 10. That means you pay Rs 200 as the entry load and Rs 9,800 is your final investment for which you will get 980 units in that fund.

Exit load, is the transaction fee charged on you when you sell the mutual fund units. Let’s say Rs 10,000 you invested initially is now grown to Rs 15,000. You are willing to sell your units at the exit load is 2%. So you pay Rs 300 and you will get Rs 14,700.
Note: SEBI(Securities Exchange Board of India) waived of the entry load when the investor invests directly in the fund.
Generally small corpus funds charge you more load and big corpus funds charge you less load. Fund houses will use the amount collected as load from us for the operational costs like, fund manager salary, advertisements, marketing etc…

AUM
Assets Under Management is the total value of all the assets currently being managed by the fund.
Let’s say the corpus is Rs 12,000 but, due to a rise in the price of the shares it has invested in, the value of the units has increased. So the Rs 12,000 invested is now worth Rs 15,000. This increased figure is referred to as AUM.
You may get confused among the terms AUM and Corpus, AUM is the value of fund investments as of date and Corpus is total investment made by investors on the fund irrespective of current value / worth.

SIP:
Systematic investment plan is the mode of investment in any mutual fund. By using SIP you need to invest fixed amount of money regularly like monthly or by monthly etc.., whichever the option you choose while investing. hence you will get the fund units accordingly.
Let’s say every month you commit to investing, say, Rs 1,000 in your fund. At the end of a year, you would have invested Rs 12,000.
If the NAV on the day you invest in the first month is Rs 20, you will get 50 units.
The next month, the NAV is Rs 25. You will get 40 units.
The following month, the NAV is Rs 18. You will get 55.56 units.
So, after three months, you would have 145.56 units. On an average, you would have paid around Rs 21 per unit. This is because, when the NAV is high, you get fewer units per Rs 1,000. When the NAV falls, you get more units per Rs 1,000.
Note: Best investment option to invest in mutual funds is through SIP.

Growth and Dividend Plan:
When an investor invests the money in any mutual fund and due to good market conditions if the fund performs well then fund unit value will be increase. At this point of time board of directors of the mutual fund can decide to share the earnings to their unit holders. So the amount allocated to unit holder by fund house is called Dividend. You are eligible for the dividend if you opt the dividend plan while making the investment in particular fund. As a result, NAV of the fund falls by the amount of dividend declared.
Example: Let’s say if the NAV of the fund is Rs 50 and the fund house declares a dividend of Rs 5 per unit, then the NAV of the fund will go down by Rs 5 i.e. new NAV becomes Rs 45.
If you opt the growth plan while making the investment in the particular fund, you did not get any dividend rather your NAV goes on increasing.
Example: Let’s say you invested Rs 1000 in fund A and 10 units allocated for you. so your unit value is Rs 100. If the NAV appreciates to Rs 120 then the worth of your 10 units now is Rs1200. So in growth plan your units remain while the worth of your investment has gone up.

Mutual fund investing mistakes to avoid

The equity markets are on the rise. New fund offers are again the rage. And once again, you are receiving solicitations from your so-called financial advisors to invest in mutual funds so that you don’t miss the boat. At times like these it's important to keep some tips in mind.

1. Invest in Funds backed by experienced Asset Management Companies and Asset Managers: If you had the choice, you’d probably go to an experienced doctor rather than someone fresh out of medical school. Same with mutual funds. Invest through an experienced asset management company and a fund manager, both of whom have operating and investment history in India.

2. Cheapest is not the best: This is probably the most common and silly mistake that investors make when investing in mutual funds. For some reason they think that a Rs 10 net asset value (NAV) is better than a Rs 20 existing fund of the same category and type because the former is cheaper.
What matters is the amount of money you are putting in. Rs 1 lakh put into a either fund will grow the same amount assuming that both funds invested in the same underlying securities. So, whether Rs 10 grows to Rs 12, a 20% increase, or Rs 20 goes to Rs 24, it’s the same thing.

3. Don’t invest in a new fund if a previous one of the same category exists: At the time of a new fund’s launch, there is a lot of hype created through advertising aimed at enticing you to invest.
However, there might be a fund of this type already existing, which might be a better option because it has had an operating history for a while, as well as proven risk management experience in that category. You are better off avoiding the new fund at launch and investing in the older fund of the same category.

4. Understand your risk appetite: Not all medicines are suited to all patients. Some patients can handle a higher dosage depending upon their age, their allergies, their size etc.
Similarly, not all mutual funds are meant for everyone. Before you invest blindly, understand the risks involved and evaluate whether you can handle the risks associated with the fund and its underlying exposure.

5. Build a strong foundation: Just like a house needs a strong foundation, so does your mutual fund portfolio. You need to make sure you have a safe and stable exposure to index funds, large cap diversified funds before you start exposing yourself to sector and industry specific funds, which are usually of a higher risk.

6. Be realistic about returns: Trees don’t grow to the sky, and neither do stock market returns. Be realistic about what returns you can expect. Your money is unlikely to double in the next two years through mutual funds, and don’t fall for the salesmanship of your advisor.

7. Give your money the chance to compound: By chopping and changing your portfolio and getting in and out of funds frequently you are disturbing the process of compounding and not giving your money the ability to grow. Be patient, even if in the short term a fund might not be doing well.

