Fund Primer — Equity Funds: Evaluate risk carefully

Investors often enter the equity market without understanding the risks. Such investment carries systemic risks, irrespective of whether one opts for direct exposure or through mutual funds. Here is a way to evaluate such risk.

To achieve financial goals, the first evaluation is the risk-taking capacity of the individual. People tend to take higher risks early in their career. Later on their risk-taking abilities are limited due to the lesser number of earning years.

The fewer earning years ahead limits the latter’s risk-taking ability even if the individual is very keen to achieve investment goals.

If individuals are unable to understand and assess their risk appetite, it may not be wise to hold risky assets such as equity.

Risk perception: Let us say that the risk perception of investors vary between 1 and 100 per cent. For someone in his 20s, equity may mean losing as much as 40 per cent of investments, while for his father, a 10 per cent decline could mean a high-risk strategy. This perception arises from one’s ability to tolerate risk.

Another key issue in which investors often falter is the nature of funds. Take the example of an investor who made his money in the derivatives market in 2007; this prompted him to use his father’s retirement corpus (earmarked for the investor’s sister’s wedding) in a high beta mutual fund, which fell by over 50 per cent in a downturn.

Two lessons emerge from this case: one, funds with a crucial financial goal in the near future cannot be exposed to market vagaries. Two, transfer of risk to a younger person does not automatically mitigate the risk of investing in equity.

The final step of evaluation is risk tolerance. If you cannot stomach losing money don’t barge into the equity market. If you are ready to lose at least 20-30 per cent, then you can consider mutual funds.

Risk tolerance: We come across advisors recommending MIPs to retired people as part of portfolio diversification. The advisor might know the risk profile of the investment but investor understands the risk only when he losses money.

To understand how it is possible to lose money without understanding the risk tolerance, we analysed the performance of monthly income plans (which invest about 80 per cent of the money in debt schemes and rest in equity).

The perception among individuals is that monthly income schemes declare dividends every month. Some investors enquire during market downturns why their MIPs are not declaring dividends. For instance, if an individual had invested in an MIP in January 2008, the one-year category average return of the scheme would have been minus 8 per cent.

The disparity between the best in the category and the worst was wide. The best generated a 20 per cent return in one year ending January 2009 while the worst lost 12 per cent. If you had invested in the scheme without understanding your risk tolerance and sold the units in loss in panic, your tolerance for risk was low.

Had the person stayed invested during the market correction, the fund would have once again moved to positive territory.

For instance if you look at a one-year period ending September 29, the best performing Reliance Monthly Income Plan generated a return of 30 per cent while, for the same period FT India Monthly Plan (Bonus) lost 3.5 per cent.

This shows that before investing one has to evaluate the risk-taking capacity, perception and tolerance towards risk to accumulate money in an asset class such as equity.

Source: http://www.thehindubusinessline.com/iw/2009/10/04/stories/2009100450350900.htm

A layman's guide to interest rate futures

Interest rate futures, that long cherished dream of Indian bankers, bond dealers, and reformers will be launched on Monday. This is an instrument that will help a company fix its interest cost, irrespective of interest rate movements.
According to CNBC-TV18’s Gopika Gopakumar, after a long wait of six years, interest rate futures will yet again be traded on the NSE. Listed on the exchange will be a contract worth Rs 2 lakh. Each contract will comprise 10 year government securities with notional interest rate of 7%.
A potential investor like a mutual fund can open an account with a bank or brokerage already registered as trading members with the NSE. If the fund buys a 10-year government security from the spot market at Rs 101, and expects interest rates to rise by December, then it will ask its bank or broker to sell a December futures contract at say Rs.97.50. It pays a margin of 2.33% for the first day and 1.61% for subsequent days. Assume rates go up and the spot price of the government security falls to Rs100, then the futures contract will fall to Rs 96.60.
In this case, the mutual fund is making a loss in the spot market. But it is making a gain in the futures contract (Rs 97.50-96.60). Its loss is thus minimized to 10 paisa against one rupee if it was unhedged. On the other hand, if a mutual fund expects rates to fall, then the fund will go long, i.e. it will buy a futures contract to hedge itself. Note that in this product the investor has to physically deliver bonds when the contract matures. It can deliver any bond with residual maturity of 8-12 years.

Hemant Mishr, Regional Head-Global Markets, Standard Chartered Bank, expects active participation from institutional players both financial and the non-financial institutions. "I see mutual funds, insurance players being active players." However, he does not see active retail participation at present.

B Prasanna, MD, ICICI Securities Primary Dealership Company, says though in the initial period it will probably be institutional market participants using this product, he expect quite a bit of the retail households, broking communities to enter into the particular product going forward.

Here is a verbatim transcript of the exclusive interview with Hemant Mishr and B Prasanna on CNBC-TV18. Also see the accompanying video.

