“Long years ago, we made a tryst with destiny and now the time comes when we shall redeem our pledge... At the stroke of the midnight hour, when the world sleeps, Indiawill awake to life and freedom.” - Jawaharlal Nehru
Thursday, August 14, 2008
Happy Independence Day
“Long years ago, we made a tryst with destiny and now the time comes when we shall redeem our pledge... At the stroke of the midnight hour, when the world sleeps, Indiawill awake to life and freedom.” - Jawaharlal Nehru
Wednesday, August 13, 2008
Market uncertainties - How to make the most of it
This year we have seen volatility in almost every possible area right from equity markets to commodities, oil, currency, interest rates, and inflation. Oil has corrected by 20% from its top of $147 to around $118 now. Rupee though in a band has been appreciating in the last couple of weeks. Equity markets have once again surprised everyone with a bounce back to 15000 levels. Majority of the people are still confident that this is a bear market and the market could be headed to lower levels. They might be right but at the same time could also be wrong. Time and again the markets have made most analyzed opinions look like weather predictions and one should certainly not take such predictions as advice for your situation.
For a moment, let us consider a few ?What ifs?. What would happen if oil corrects to $100 or lower? What would happen if rupee appreciates from here on (which looks like a strong possibility)? What if the monsoons are good and agricultural output is better than expected? What if government pushes ahead with banking, insurance, pension and disinvestment reforms to improve its track record? The earnings of the last quarter were in line with expectations and in fact a tad better than what many had expected. A confluence of all or most of these factors have the propensity to propel the market further and provide for a decent rally. At the same time what if oil rockets up and crosses $150 and all other factors don?t fall in place. If we indeed get into such a zone, no asset can actually protect the value of money and there might be no worthy investment in such situations. This is what we call as uncertainty and this is precisely why people can expect higher returns from equity.
Everyone understands the principle of buying low and selling high. How many people do you think actually bought when the markets were going lower. Very few I bet. Though the principle might sound very simple, implementing it takes a lot of guts. In such situations most people tend to alter their investment strategy by either exiting existing investments or not making new investments. However for the brave ones, absolute returns have been in excess of 20% in a matter of weeks.
What should one be doing now?
First, do not alter your investment strategy just because everyone else is doing so or because the experts say we are headed for doom. Understand that big money is made in equity markets by staying invested for an extended period of time, by certainly buying low and then selling high. You will occasionally make money by flipping stocks and through tips but this should not be construed as a consistent viable investment strategy. Create an investment strategy if you do not have one. Variables that should be considered here are your financial needs, current financial situation, liquidity needs, time horizon, and actual behavior towards risk.
Ask yourself how did you react in the current equity market downturn? If your mood swings were as volatile as the market swings, you might not have the risk behavior to take on a lot of equity in your portfolio. Changing one?s behavior is very difficult and a prudent strategy would be to cut down your equity exposure on rallies. One is likely to witness a lot of profit booking on subsequent rises and hence don?t be surprised if you see markets down after consistent rallies. However if you have been calm during such turbulent times, you should look at adding equity when the market goes down or corrects.
With interest rates going up, there are a lot of Fixed Maturity Plans with higher yields coming out. The yields in them could be anywhere between 10.2% and 11.15%. However make sure that the indicative portfolio is checked thoroughly. Avoid real estate bonds even though they could give higher yields. Industry insiders believe that a couple of real estate players have defaulted on their payments and this will have an impact on NAVs of some of the existing FMPs. (View - Fixed Maturity Plans open Now)
Residential Real Estate prices have been on a downswing for quite some time and are expected to correct another 25% comfortably. The key question is by when can this happen. Real Estate normally takes time to correct unlike stocks and hence the period could be anywhere between 6-18 months. Also rising interest rates have given heartburns to a lot of homeowners. Infact some people have also undergone counseling as they have developed suicidal tendencies. We strongly recommend not going in for high amount and high interest rate loans. Even if residential prices correct by 15% and interest rates come down slightly in the next 12 months, you will emerge as a winner by being patient.
Look at investing in gold on further corrections.
Market downturns are certainly not easy to digest but you should not let these unduly affect you. You should concentrate on your financial goals, portfolio, overall financial situation and how best to capitalize during such uncertain times.
For a moment, let us consider a few ?What ifs?. What would happen if oil corrects to $100 or lower? What would happen if rupee appreciates from here on (which looks like a strong possibility)? What if the monsoons are good and agricultural output is better than expected? What if government pushes ahead with banking, insurance, pension and disinvestment reforms to improve its track record? The earnings of the last quarter were in line with expectations and in fact a tad better than what many had expected. A confluence of all or most of these factors have the propensity to propel the market further and provide for a decent rally. At the same time what if oil rockets up and crosses $150 and all other factors don?t fall in place. If we indeed get into such a zone, no asset can actually protect the value of money and there might be no worthy investment in such situations. This is what we call as uncertainty and this is precisely why people can expect higher returns from equity.