Source: http://in.reuters.com/article/personalFinance/idINIndia-41544820090805?sp=true

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

Evaluating mutual funds a research-based task

Evaluating the performance of mutual fund (MF) schemes can be a daunting task. Because the net asset value (NAV) or price of one unit of the scheme only tells part of the story as getting the return from the scheme often doesn’t make much sense. According to investment experts, even those who claim to track the performance regularly mostly get the evaluation wrong. Only a few savvy investors have figured out where to source it from—something that may seem so simple yet can be quite a task.
“Most investors look at their acquisition cost and historical return offered by the scheme. Many often go by what the MF distributors claim as returns,’’ says Amit Trivedi, a financial trainer, who runs Karmayog Knowledge Academy. “Only savvy investors go by rankings given by popular websites like valueresearch or other publications. Mostly people are interested in historical returns,’’ he adds.
That is sad news, as an investor must have a clear picture of the scheme he or she wishes to invest or sell. A wrong evaluation could lead to wrong decisions. That, simply put, means loss of money or opportunity to make money. An investment consultant says: “Recently I got a call from a client. She wanted to invest in a particular scheme. When asked why she wanted to do so, she said she saw that it had given huge returns in the last one month.’’
The consultant then checked the scheme’s performance and found that it was a perpetual laggard that had performed only in the last month—something that needed investigation. Worse, there were other schemes in the same category with consistent and superior performance. Not convinced about the sustainability of superior performance in the long run, the expert advised his client against the scheme. “This is what happens when you don’t have a complete picture,’’ he says.
But, how does one “correctly’’ evaluate the performance? According to Trivedi, if one is considering investing in a scheme, even before analysing the performance one has to find out whether the scheme matches one’s investment objective. “It is important that the scheme’s philosophy matches your investment philosophy. For instance, if your investment style is conservative, the fund manager’s investment approach should be conservative. Or vice versa.’’
The next trap to avoid would be committing the mistake of comparing the scheme with wrong schemes or benchmarks. This may sound a silly mistake to make, though it is not. “One of the most common mistake investors commit is to merely look at the returns offered by the scheme. If you don’t look at the performance in the context of the relevant benchmark or peers, the figure doesn’t mean anything,’’ says an MF manager. “Another routing mistake is to look at the performance of schemes in the wrong category. Sometimes people even look at wrong benchmarks to draw wrong conclusions,’’ he adds.
Here is an example of how the comedy for errors takes place. Lets say the midcap category has been performing well in the recent past. If one were to compare a largecap scheme with one in the midcap category, the investor would wrongly assume that the largecap hasn’t performed well. However, this is not the case. It is just that midcaps have outperformed largecaps for a brief period of time. It would also be a mistake to compare the performance of a largecap scheme with the midcap index for the same reason.

Source: http://economictimes.indiatimes.com/Personal-Finance/Mutual-Funds/Analysis/Evaluating-mutual-funds-a-research-based-task/articleshow/4646857.cms

Mistakes to avoid in the next stock market rally

Recent stock market activity, especially the reaction post-elections, might suggest that the worst is behind us. So many of us made investing mistakes and suffered over the last 18 months.
Everyone makes mistakes….but really smart people learn from their own mistakes and those that other people make. If this is indeed the start of a new upcycle, then now is the best time to review what went wrong the last time so that we do not repeat the same mistakes again.
Read more and get smarter….

1. Don’t be unrealistically optimistic:

Markets can come down as well – don’t believe the cheerleaders who only give you the positive picture of markets going up.
Be very suspicious of the so-called experts on TV who are “confident” that a stock or the market will go up. If they are such geniuses, why did they not warn you 18 months ago that the market would go down by about 60%?
Be cautious about any predictions you hear from so-called “Gurus” on the direction of the market, don’t blindly trust what they say. Most “Gurus” have a poor track record.

2. Understand your risk

You cannot get high rewards without taking on high risk: Not all investments are suitable for you, because they might be too risky for your risk profile. There are no get rich quick schemes – the stock market is not a casino, it takes patience, skill and experience to achieve superior returns. If someone promises to double your money in 3 years, be very suspicious.
If you lost money in the last few quarters and were emotional about it, recognize that some of it was your own fault for investing in instruments that were too risky for you to handle. Avoid these in the future, even if the market is racing to the top.

3. There is no substitute for quality:

Invest in good quality stocks or mutual funds. Don’t speculate. In a bear market, the speculative names are the ones that fall the fastest. Build your portfolio on a strong foundation. The newest NFOs might not be the safest things for you to invest in, because they are untried and untested.
Its best to be safe and to invest in high quality names. Don’t take a punt on some random tip on a company that has no track record or history of quality performance.

4. Don’t invest blindly

Invest towards meeting your financial goals: Don’t just believe what your friends or neighbours are telling you about their investments, these investments might not be suitable for you. Invest because you have a certain goal in mind such as planning for your retirement, or buying a house, saving for your daughter’s wedding or son’s overseas education. This will help you match the right investment product with the right goal.
Everyone wants a return on their investments, but that is not the reason to invest. You invest because you want to do something with the money – marry your daughter, buy a house, plan your retirement. Ensure your investments are allowing you to meet these goals.