Q: This looks like complex instruments, so who will be the audience or the users, it will not be as common as currency futures?
Mishr: Yes, this won’t be as common as currency futures and it’s slightly more complex than the futures that Indian investors have seen whether its equity or currency futures. In terms of the participants in this market, I would expect institutional players both financial and the non-financial institutions, I would expect the mutual funds to be an active player, I would expect the insurance players to be there. There is a thought that the retail investors run in a risk whether it is through a mortgage or a personal loan. I don’t at this point in time expect active retail participation in this. The banks would be more critical and more active counterparties for this.

Q: It does look like it is only going to be an instrument. How useful will it be for a primary dealer and for banks, will you be able to almost negate an interest rate risk?
Prasanna: This is a very good product, it is a good for all kind of market participants, things like PDs. You can run directional trades on the long as well as on the short side using futures. You can also hedge your underlying risk like when there was a devolvement in the auction or the underwriting risk that you take in auctions, so there is a bit of something for almost all market participants in it. Having said that, I would also presume that the experience of currency futures have actually told us that the retail participants have actually come in a big way in that particular product, so though I agree that in the initial period its probably going to be the institutional market participants but going forward I would also expect quite a bit of the retail households, the broking communities to kind of enter into the particular product. To start with, it would be primarily institutional but later on it could be broad based to a lot of newer participants.

Q: If it is largely for institutions, would not the OIS swaps have done the same job. Why would this be different if institutions are going to hedge, surely they were doing the same with OIS?
Mishr: That’s a good point. The interest rate swap market has seen a lot of activity ever since they were first opened up in 1999. From a bank’s perspective, it would prefer a future for a simple reason that it’s a lot more cleaner both in terms of cash outflow and in terms of the risk in that instrument. Going forward, I see a big part of the bank’s liquidity actually going to the futures market, while corporates will continue to access the OIS market. So, when a corporate speaks to a bank, they might still might be wanting to hedge in the OIS, but the bank in turn will not want to hedge in the OIS market but would access the futures market.

Q: Will the larger economy be able to read any signals from the futures contracts in the interest rate industry?
Mishr: For the constraints that have been placed on government of India bonds, that typically is an exaggerated movement when the interest rate cycle turns. We have seen that in the past couple of weeks. I would expect positive feedback from futures into the cash market at two levels. One, in terms of incremental liquidity that comes into the GoI market, but also about trading happening across the curb. I don’t expect this to happen in the next few months or even in the next one year, but a possible situation when you got a future not only on the 10-year bond but on the five year and the one year bond which will feed into incremental liquidity and trading in the five year and the one year cash markets as well.
Prasanna: Just adding one more point here which most of us seem to have missed out ‑ the ability to strip out interest rate risk to credit risk which is inherent in a corporate bond. This is an important factor which will allow the participants to do so. Hence this product will not only add some kind of liquidity to the cash market which is what the positive feedback which Mishr was referring to, but it will also galvanize the trading in bond markets. A person who wants to take an exposure in corporate bonds can strip out the interest rate risk by shorting IRF if he wants to take the credit risk.

Q: Let me come to the product itself. The manner in which it has been launched at this point in time, does it satisfy you or do you think it needs some bit of tweaking? Are you nervous about some features?
Mishr: The process that was followed by the joint technical committee of RBI and Sebi was very comprehensive in terms of seeking market contract from a host of participants, banks, MF industry, insurance companies etc. In may ways, this is closer to what will succeed in the market place. However, it is important that we have reasonable expectation out of this. In terms of timing, this is just wonderful. With the interest rate cycle turning round and with the markets being as volatile, if I compare 2009 with 2007; the interest rate volatility on the 10 year curb at that point of time was 8% and its more like 35-40 at this point of time, so if it won’t succeed now, it won’t succeed in any point of time.

Q: How much can it neutralize the risk for say a mutual fund or bank, how much can it take out really?
Prasanna: I would still presume that the quality of the fund management team is more important because it is not a solution which is going to make you money in all kind of phases, you still have to take the right view. A derivative is something which will only make you money if you take the right view. I guess it is very important to see what kind of strategies a fund manager is employing with this product.

Q: The other problem that people or regulators rather common people will have with any derivative instrument, we know how the currency derivatives ruined or troubled the corporates and even banks, do you think this has potential for such kind of trouble, people speculating for its own sake and getting carried away because of a one way movement in the direction of trade?
Mishr: There are two points important out here. The world is migrating slowly from OTC to exchange, so there is a lot standardization happening in the OTC space that the regulators like the EUS treasury and the FSA are the few are pushing. That is the trend and trajectory, in interest rate futures. This is a relatively complex instrument compared to our currency and equity futures which is something that the investor has to keep in mind which is why I am a bit weary about proposing that to retail investors on day one. But if someone wanted to take a view on an interest rate, the exchange traded future is the best possible choice at this point in time.
Prasanna: I just wanted to make a point on what could potentially to bring this product more successful. One is the fact that there has to be a very strong linkage between the cash and the futures market for any successful derivative product launch. In that respect, I think there are a couple of things which the regulators would need to do going forward to make this product a bigger success. One is to bring about a very active inter-bank term money curb at the short end where people can really transact for lending and borrowing for 1-2-3 months which is in our market at this point of time.
The second thing is again linkages between the cash and futures means that the ability for market participants to execute arbitrage strategies both ways between the cash and futures whenever the futures deviate from the futures price. Unfortunately, even in that respect we are not able to do it on both sides because you are not having the ability to short the cash bond because there are limits as for the period which you can do it. There are very strict positional limits which would probably allow the futures deviate from its fair price for a pretty long period of time, so these are the things that the regulators need to think about going forward for this product to become a bigger success. Then, you can expect a lot of participations from corporate treasuries etc.

Q: What should be the next step in the evolution of the interest rate market?
Mishr: The next step in my opinion would be having more benchmarks to the 10-year. Whether you look at it from an institutional perspective, we run risks which are not necessarily the ten year risks. If I am running a five year risk, I think the spread and the basis risk is far too much for me to take the view on the 10 year point, so having benchmarks across the yield curve as importantly having the money market benchmark is very critical. I would see this as the first step towards non-linear products for interest rates in India.

Q: Can you explain?
Mishr: There is no reason why we shouldn’t have interest rate options in India, compared to one of the more tradable benchmarks. Once you got more liquidity in the term money market, we will have that once it is actively traded. I see this as a base market for a lot of other products which will be benchmarked and settled on this whether it’s the BSE or the NSE future’s price. We look at the LME for instance, there are lots of OTC products which the LME three month price fixes, so that in my opinion would be the next logical step.

Source: http://www.moneycontrol.com/india/news/business/a-laymans-guide-to-interest-rate-futures/413340/1

Where to invest: Liquid Funds...Liquid Plus Funds...or Bank FDs

Liquid funds with no entry and exit loads and practically no credit risk, have not only been popular with banks and companies to park their short term money, but have also emerged as stiff competition to the savings bank a/c. For the past few years, post-tax returns from liquid funds have been in the range of 5%-6% p.a. making them a hit among individual investors especially the high net worth investors (HNIs). However, liquid funds are fast losing their edge over the savings bank a/c with average returns dropping to 3.5% p.a. This is mainly on account of the decline in short-term interest rates and the SEBI guideline restricting these funds from investing in any security having a residual maturity of more than 91 days. The average maturity period of most of these funds ranges from 50 to 60 days.

Is there an alternative to liquid funds? Yes, investors can consider investing their money in ultra short bond funds (erstwhile liquid plus funds). These funds can invest in securities with higher maturities and hence are able to generate returns which are 50-80 basis points higher than liquid funds. However, these extra returns come with slightly higher interest rate risk and credit risk. Most of these funds also have a lock-in period of at least 7 days. The average maturity period of these funds ranges from 140-150 days.

There is yet another option for individual investors. Of late banks have been offering a facility to transfer the money sitting idle in savings bank a/c to fixed deposits. The rate of fixed deposit is however, slightly less than the rate of a conventional FD for similar maturity.

The beauty of this facility is that the money lying in the fixed deposits is not subject to any kind of lock-in i.e. the investor can withdraw the money as and when required either through the ATM or by issuing a cheque without any penalty for premature withdrawal. Moreover, if the interest rates move up, money can be moved from lower interest rate FDs to higher interest rate FDs without any penalty. To top it up, the amount can be transferred either online or through simple instructions on the phone using the ATM/debit card number and the PIN. We urge investors to check with their bank for any such facility and if it does exist go for it NOW. After all, opportunity only knocks once!

Should you invest in Monthly Income Plans?

It's common for diversified equity funds to emerge as a top-of-the-mind investment when stock markets are booming. In such a scenario, hybrid funds like Balanced Funds and Monthly Income Plans (MIPs) are relegated to the sidelines. Investors can miss out on a very critical component in their portfolio by shutting out hybrid funds completely. Hybrid funds (powered by their flexibility to invest across asset classes) can add immense value to the investor's portfolio (especially during the down turn). While the role of balanced funds in the investor's portfolio has been well-documented, it is time for investors to sit up and recognise the value MIPs can add to their portfolio.

MIPs invest predominantly in debt instruments with a small portion of assets allocated to equities. The equity component provides MIPs with just the edge it needs to outperform conventional debt funds. The equity component usually varies between 5%-30% of assets. So under what circumstances would MIPs add value to an investor's portfolio? The graph below answers this question.

As is evident from the graph, during the crash in the stock markets last year, MIPs have fallen less as compared to the BSE Sensex indices. And this is where it adds value to an investor's portfolio. When the stock markets rally, they will lag conventional equity funds, but when the markets move down, they will limit the fall in an investor's portfolio.

Hence MIPs become important from an asset allocation perspective. Although, you can reach the desired asset allocation by allocating the assets in equity and debt; MIPs offer a convenient way of achieving the same.

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.