5. You cannot successfully time the market:

If you believe that you can sell at the top and buy at the bottom, we hate to break this to you but you are not a genius. Its never been done successfully by even the world’s leading investors, so don’t try this strategy at home!
No “Guru” predicted that the market would go up in May 2009 by close to 30%, and not many people were able to time this rise successfully, just like not many people were able to exit the market successfully when the markets first started correcting. Invest regularly but don’t try to pick bottoms and tops.

Source: http://in.reuters.com/article/personalFinance/idINIndia-40003320090608?mlt_click=IFR+Asia_21_Story+1_sec1-priCon-m0-NONE_News&sp=true

Suggested portfolio returns as on 3rd June 2009

On 3rd March we have posted one article about suggested portfolio as per our research.(Click here to view article posted on 3rd March 2009) We had suggested good blending of mid cap, small cap and large cap with small allocation to balance fund too. We bat on JM funds after direct meeting with fund manager and research analyst, JM worked in our suggested portfolio as a black horse.

We have kept 12 % in liquid fund to average in funds whose NAV falls more after investment or to take advantage of sharp correction by investing in to any Index fund.

You can see we have allocated 88% in equity fund which have generated 96% absolute return in three month time.

Now, if you have got returns as per your expectation than you must move out of equity.

If you want to book partial profit, we advice you to take out 20 to 25% from equity mutual fund to liquid fund and start weekly STP in the same fund for next five month.

I do not want to take much of your time; let me present you a suggested aggressive portfolio result as on 3rd June 2009.

If you are not able to view it properly click here or click here to get attachment

Note: Portfolio allocation and requirement changes from individual to individual.

SIP, effective means of wealth accumulation for retail investors

Some trends never go out of fashion. Probably because they are time tested and proven. Taking a leaf out of the age-old piggy bank concept, fund houses are now re-inventing the systematic investment plans (SIPs). The product, a great success globally so far, has proved to be a great way to accumulate wealth for retail investors with low risk appetite. The virtues of rupee cost averaging and compounding has made it a popular plan to invest with.
Drawing from this success, a few fund houses have launched daily SIPs in India. The new product plans to collect a small sum from an individual on a daily basis and invest in the market, much like depositing a penny in a piggy bank. To help you decode the new product, here’s a pocket guide on daily SIPs and things you must keep in mind before investing in it.

RIDING HIGHS & LOWS

For starters, SIPs allow one to contribute money to a fund on a uniform basis and help average out the peaks and dips in the market over the long term. The benefits of investing via SIP route get amplified in case of a daily SIP where investments are scheduled daily. “It captures the daily levels of market volatility. It not only ensures that one is invested at the highs and the lows but also makes the best out of an opportunity that could be tough to predict in advance,” feels Krishnan Sitaraman, director, fund services at Crisil.
Financial planners say the daily SIP scores over the monthly one as it provides larger benefits of rupee cost averaging. In case of a monthly SIP, you still can lose out if the markets are up on the chosen day of the month. The daily SIP, however, eliminates this flaw and lets you benefit out of equity market volatility.
The scheme, they say, can be even used as an “effective tool” for those who are looking to make a lump sum investment. “One could let market volatility play to their benefit by splitting the lump sum amount in to daily instalments over a relatively short time frame. This strategy avoids market timing and helps rupee cost averaging also,” says Mukesh Gupta, a certified financial planner and director of Wealthcare Securities.
For small time savers, the product offers a very small threshold investment level to invest in mutual funds. The regular stream of investments even passes on the benefits of compounding. Further, the product brings in an element of financial discipline. Currently, Bharti AXA Investment Managers and ING Investment Management have mutual fund schemes in the market that invest an individual’s money on a daily basis in the equities. Sahara Mutual Fund too plans to launch a similar product soon where it proposes a minimum investment of Rs 10 a day.

LOOK BEFORE YOU LEAP

It is important for you to check if there are any incremental transaction charges to complete each investment instalment in case of daily SIPs. Usually, a fund charges 2.25% of invested amount as the ‘entry load’. However, in some cases this amount may get reduced. You should also keep in mind the contribution after taking into account the cash flows available.
Divya Baweja, partner, BMR Advisors, however, is not too smitten by the idea of daily SIPs. “It is administratively cumbersome to get in to a daily SIP, since you need to monitor this on a daily basis. At this stage, the success of daily SIP needs to be tested,” she feels.Financial planners believe you should ideally remain invested in a daily SIP at least for three years to reap dividends. “Historical evidences show probability of having negative return over a four-year period is almost negligible,” Gupta says.

STACK UP

ING Investment Management was the first fund house in India to launch this unique feature as part of their offering, Zoom Investment Pack or ZIP. Under the scheme, investors’ money was collected as a lump sum and allocated on a regular basis in the market than at one go. It requires a minimum investment of Rs 5,000 and you can choose to invest just Rs 99 per day. However, in case of Bharti AXA Mutual Fund, you are required to shell out a minimum Rs 300 per day that sums up to Rs 6,600 per month (for 22 working days).
“It operates like any other mutual fund. The money after getting in to the fund is at the prerogative of the fund manager. It is his discretion whether he wants invest the money in the market on the same day or later,” Vikaas Sachdeva, country head for business development, Bharti AXA Investment Managers, explains.
On the other hand, the Sahara daily SIP plans to raise money 365 days a year irrespective of any holidays. The fund proposes to infuse the money on a daily basis in the market. The two daily SIPs have so far proved to be successful in generating retail interest, now it remains to be seen how far a penny a day can take you.