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

Amfi to upgrade certification test

Plans separate module for offshore funds

The Association of Mutual Funds in India (Amfi), the representative body of asset management companies (AMCs), is in the process of upgrading the mutual fund certification programme in a bid to bring in more competency among fund distributors and advisors.
While a new work book is being designed for the certification test, Amfi is also working on a separate module for offshore funds.
“We are now going to revise the work book and the question bank will be based on it. The work book will be released by December 2009. Upgrading the test modules will help distributors and advisors gain more expertise about the products,” said A P Kurian, chairman, Amfi.
“The scope of the certification programme could be extended to cover all components of financial planning. Implementing a minimum standard of giving advice is an essential next step towards the industry’s development. The programme should also include knowledge about global products,” said Navin Suri, CEO, ING Investment Management.
The Amfi test is a multiple option-testing programme, with 50 being the passing mark out of a total of 100.
The certification programme comes in two modules — Amfi Mutual Fund - (Basic/employees) Module Certification and Amfi Mutual Fund (Advisors/distributors) Module. There are no restrictions of age or qualification for anyone to take the test, but the Securities and Exchange Board of India (Sebi) has made it mandatory for every entity engaged in marketing and selling of mutual fund products to pass the certification test (advisors module).
Amfi and those AMCs that distribute offshore funds, feel that there should be separate module for the distributors who wish to sell global funds. “The asset allocation patterns of offshore equity funds are different from conventional schemes that are guided by domestic market dynamics. So, there should be separate test and training for the distributors who sell such schemes,” said the CEO of a global AMC.
“We will work out a separate module for the distributors who also want to sell products that invest across other global markets, but we have not finalised anything in this regard so far,” said Kurian.
There are about 90,000 Amfi-certified distributors in India at present. Though an upgradation of the test could help bring in more expertise among distributors, some fund houses feel that any significant change in the test modules could complicate the test, which would not be desirable, considering the low penetration level of the industry as compared to the insurance sector. As per industry estimates, there are about 3 million life insurance agents in India at present.

Source: http://www.business-standard.com/india/news/amfi-to-upgrade-certification-test/360259/

How to review MF investments before redeeming the units?

TAKE STOCK OF EXIT LOADS & TAX IMPLICATIONS
IF YOUR mutual fund investment is yielding a lower return than what you anticipated, you may be tempted to redeem your units and invest the 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 MF 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 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 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, 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.

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, which you hope will lead to an outstanding return on an investment that suits your investment goals. A category of investors track 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. Ifthe 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. Change in Fund Strategy: If you researched your fund before investing in it, you are 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.

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. You can also 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 three 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 to get 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.

Need a tax break:

If your fund has suffered significant capital losses and you need a tax break to offset realised capital gains of your other investments, you may want to redeem your fund units to apply the capital loss to your capital gains.

Selling a mutual fund isn’t something you do impulsively, without a great deal of thought and consideration. 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.

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.

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

ETFs V/s Mutual Funds

You must have heard from people that the gold ETF was the best investment in 2008! Are you aware what a gold ETF is? Let us first know what basically an ETF is.
ETF is the abbreviation for exchange traded fund, a financial instrument that tries to imitate its benchmark index by investing in stocks in the same proportion as that of the benchmark index.
On other hand a mutual fund is a trust that pools the savings of a number of investors and invests the collected money.
You can say that an ETF is similar to an index mutual fund which also invests in stocks in the same proportion as that of the benchmark index. So Nifty BeES ETF by Benchmark Mutual Fund invests in the same stocks as that of its benchmark S&P CNX Nifty Index.
You may be wondering how are ETFs different from mutual funds, as both collect money from investors and invest in scrips or other assets like gold.
The factors in which these two differ from each other are

Low cost:

ETF have lower cost as they are generally passively managed and invest only in index based stocks. They don’t trade, buy or sell stocks frequently, and the proportion for investment in each scrip is normally fixed, based upon the weightage of that scrip in the index.
Thus, ETF requires low management expertise as research and marketing expenses are less.
Mutual Funds on the other hand are more dynamically managed and hence have a higher expense ratio. Fund houses spend a lot of money on research of scrips. They buy and have a tendency to churn the scrips more frequently.
Take this for example Nifty BeES has a cost structure of around 0.50% as compared to 1.25% of ICICI Prudential Index Fund. Apart from management costs, mutual funds also charge entry and exit load which take almost 2% out of your total investments; whereas in ETF, you have to pay only brokerage charge.

Liquidity:
ETFs can be sold or bought like stocks during market hours, unlike mutual funds which can be bought and sold only at the day’s end as per their calculated net asset value (NAV).
To understand the above, lets us assume, if you want to redeem your investment on a particular day for some monetary need and by sheer bad luck the market begins to fall. As ETFs are traded on the markets you can minimize your loss by immediately selling your ETF.
Had you wanted to redeem from a mutual fund you would have had to wait till the end of the trading session for the generation of NAV; by the time the market might have fallen substantially, leading you to suffer a higher loss.