Source: http://economictimes.indiatimes.com/Features/The-Sunday-ET/Money--You/SIP-effective-means-of-wealth-accumulation-for-retail-investors/articleshow/4599160.cms

Are you ready with your shopping list???

Still not let me share with you some view about how you can add funds to your portfolio…

First of all you have to decide whether you want to be in large cap, mid cap or small cap. If you want to be with giant and somewhat risk averse in equity than large cap will be a best option for you. At the same time if you want to take high risk in equity market and looking for super normal returns over a period of time with some multi bagger scripts than Small cap or mid cap will be a good option for you.

Let me tell you one more thing that in a present market condition fund manager and their investment style will play a big role in your portfolio make over. Nowadays you will found many funds setting on huge cash level, near about 20% to 35% or even more, irrespective of any market cap fund that can affect your portfolio returns.

If a fund you have invested with a view to get super normal returns in small cap or mid cap fund and the same fund is setting on high level of cash than you probably dissatisfy with the performance of the fund.

So, as per your risk appetite, time horizon and level of aggressiveness to chase returns in equity market you should go for a scheme where your investment objective correlates the fund manager present and future investment pattern.

Mind well if you are of view to go with a very aggressive and fully invested fund than at the time of market raising you will gain a lot but at the time of market fall your fund will also fall with the same magnitude if the fund is fully invested in to equity and have very aggressive stock picks in his portfolio (high beta stocks).

Remember every coin has two sides.

Happy investing.

Investing in 'Grandfather instruments'

Generation, following the footsteps of their elders? There may be a few in a hundred, who would do so.
This holds good for financial planning too, and even going about choosing the type of financial instruments.
Youngsters normally prefer to invest in equities with greed to earn higher returns, as against investors belonging to the older generation, who look for stable and regular returns from investment instruments.
Young greedy investors, who had been fascinated by the dazzling skyward rally of the equity markets in early 2008, have witnessed their portfolio value virtually halving.
With their portfolio worth reducing, investors have been forced to look for avenues outside D-Street. “Which avenue to choose in this scenario?” is the question perplexing the investors, hit by the global meltdown and volatility of the markets.
Have we ever tried to consider and review investing into instruments used by our grandparents and people of the older generation? Most of us might have never thought of investing into instruments like Post Office Money back scheme, National Saving Certificate and the like.
We normally hear about them from our grandfathers, and senior citizens, particularly in the context of retirement planning. Lets thus call such instruments, as `grandfather` instruments, within the realm of our discussion on considering them as a prospective investment option, and try to review them as under : -
Public Provident Fund (PPF) scheme was introduced by the government in 1968. This `grandfather` instrument, can be opened by any individual assessee, while a guardian can open the account on behalf of minor.
A PPF account can be opened by any individual assessee. (Guardian can open the account on behalf of minor). Along with the exempt (Income Tax) interest of 8% per annum, calculated on the minimum balance from the fifth day till the end of the month, the investment tool also can be used for tax planning purpose, u/s 80C of the I.T. Act.
One can build a decent corpus by investing the principal amount over a period of 15 years. The minimum lock-in period is 7 years. On expiry of the 15 year duration, the PPF account can be prolonged for duration of 5 years at a time.
During the period, the minimum amount one can invest is Rs 500 and then in multiples of Rs 5. The maximum amount in a financial year can be Rs 70,000, in lump sum or installments.
PPF can also help you acquire a loan of up to a maximum 25% of the balance from the third financial year to the sixth financial year. However, the loan option is not available once you start withdrawing, that is sixth year after opening of account.
Post Office Monthly Income Scheme (MIS) is mostly opted by Voluntary Retirement Scheme (VRS) takers and retired people looking for fixed monthly income.
While PPF limits the account to one person, here, one can open multiple MIS accounts and each account can be converted into a joint account and vice versa.
MIS requires a minimum investment of Rs 1,500 or in multiples thereof. The upper limit for a single account is Rs 450,000 while that for a joint one is Rs 900,000. Alongside one can also claim a bonus of 5% on maturity. (Revised on Dec. 8, 2007)
However, unlike the case in PPF where interest is tax free, the interest income of 8% in this case is taxable. It is however not subjected to TDS (tax deducted at source) deduction. Also, the balance is exempt from tax. Alongside, one can claim a bonus of 5% on maturity of the instrument which is 6 years. (Earlier, it was 10%; the same has been revised to 5% with effect from Dec.8, 2007.)
National Savings Certificates (NSCs), are certificates issued by government of India that can be availed in the denominations of Rs 500, Rs 1,000, Rs 5,000 and Rs 10,000 at all post offices across India. This ‘grandfather’ instrument carries an interest of 8% which is compounded half yearly and has a maturity period of 6 years.
Though the interest of 8% is subjected to tax, a full amount of Rs 100,000 can be deployed towards tax planning exercise, eligible for deduction u/s 80C of the I.T. Act.
Kisan Vikas Patra (KVP) works in a similar way to NSCs and can be availed in same denominations across post offices in India.
They attach an annual interest rate of 8.25% and maturity period of 8 years and 7 month. They have been propagated as a safe route for investors who wish to double their investment. That is if one procures KVP certificate of Rs 100, one will earn up to Rs 200 on maturity.
While these instruments may be low on their returns aspect as compared to equities and mutual funds, they beyond all doubts, are backed by government, and hence are comparatively safer.
So `grandfather` instruments like these would prove to be safer and prudent to park your funds into, and improve the worth of your portfolio, particularly when the stock markets are highly volatile, as is the case in the current scenario.
Moreover, by investing in these instruments, you can follow the footsteps of your parents or grandparents and also build your retirement corpus.

Source: http://in.reuters.com/article/personalFinance/idINIndia-39013520090413?mlt_click=IFR+Asia_21_Stories+2-8_sec1-priCon-m5-NONE_News&sp=true

Investment Mantras for Women

There are some myths about women when it comes to investment. Some of them are…
Women are not as active as men when it comes to investing money; they generally keep themselves away from taking investment decisions; they are well known for spending money or keeping it idle rather than investing it for earning more; even, non-working women are mostly dependant on their spouses for meeting their day to day expenses…
Though, to some extend its true that women are dependant on their spouses for finance, they should also think about their future. Problems don’t come giving prior notice. What if they face the situations of being divorced or widow?
In such cases the main problem for a woman is the regular flow of income to take care of their needs, provided they are not buck-earners. However, in the current scenario of layoffs, lack of job security and slowdown, even earning women can also face these problems.
As per the latest International Labor Organization (ILO) report, the deepening economic and job crisis across the globe is expected to increase the number of unemployed women by up to 22 million in the year 2009.
The global employment trends (GET) report by ILO indicated that, of the 3 billion people employed around the world in 2008, 1.2 billion were women (40.4%). It said that, in 2009, the global unemployment rate for women could reach 7.4%, compared to 7% for men.
Women should start thinking and understanding the importance of money and its investment aspect to avoid critical situations at any stage of their lives. They need to develop skills to plan for their financial needs.
Generally, women tend to keep cash idle rather than investing it. They tend to think that this `idle cash` can be easily used for contingencies and to spend on their personal care like beauty parlors and jewellery etc.
However, as an exception, few women do invest into risk-averse avenues such as bank deposits and post offices` schemes. They generally avoid risky options such as equities, as they think that it takes a rocket science to understand equity markets` trends, patterns and volatile nature.
Instead of worrying about the `complexity` of equity markets, they should equip themselves with the basic knowledge about investing to make fruitful investments.
Financial independence is a very crucial thing for women in today’s world. Women from different age groups should start investing from the early stages of their lives to secure the future and for better lifestyle.
Below are the various investment options for women from different age groups.
Age group 20 - 30 years
You can call this stage as `Young Unmarried Stage`. Women from this age group can plan their future very well as there are various investment options available suiting their needs at this stage. Investing in equities is perhaps the best option for the women at this stage.
Equities are well known for growth and good returns, provided the markets are doing well. The dividend income from equities can also help them to earn regular income. They can follow intraday trading and buy today sell tomorrow (BTST) strategies. Other investment options for this group are derivatives, F&O and equity linked mutual funds.
Age group 30 - 40 years
This stage is called `Young Married With Children Stage`. In this stage women have to think about their children also. To secure the future of their children they should opt for the investments options which suit them. There are different categories of mutual funds and insurance policies like educational plans. Women between this age group should go for such plans.
Age group 40 – 50 years
This is `Married with Older Children Stage`. As children become old, parents have to keep funds ready for their higher education and marriage. This is a very crucial stage for any parent as their children’s career depends on their education and parents have to arrange funds for their education.
Accordingly women should opt for the investment options like insurance plans for the marriage and education purposes.
Age group 50 – 60+ years
This stage is called `Retirement Stage`. At this stage, women can invest into less risky and safer investment options such as PPF, NSC, Post Office Saving Schemes and debt instruments for the steady flow of income at the later stages of lives.
A word of advice
Before making any investment, women need to do the cost benefit analysis of their investment options. They should analyze the risk associated with it, its liquidity and safety aspects. They just need to understand the basics of investing and opt for the right kind of avenues which will suit them. If they follow the basics, no doubt, a woman can also be as good investor as a man!

Source: http://in.reuters.com/article/personalFinance/idINIndia-39055220090415?mlt_click=IFR+Asia_21_Stories+2-8_sec1-priCon-m5-NONE_News&sp=true

Index funds versus individual stock picking

“Where should I invest my hard-earned money?”