Long-term investor protection:

the stock exchanges, thus Asset Management Company managing the ETF is not involved in the transaction. However, in case of mutual fund, units are purchased and sold by the Asset Management Company.
This may lead to investors suffering if there is a large exit of money from the scheme as was witnessed in many mutual fund schemes during the October-November 2008 period. During the period, long term investors had to suffer, due to large outflow of funds from schemes which led to many fund managers selling their best assets in fire sales.
Thus, ETF protects long-term investors` value as assets are not sold even when there is large selling seen in ETFs.

Low tracking error:
ETFs have very low tracking error, which is the difference between the returns by funds measured against its benchmark index. This is because, ETFs invests in stocks that constitute the benchmark index, in the same proportion as their weightage in the index. Also the gap between ETF`s NAV and market price is less because of arbitrage opportunities which traders take advantage of.
On the other hand, mutual funds are not so keen to invest in stocks in the same proportion of the benchmark index of the scheme, and mostly deviate from the returns posted by the index. Index funds have high tracking error as there is no arbitrage between the funds` NAV and market.
Thus, if you believe that index will gain, have limited funds to invest in stocks, and not comfortable with any particular scrip, then exchange traded fund will be the right investment option.

Source: http://in.reuters.com/article/personalFinance/idINIndia-39097720090417?sp=true

Everything you need to know about FDs

Fixed deposit (FD) is an investment option that allows you to invest a sum of money for a fixed time period and at a fixed rate of interest. During the course of the FD, even if the prevailing interest rates go up or down, you will be entitled to the rate of interest that was committed to you.

FDs pay a higher rate of interest than your savings bank account. The current rates, as of early April, for a one-year FD are approximately 8-8.5%. Your savings bank account offers you only 3.5% interest.

Other conditions being equal, you are better off putting your money in an FD account rather than a savings account. The interest can be paid to you quarterly, half-yearly or annually. If you are a senior citizen, the interest rate on your FD may go up by 0.5%.

Two types:

1. Bank and NBFC FDs: Offered by banks or non-banking finance companies; the Reserve Bank of India (RBI) regulates these institutions.

2. Corporate FDs: These are offered by companies that are looking to raise money from the open market. Corporate FDs typically pay a higher rate of interest, but also carry a relatively higher risk than bank FDs.

Advantages

• FDs offer a safe return: FDs are usually secure and are very low-risk investments. Bank FDs are guaranteed up to Rs1 lakh by the Deposit Insurance and Credit Guarantee Corporation.

• You can raise a loan against your FD: You can borrow up to 85% of your deposit amount (in some cases, only after a few months of your FD’s existence). This is valid only for bank FDs.

• Low maintenance: Unlike other investments such as stocks, mutual funds or even real estate, you don’t need to monitor your FDs on a daily or monthly basis, or undertake any kind of maintenance work.

• Choice of time period: You can make a deposit for any period of time, from 15 days to 10 years.

Disadvantages

• Relatively low returns: Because FDs are very low-risk instruments, they offer low returns compared with alternative investment options such as stocks and mutual funds.

• Lock-ups: Your money will be locked up in an FD for the duration of the deposit. As a result, unlike a savings bank deposit, you will lose the flexibility of accessing your funds whenever needed. You can break your FD if needed, but you would have to pay a penalty, which could include both a reduced interest rate as well as charges that are typically around 1%of the investment amount.

• Unfavourable tax treatment: Unlike other investment options, interest income earned from FDs will be added to your income and taxed.Taxes and FDs

• Tax-saving investments: Under section 80C, you can get a tax deduction of up to Rs1 lakh a year if you invest in a five-year FD.

• FDs and tax deduction at source (TDS): If the aggregate interest income that you are likely to earn from all your bank FDs held in a single branch is at least Rs10,000 in a financial year (Rs5,000 in the case of corporate FDs) then TDS will be deducted at 10%.

• If you do not fall in a taxable slab, then furnish Form 15G or 15H to your bank to prevent TDS on the interest income that is paid to you.

7 things to watch out for

1. Always appoint a nominee on your FD for quick withdrawals, and to avoid hassles if you are not around.

2. FDs from companies might pay more but come at a much higher risk than bank FDs. These FDs are not deposit-guaranteed.

3. In times of rising inflation, avoid FDs because your money will lose its purchasing power.

4. When making a deposit, check the penalty clause for early withdrawal.

5. If you need to withdraw funds for an emergency, instead of breaking the FD, you might want to consider taking an overdraft of up to 85% on your FD rather than pay the withdrawal penalty.

6. You might want to split your investment and make multiple deposits in small sizes and spread them across different maturities as opposed to making a single large deposit. This way, even if you do have to make a premature withdrawal, you will not pay a penalty on the entire amount but just on the limited amount you withdraw.

7. For FDs longer than a year, if your interest is paid at maturity, the taxes on interest income from your FDs are due on interest earned, even if the interest hasn’t been received by you.

Source: http://www.livemint.com/2009/04/12222430/Everything-you-need-to-know-ab.html?h=B

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

183 mutual fund schemes pending with SEBI

Change in guidelines, pending responses to queries from the Securities and Exchange Board of India (SEBI) and adverse market conditions have delayed the launch of total 183 mutual fund schemes, reports Business Standard. Out of the 183 schemes 68 schemes of the fixed maturity plans (FMPs) category have been shelved because of a change in guidelines in the third quarter of 2008-09. Of the remaining schemes, SEBI still has to approve around 70-75 schemes, despite their offer documents being filed since April 2008.
SEBI has said that a large number of applications were sent back with queries, but the fund houses did not come back with a response. But certain fund houses alleged that the market regulator has not approved their schemes within the stipulated period of 21 days from the date of filing the offer document and that some of these offer documents were filed up to 11 months back.
Since April 2008, about 290 offer documents were filed with SEBI, which charges a fee of Rs 100,000 for filing an offer document. However, if the fund house does not launch the fund within a six-month period of getting the approval, the application lapses. The fund house is then required to file a fresh offer document.

Source: http://www.myiris.com/newsCentre/newsPopup.php?fileR=20090316124838196&dir=2009/03/16&secID=livenews

The Seasons Of An Investor's Life

An investor's life is not a static thing. Assuming that you get income from sources other than your investments - like employment or your own business - this income will change as you age. Generally speaking, your income increases as you get older. This means that, as an investor, you will have the most income when you have the least amount of time to invest. Here we look at what characterizes the various "seasons" of your life as an investor and what actions you should take at each stage.

It is important to note that, although the seasons of your investing life are more or less set like the seasons in a year, you must start as early as possible. If you start investing late in life, you will have a very compressed spring, summer and fall, followed by a very long winter. If you start early, you can enjoy each season to its fullest.

Spring

When you are young and just starting to invest, you probably don't have enough disposable income to devote INR 10,000 a month to investments. You may have only INR100 to INR1000 rupee to spare. The important thing is to invest this small amount regularly. Due to the costs associated with investment and the smaller income you have available in the spring of your investing life, the choices available to you will likely be limited. Look for plans or investments at your local bank that allow you to invest a small monthly amount with little or no commission, such as some mutual fund plans. You probably shouldn't bother with something like a $20 savings bond - while the return will be better than nothing, it will still be discouraging.

Spring is a time of discovery and learning. This is a time to check out companies and learn how to decipher a balance sheet. It is also a good time to start reading about higher level investing, so that you'll be ready before you enter that phase. Generally speaking, this is when you do some small-time investing as training for the future. You should avoid any investments with high commission costs because your goal is not only to gain experience, but also to get a return on your investment as you learn.

Summer

You are starting to move up in the world, and while your disposable income won't put you on the Forbes list, you do have up to INR5000 a month to devote to investments if your cell phone bill comes in cheap. This is the time to look at index funds, income-producing investments and retirement plans. Summer can't last forever, but if you start planning for retirement now, the winter will be much milder.

If you're like most people, summer is a time when you can be very aggressive with your investments, because your disposable income is fairly high compared to your expenses. Furthermore, you may not have a mortgage and a family to worry about at this point, and this means that you can put a larger portion of your investment capital into high-risk, high-return vehicles. If you are keen, you can even look into things like options and shorting.

Fall

This is when you're in your earning prime. However, this season may also be the most expensive time in your life if you are providing financial support to children. In the transition between summer and fall, you may have gained some major debt in the form of a mortgage, but you will be paying it down diligently with your increased earning power rather than spending that money frivolously. Right? After all, winter is on its way.

In the fall, you will also be making a series of shifts as far as your investing strategy goes. Hopefully, some of the high-risk investing you did in the summer will pay off now, and you will be able to put that money into more stable investments. Your tolerance for risk isn't what it used to be, but the experience you've gained and the capital you control allow you to profit from lower risk investments. You will be buying bonds as well as continuing your investments into stocks and index funds. If you have prepared well in spring and summer, fall will be the most profitable season as far as investments and income - think of it as bringing in the harvest. This is when you will feel tempted to overspend because of your relative financial security, but try to be cautious, because income branches such as earned wages will soon be bare.

Winter

Your earning days are over and, from your perspective, this winter seems far better than that busy summer long ago. Your bonds and other investments are coming due at important intervals and covering your expenses. When you have extra money, you look at income-producing investments to help you purchase that time-share in Hawaii. If your investments have been especially good to you, you are also looking for a good estate lawyer to help you transfer your unneeded investments to your children and grandchildren, thus sparing your family the burden of estate taxes.

As you sit back in your armchair, basking in the warmth of financial security, you think back to those first steps you took way back in the spring and realize that planning for the seasons of your investing life wasn't so hard to do. In fact, it was almost natural.