This question invariably puts investors into a serious dilemma as to which investment option should they consider. They get deeply consumed in the process of assessing, determining and considering options which would render optimal returns to them, involving minimal risk and offering safety to their capital.
Investment in equities (individual stock picking) and various types of mutual funds are two very obvious investment vehicles that would come to investors` mind. Equity funds, debt funds, balanced funds, index funds and so on are the several types of mutual funds, which can be considered. Which type of fund is better amongst them? The answer to this question would depend upon the investment goal, risk appetite and time horizon of the investor.
Let us compare individual stock picking and index funds in detail:
Individual stock picking is nothing but merely equity investing. It is the most popular investment vehicle amongst investors. It is considered a high risk- high returns investment vehicle.
But the Bear Market Run carrying on since last year has been responsible for the erosion of capital of several investors. On a broader side, the returns depend on the financial health of the company (of which you have purchased the shares), the performance of that particular sector and the overall market performance in general.
On a narrower side (investors' side), the returns depend on investors' investment objectives, risk taking capacity and tenure of the investment. If the particular sector or company's shares are not performing well, the investors incur losses. Risk of losing money is high in case of equities due to volatile nature of markets.
Index Funds are a category of mutual funds which invest into a whole index [Sensex (30), Nifty (50)] rather than a specific stock. This strategy is also called ‘indexing’. The goal of most index funds is to follow the index performance. Index funds buy all the stocks of a particular index. This is a passively managed scheme.
The fund managers of these schemes do not get involved actively in shares selection and the process of investing. However, the volatility of markets (indices) is uncertain. The performance of the indices cannot be foreseen by any one. In India, the indices (Sensex, Nifty) are small as compared to US index of S&P 500.
Benefits of index funds
Economical: Indexing is a passive investing strategy; it does not involve any active management by the fund managers as in the case of the actively traded funds. The main objective of index funds is to reflect the performance of indices. The cost of analysts` salaries, research cost, and brokerage is saved in case of the index funds.
Better Performance: The performance of passive funds is likely to be better than actively or professionally managed funds. In the long run, any particular stock cannot beat the whole index performance.
For the week ended Mar. 20, 2009, Index funds were the biggest gainers among all classes of mutual funds with 3.16% gain as the 30 share index, Sensex rose 210.07 points, or 2.40%, to 8,966.68 in the week ended Mar. 20, 2009. On the other hand, the broad based NSE Nifty rose 87.8 points, or 3.23%, to 2,807.05 in the same period.
NAVs of the index funds category gained 3.16% in the week Mar. 20, 2009.
Among the index funds, Nifty Junior BeES gained 4.33%, Benchmark S&P CNX 500 Fund added 3.49%, J M Nifty Plus Fund rose 3.33%, LICMF Index Fund - Nifty Plan climbed 3.27%, Birla Sun Life Index Fund gained 3.24%. (Myiris).
Diversified Portfolio: Index funds invest in all stocks from different companies and different sectors of a particular index, leading to a wide range of stocks, which helps in the diffusion of risk.
Returns: Returns in index funds are largely dependent on the performance of whole indices; the Sensex and Nifty being benchmarks of the index funds` performance in India.
Saves time and money: The hard core research of specific stock or sector is not required in case of index funds as these funds track the performance of whole indices and not a stock and sector in particular. This saves time and money also as nothing comes free and research is not an exception.
Disadvantages of index funds
Market risk: When the market undergoes a fall, you also lose in case of index funds as these funds are entirely based upon the ups and downs of the market
Less Flexibility: Index funds lack in flexibility, as investors don’t get the opportunity to invest into stocks in that particular index. This is so because there is no scope of selecting stocks of personal choice, based on quality and research.
Conclusion:
To conclude, index funds can possibly offer higher returns in the longer period of time, subject to performance of indices or markets. Index funds thus seem to be a better option between the two, as their advantages considerably outweigh the disadvantages. Diversification, lower cost and maintenance give them an edge over individual stock picking.
Source: http://in.reuters.com/article/personalFinance/idINIndia-38898620090406?sp=true

Two fund houses that weathered the storm

Mutual funds suffered heavy redemptions in 2008 as investors headed for the exits in a year that saw the Sensex, the BSE bellwether, plunge by more than half. No one escaped unscathed, but some funds emerged less bloodied than their peers from the carnage on the markets....

::Best equity fund house::

Reliance Capital Asset Management Ltd (RCAML), the country’s largest mutual fund house by assets under management (AUM), has been named “Equity Fund House” of 2008 by Morningstar India Pvt. Ltd, the Indian arm of Morningstar Inc., an independent research provider on mutual funds, hedge funds and other investment alternatives.

RCAML, owned by Reliance-Anil Dhirubhai Ambani Group, managed in excess of Rs70,000 crore at the end of 2008, and about 28% of the corpus was in equity funds. RCAML manages almost one-fifth of the total equity AUM of India’s mutual fund industry, which was Rs1.1 trillion at the end of the year.Ten of RCAML’s equity schemes were considered for the assessment, along with those of other fund houses that were in contention for the award. Under Morningstar’s evaluation system, only open-ended schemes with at least three years of history are considered. On a relative basis, every fund from the RCAML stable, barring Reliance Equity Opportunities Fund and Reliance Tax Saver, seems to have performed well at a time when the market is in a bear grip. Overall, equity funds had a poor run in 2008, with the Bombay Stock Exchange’s bellwether equity index, the Sensex, losing 52% in 2008 and foreign institutional investors, the main driver of Indian equities, pulling out at least $13 billion (Rs66,950 crore) from Indian stocks.

Madhusudan Kela, 40, head of equity investments at RCAML, has been with the asset management firm since 2001. His funds, though all down by at least 40%, still outperformed peers last year. In an interview, he spoke on the philosophy underlying RCAML’s equity market investments, the cash strategy he employed in 2008, and his outlook on equity markets. Edited excerpts:

Many fund managers were caught unawares by the impact of the financial crisis that started elsewhere, but quickly spread to India. When did you start realizing that things were not quite normal?