Source: http://www.investopedia.com/articles/basics/06/investingseasons.asp

Make your MF portfolio a long term plan

Over the last few days, there has been a growing consensus on the fact that asset classes are set for a free fall. While equity has been showing intermittent strengths at lower levels, it has been more on account of trading support than investment buying with long-term investors preferring cash or debt. In fact, in the last few months, the fund flow from the high net worth individual community to debt has been on the rise and besides bank deposits, income funds and gold have been the preferred bets.
In such a scenario, investors have to rely on a de-risking model to build a portfolio and reliance on a single instrument or option may not provide the comfort. Investors who prefer mutual funds can look at a combination of products to minimise risk. While the percentage of allocation for each scheme differs based on individual risk-taking ability and tenure of the investment, these options can be considered by a larger segment as portfolio components.
Here are some of those options:
Debt allocation :
This has been the preferred option in recent times due to the economic environment. While fixed deposit is a product with assured returns, mutual funds (MFs) don't offer the comfort of assured returns. However, MFs have a wide range of products ranging from income funds, liquid funds to ultra short-term bond funds for investors looking for a debt option. As they are more tax-efficient and also offer the flexibility of partial withdrawal, these products can be your option besides fixed deposits.
Allocate around 50 per cent of your corpus towards these in the current market environment, while your short-term fund needs should be completely in debt.
Balance with risk :
An ideal MF portfolio should reflect the risk-taking abilities of the investor and should have a mix of debt, equity, gold and other options that come up from time to time. For instance, the real estate portfolio management service (PMS) or equity PMS are some options that have been launched by mutual fund companies in recent times. As a result, investors should be aware of the changing market needs and should also have the liquidity to take advantage of such opportunities. For instance, while everyone expects the equity markets to test new or October lows in 2009, a smart investor would brace himself for such an event by building his liquid portfolio.
The management of risk is a key component of an ideal portfolio and that could be achieved through a single product or a combination of products, the latter is a better option though. For instance, balanced funds do take care of risk management but to a limited extent and would be an option for small sums. A senior citizen can allocate his corpus between fixed return products and balanced funds for his postretirement fund needs in the early stages of his retirement life. For him, such a combination can fulfil the needs of balancing with a couple of products. It may not be the case for a young investor who has different fund needs with different tenures.
Finally, portfolio creation is a long-term exercise and with respect to equity portfolio, the task extends over a longer period of time. In the case of equity, the approach has to be long-term and has to be a continuous process. For MF investors, there are plenty of products for such an exercise in the form of systematic investment plans (SIPs) and systematic transfer plans (STPs), and such investments can be through a combination of products across sectors.

Source:http://economictimes.indiatimes.com/Features/Financial_Times/Make_your_MF_portfolio_a_long_term_plan/articleshow/3962507.cms

Fact of the matter

A mutual fund scheme`s fact sheet is like a monthly report card. It provides information to investors about where and how their funds have been deployed.

A mutual fund scheme's fact sheet is like a monthly report card. It provides information to investors about where and how their funds have been deployed. It also showcases the performance of the scheme and the quality of investments. Sometimes, the monthly reports are also accompanied by the fund manager's views and comments.
There is no standardised format for a fact sheet. The Association of Mutual Funds of India has suggested that all fund houses have a uniform format, but as there is no guideline from Sebi, fact sheets across the fund houses tend to be different.
However, the important details of equity and debt funds in the fact sheet are almost the same for fund houses. Here are the vital points that an investor can check in a fact sheet:

Stock allocation: It lists the individual stocks in which the fund has invested its corpus, as also their proportion. Equity funds plough in money in a large number of stocks, but investors must consider the top holdings (eight to 10 stocks) of the fund's scheme. This will help them determine the extent of diversification by the fund.
Sector allocation: This is important as equity diversified funds invest across sectors to derive the benefit of diversification. The funds that consistently allocate a substantial proportion of their assets to a single sector are more likely to be affected by factors such as a slump in that particular sector. Diversifying across various sectors helps offset the negative effects of a downside in a couple of sectors.
Cash levels: In the past few years, mutual funds have increasingly been using cash as a strategic tool to combat volatility. Check your fund's cash level as it can hint at the market conditions your fund manager is expecting in the near future. For instance, if the cash level is high, it probably means that the fund manager is expecting market uncertainty.
Expense ratios and loads: Check the expense ratio along with the entry or exit loads associated with the scheme. The fund's net asset value is computed after factoring in these expenses. The higher the expenses charged by the fund, the lower are the returns received by the investors. In case of debt funds, the indicators that one should look for are different from those that are common to equity-oriented funds. The factors important for debt funds include the quality of investments, maturity and rating profile.
Average maturity: As the performance of a debt fund is inversely related to interest rates, the average maturity of the fund's debt holdings is of utmost importance. If the average maturity is consistently high (over a period of time), it implies that the manager expects the interest rates to fall in the future, and vice versa.
Rating profile: Debt funds invest in securities with different credit ratings (e.g. AAA, AA+). Such ratings determine the risk profile of a debt fund. The funds that invest the majority of their corpus in low-rated debt instruments are prone to high credit risk, which can affect their performance considerably. There are other facts in the fact sheet that are common to both equity and debt funds such as the investment objective, performance of the fund, applicable dividends, performance of the fund versus that of the benchmark, and the past performance compared with funds within the peer set.