In hindsight, we should have been less greedy. And maybe now, we need to be less fearfulInternationally, things turned out to be far worse than what we anticipated in January 2008. And it became even worse following the collapse of Lehman Brothers Holdings Inc. in September 2008. As a fund house, we had a cautious stand from January, which became even more cautious post-September 2008.

How many of your equity funds weathered the storm in the markets? How did they cope with it?

A majority of our equity funds have weathered the storm. However, I would have liked them to do better. Most of our funds have been in the top tier compared with their benchmarks and peer group. We have been bottom-up investors, and that is what helped us produce extraordinary returns between 2002 and 2008. The fall has to be looked into in that context. As I said, we have been cautious and that is reflected in our cash holdings of more than 25% for the fund house as a whole—more than Rs5,000 crore of cash on an asset base of Rs20,000 crore. Needless to mention that this also helped us cope with the gigantic fall last year.

If you were to talk about one unique philosophy you apply to managing all equity funds, regardless of themes, market capitalization, etc., what would that be?

The core philosophy is buying the right companies at the right price with a long-term view on investments. As you can see from our portfolios, there are stocks we have held for more than five years, and which have been part of our core holdings. We will not hesitate to take the right risk if the corresponding returns justify taking that risk. For instance, we might be buyers of mid-cap companies today, which are completely out of fashion, as we can see that risk-reward is in our favour.

What is your view on the markets?

The global situation has become far worse than what we had anticipated. And it still remains very uncertain. This obviously has an impact on India, both in terms of fund inflows into the country and risk appetite for equity investments in emerging markets. Hence, this will continue to be an important part for the markets.

On the domestic front, the outcome of the elections will play a very important role in framing an outlook on the market.

What is your strategy to make sure your funds remain in the top quartile?

Most of the uncertainty...is reflected partially or fully into stock prices, and hence we would like to make stock-specific investments in these uncertain times to take advantage of the opportunity. As a matter of fact, Reliance Growth Fund’s net asset value was Rs12-13 in 2002 and it went beyond Rs500 in 2008. Obviously, lots of investment in that fund was made in uncertain and challenging times (2002-2003). And that helped us generate these kind of returns.

Which are the sectors you are comfortable with?

The pharma segment looks good from a two-year perspective. There is clarity and visibility in earnings in this sector. Most of the companies have more than one engine of growth; have large cash flows compared with their market cap; and by and large, have good promoters and corporate governance.

In these uncertain times, people will take note of this sector. What about the untouchables?

I wouldn’t say anything is untouchable in the stock markets. Most of the stocks may offer value at a particular price.

What are the lessons from this downturn?

One lesson that has formally got reiterated is that the markets are all about greed and fear. Maybe in hindsight, we should have been less greedy. And maybe now, we need to be less fearful. The second point is that you have to live the markets, literally 24/7/365. You have to be extremely alert and can never afford to take your eyes off it. Third, one has to realize that there are a few good years and a few bad years in the markets and nothing will keep perpetually going up or going down. Hence, having extreme views does not deliver performance in markets.And finally, 2008 taught us that whenever the markets make a story around every stock in the listed universe, trying to justify their valuations and making an investment theme around them, it’s not the best of times to be in the market.

Do mutual funds deserve awards this year?

No, mutual funds do not deserve any award this year for their performance.

::Best debt fund house::

ICICI Prudential Asset Management Co. Ltd has won Morningstar’s award for the best debt fund house.

Debt funds are those which invest in fixed-income securities such as corporate bonds, government bonds, debentures, certificates of deposits and commercial paper. Such funds have Rs3.9 trillion of assets under management. This is about three-fourths of total assets managed by the mutual fund industry in India.

Despite delivering more returns than equity funds, debt funds—especially short-term funds—suffered on account of heavy redemptions. At one point of time during the liquidity crunch triggered by the collapse of Lehman Brothers Holding Inc. in mid-September, investors withdrew as much as 30% of the total debt assets management. Since then, money has flown back into debt as the Indian central bank repeatedly cut rates and investors regained some confidence.

To be sure, one-year returns of debt funds ranged from 8.62% for very short-term liquid funds to 26.38% for long-term government bond funds. In contrast, almost all equity funds have seen returns shrinking.

ICICI Pru has some 22 schemes managing Rs46,000 crore in its fixed-income portfolio. Its short-term bond fund and short-term gilt fund have both topped in their respective categories.

Nilesh Shah, 41, deputy managing director of ICICI Prudential Asset Management, spoke on how a conservative strategy enabled his fund house to beat the market downturn and why debt might still be a good asset class for investors. Edited excerpts:

What has been the impact of the collapse of Lehman Brothers on the mutual fund industry?

The world before Lehman and world after Lehman is totally different. The world before Lehman was based on the trust and confidence that banks don’t fail. The world after Lehman raises doubts that even banks can fail. Now this results in stoppage of flows between banks, restricts credit flows from banks to customers. In a sense, speed breakers have been created for smooth flow of credit in the financial system.

How have many of your debt funds weathered the storm?

Our philosophy for debt fund management is SLR—safety first, liquidity second and returns third. So, we were conscious of credit risk in our portfolio since the beginning of 2008…almost since the middle of 2007.

We gradually reduced or eliminated even from our conservative standards names we believed could face a tough environment. Even though we invested only in AAA and AA rated securities and there was no question of any default or delay in payment of interest or principal, we ensured that we didn’t stay invested in any instrument that could potentially face a rating downgrade.