Benefits of investing in debt funds

The decline in the Indian and global equities market has finally brought us to the conclusion: what had began as a global liquidity glut four years ago has eventually ended as a liquidity crisis in 2008!
In the current recessionary scenario, opportunities for investments are limited and fraught with risk.
In such a backdrop, an investor’s choices with regard to alternative investment avenues are restricted and involve considerable uncertainty. It is no surprise that a majority of the investors choose to switch into a much-safer investment class — debt oriented funds.
A debt fund is a diversified portfolio of assorted debt and money market instruments managed by professional managers of a mutual fund.
A stake in this is available to the general investor at an equally apportioned price of the ‘total portfolio value per unit’ .
This is also known as NAV(net asset value). So for all practical purposes, a debt fund is a simple proxy to investment into debt as an asset class.
Debt funds can be categorised into various sections based on the specificity of securities they invest in, timehorizon and the objective. These would be namely: income / bonds funds, liquid/ money market funds and gilt funds. The maturity of securities, which these debt schemes invest in, may vary according to the scheme objective and investment strategy.
But their investment universe largely ranges from treasury bills, commercial paper, corporate deposit and repos for the short-horizon funds to corporate bonds, gilts, debentures and fixed deposits for long-term debt funds. In this categorisation, the only break is gilt funds that invest in sovereign papers of central and state governments.
Another addition to the debt fund category is fixed maturity plans (FMPs), which are nothing but close-ended debt funds and invest according to the scheme maturity and investment pattern as provided by the scheme mandate. The key advantage of debt funds is the near assurance (not always) of the flow of periodic income to the investor by way of interest/ coupon payment (or on deepdiscount ) on a largely pre-fixed rate of return.This ‘pledge’ of ‘return’ ensures that the pricing of the future cash flow is largely accounted into.
This ensures a significantly reduced volatility (risk) in prices of the underlying debt assets (and thus the NAV) of the fund.
In the case of liquid funds, the risk associated with NAV volatility tends to be almost negligible.
To compare and contrast: the volatility in annualised returns (risk) of Crisil Liquid Fund Index was 0.60% as on November 30.
During the same period, the volatility in annualised returns (risk) of Nifty Junior, Nifty and Sensex was at 38.06%, 32.99% and 31.98%, respectively . The difference is stark!
In all fairness, debt-based investments face credit risk and interest rate risk.
But even here, in case of gilt based funds, the credit risk is absent, making it a near risk-free investment (however, interest rate risk remains prominent here).high quality debt-papers backed by an asset guarantee to ensure capital safety.
In sum, the cornerstone of debt funds is the nearly ascertained yield on investment with a satisfying protection to capital.
The comparably low risk attached with the debt fund investments may in-turn , invite a hypothesis that: “the commensurate return on debt funds too may be low, given the low risk” .
This is not entirely untrue! But debt funds do exhibit high return potential in a given set of circumstances.
Especially during a declining phase of the interest rate cycle, when the rally in the secondary gilt and bond market provides the majority of debt funds the opportunity to profit from high prices of the securities.
The debt funds thus find themselves in an advantageous position to benefit from the bond rally, and are potentially inclined to provide double digit returns.Debt mutual funds also gain significant tax arbitrage advantage against a very popular investment tool in Indian financial landscape — fixed deposits (FDs).
The returns on FDs are fully taxable to the extent of 33.99%. In comparison, income from debt funds is taxed according to the scheme’s characteristics.
The dividend income from liquid funds invites the tax incidence of 28.325%, whereas dividend income from all other debt funds are taxable at 14.1625%.
In case of growth schemes, where income accrues as short term capital gains, the tax incidence would be as per the tax slab.
Whereas in case of long-term capital gains from debt mutual funds, the incidence of taxation would be 10% flat or at 20% with application of indexation.
Thus, invariably in all cases, the investor stands to make a higher net return on investment vis-a-vis FDs due to tax arbitrage.
Given the scope, dimension and dynamism of investor needs, the investment in debt funds must be planned after realistic appreciation of the risk-reward trade-off and the investment horizon incumbent to such debt asset.
Yet, even in case of equity-oriented investor , the presence of a debt fund in their portfolio accords a stable grounding to the overall portfolio, and tends to restrict the downside of the investments during the market downturn.
I would thus like to reiterate that investors have been presented with a unique opportunity by the present Indian debt market, wherein the declining interest rate cycle has triggered a major rally in gilts.
However, the credit spread between gilt and commensurate corporate bond paper continues to linger in excess of 300 bps, and hints of a likely rally in the bond market as well.
This may prove to be a significant investment opportunity for an investor with a 6 month to 1-year timeline.
Sandesh Kirkire, CEO, Kotak Mahindra Mutual Fund

Source: http://economictimes.indiatimes.com/quickiearticleshow/msid-3868912.cms