We weathered the storm because our foundations of SLR—safety, liquidity and return—were strong.

What has been your investment strategy?

Our philosophy is unique and we apply it to all our debt funds. My mandate to my credit analyst is very simple: If there is a default in any of our obligations, both of us will lose our jobs. So he is conscious of this risk whenever he sanctions any credit limits.

Any change in your investment philosophy?

I think our philosophy is not going to change. Philosophy is like a mountain; it doesn’t move. We will continue to monitor the markets so that our customers get the best return.

But don’t you think that the good times are over for debt funds?

There may not be any more deep rate cuts.I don’t think that good times are over for fixed income funds. Our belief is that markets today are pricing the government’s large borrowing programme and hence bond yields are higher than what they were before the rate cuts. At some point of time, the Reserve Bank of India will give confidence to that market that notwithstanding the size of the government borrowing programme, the central bank is committed to lower interest rates by doing open market operations, unwinding MSS (market stabilization scheme) bonds and giving rate signals. We still believe that there is reasonable opportunity for the yield on 10-year government bonds to go below 5.5% if RBI (Reserve Bank of India) takes decisive action to support a low-interest rate environment.

What’s the lesson from this downturn?

I think one has to always keep their feet on the ground and never move away from reality. Probably beginning last year, we all got carried away by the blue sky scenario and started believing too much in the future. The businesses are cyclical and environment is cyclical and after every up, there will be a down. We need to be prepared for the upside as well as the downside.

What’s your view on the overall financial markets?

The financial markets are facing a fair amount of volatility and uncertainty. But one advantage of the current environment is the fact that the media has brought everything upfront to the investor. The information travels very fast and hence a lot of bad news are getting discounted quickly.

Do mutual funds deserve awards this year?

Yes, because we have all done our jobs in line with the mandate given to us. The markets have fallen and hence we have also fallen, but we have fallen less than the markets even if it has caused losses to investors. In debt funds, reasonable returns have been generated last year. We have followed a process, a method, and I still think that if investors give us a longer time horizon, they will not be disappointed.

Source: http://www.livemint.com/2009/03/09001616/Two-fund-houses-that-weathered.html

Where to park your retirement money in turbulent times

Unlike developed countries, India doesn’t have a universal pension and retirement scheme. Life-long pension and post-retirement benefits are available only to government employees and to a select few in some government-owned enterprises.
In a major part of the corporate sector, including government-owned companies, employees usually receive a large lump sum amount on retirement. This includes gratuity and an accumulated provident fund among others.
Given this, it falls on the concerned person to do financial planning in a way he/she not only maintains the lifestyle but also has financial independence as well.
However, this is easier said than done. That’s why we at ET Intelligence Group thought of providing some kind of guidance to readers who will retire in the not-so-distant future.
The basic principle of retirement planning is to look for a financial instrument that provides regular cash flows (just like a salary), provides a fair amount of protection against inflation and protects your capital too. Also, it is better to not be burdened by any kind of debt.
For instance, in case one has any personal or car loan, ideally, one should pay it off before retirement. And if there is a plan to purchase new house, it should be done few years prior to retirement or just after retirement by paying a lump sum amount from retirement proceeds with little loan.
Good healthcare is expensive and is required most during old age. Except for a few government organisations, medical cover is usually not offered to retired employees. So, it is very important for retirees to spend some amount on medical insurance. The ideal thing to do here is to take a medical insurance policy few years before retirement.
Another important point to take care is that it doesn’t make much sense for someone to take a life insurance policy after retirement. This is because, after retirement, the person’s earning is almost negligible (assuming the person doesn’t take up a job after retirement) and hence the financial capital lost upon the death of the person is very small.
The three important aspects that should be taken care of while planning for living expenses are liquidity, regular income and growth. Typically, the thumb rule here is that one should have around six months of planned monthly expenditure in liquid cash. The next thing to look for is the regular source of monthly income, which would meet all routine monthly expenses. This is where one can choose from the different fixed income plans available.
The three most popular plans available are the post office monthly income schemes offered by post offices, senior citizen savings schemes with monthly return offered by nationalised banks and mutual fund monthly income plans offered by mutual funds.
The first two are taxable, come with assured return but less scope for growth. The last one is not taxable, not assured and has some growth opportunity since these schemes invest around 10-20 % in equities.
The choice among these three schemes would depend on the individual’s income, risk-taking ability and effective tax rate. Otherwise, one can go for a 50:50 combination of one of the first two and the third one. The other possible schemes that provide a monthly income but not very popular, are annuity schemes offered by insurance companies and reverse mortgage of the house.
At the end, after paying for all these investments, if one is still left with some money, he can invest it in assets like equities or gold.
We have tried to represent all the above aspects in terms of indicative numbers (please refer to the table). The three scenarios represent the income and spending levels of different kinds of persons based in different locations.
One should calculate the investment required in monthly income plans to match the required future spending and medical expenses. All other fixed kind of expenses—on a house or a car—should be planned after that. We remind our readers that this is only a guideline and actual planning might differ depending on individual’s circumstances.

Source: http://economictimes.indiatimes.com/Features/Investors-Guide/Where-to-park-your-retirement-money/articleshow/4242937.cms