Everyone understands the principle of buying low and selling high. How many people do you think actually bought when the markets were going lower. Very few I bet. Though the principle might sound very simple, implementing it takes a lot of guts. In such situations most people tend to alter their investment strategy by either exiting existing investments or not making new investments. However for the brave ones, absolute returns have been in excess of 20% in a matter of weeks.
What should one be doing now?
First, do not alter your investment strategy just because everyone else is doing so or because the experts say we are headed for doom. Understand that big money is made in equity markets by staying invested for an extended period of time, by certainly buying low and then selling high. You will occasionally make money by flipping stocks and through tips but this should not be construed as a consistent viable investment strategy. Create an investment strategy if you do not have one. Variables that should be considered here are your financial needs, current financial situation, liquidity needs, time horizon, and actual behavior towards risk.
Ask yourself how did you react in the current equity market downturn? If your mood swings were as volatile as the market swings, you might not have the risk behavior to take on a lot of equity in your portfolio. Changing one?s behavior is very difficult and a prudent strategy would be to cut down your equity exposure on rallies. One is likely to witness a lot of profit booking on subsequent rises and hence don?t be surprised if you see markets down after consistent rallies. However if you have been calm during such turbulent times, you should look at adding equity when the market goes down or corrects.
With interest rates going up, there are a lot of Fixed Maturity Plans with higher yields coming out. The yields in them could be anywhere between 10.2% and 11.15%. However make sure that the indicative portfolio is checked thoroughly. Avoid real estate bonds even though they could give higher yields. Industry insiders believe that a couple of real estate players have defaulted on their payments and this will have an impact on NAVs of some of the existing FMPs. (View - Fixed Maturity Plans open Now)
Residential Real Estate prices have been on a downswing for quite some time and are expected to correct another 25% comfortably. The key question is by when can this happen. Real Estate normally takes time to correct unlike stocks and hence the period could be anywhere between 6-18 months. Also rising interest rates have given heartburns to a lot of homeowners. Infact some people have also undergone counseling as they have developed suicidal tendencies. We strongly recommend not going in for high amount and high interest rate loans. Even if residential prices correct by 15% and interest rates come down slightly in the next 12 months, you will emerge as a winner by being patient.
Look at investing in gold on further corrections.
Market downturns are certainly not easy to digest but you should not let these unduly affect you. You should concentrate on your financial goals, portfolio, overall financial situation and how best to capitalize during such uncertain times.
Monday, August 11, 2008
" GLOBAL INVESTOR'S GOLDEN RULES"
Mark Mobius (Executive Chairman- Templeton Asset Managment) " GLOBAL INVESTOR'S GOLDEN RULES"
1) Your best protection is diversification.
2) Taking risks is what you get paid for.
3) If you want to gain exposure to the world's fastest-growing economies, you've got to take the plunge into emerging markets.
4) High volatility is a characteristic of all markets, even more mature ones.
5) If you factor emotion out of the equation, and base your strategy on long-term fundamentals, you can win when markets fall and when they rise.
6) Wait five years and call me in the morning.
7) Bad times can be good times.
8) Lies can be as revealing as pure, honest truth,provide you know what cues to be looking and listening for.
9) By the time most data prepared by multinational institutions and governments become available, its already factored in stock prices.
10) Buy "good" stock in "bad" times, and "bad" stock in "good" times.
11) Times that people think are bad are often good.
12) Stocks that people think are bad are often good.
13) Countries that make it easy for travellers to enter tend to be friendly to foreign investment. 14) The quality of management is paramount.
15) Buy wet (liquid) stocks in wet (liquid) countries, not dry (illiquid) stocks in dry (illiquied) countries.
16) Patience is more than its own (just) reward.
17) Long-term planning pays.
18) The time of maximum pessimism is the best time to buy.
19) The time of maximum optimism is the best time to sell.
20) If you can see the light at the end of the tunnel, it's too late to buy or sell.
21) You earn dividends by discounting a market's "emotional quotient".
22) Buy stocks whose prices are going down, not up.
23) If a market is down 20 percent or more from a recent peak and value can be seen, start loading up.
24) Time heals most ills.
25) Privatisation primes the pump.
1) Your best protection is diversification.
2) Taking risks is what you get paid for.
3) If you want to gain exposure to the world's fastest-growing economies, you've got to take the plunge into emerging markets.
4) High volatility is a characteristic of all markets, even more mature ones.
5) If you factor emotion out of the equation, and base your strategy on long-term fundamentals, you can win when markets fall and when they rise.
6) Wait five years and call me in the morning.
7) Bad times can be good times.
8) Lies can be as revealing as pure, honest truth,provide you know what cues to be looking and listening for.
9) By the time most data prepared by multinational institutions and governments become available, its already factored in stock prices.
10) Buy "good" stock in "bad" times, and "bad" stock in "good" times.
11) Times that people think are bad are often good.
12) Stocks that people think are bad are often good.
13) Countries that make it easy for travellers to enter tend to be friendly to foreign investment. 14) The quality of management is paramount.
15) Buy wet (liquid) stocks in wet (liquid) countries, not dry (illiquid) stocks in dry (illiquied) countries.
16) Patience is more than its own (just) reward.
17) Long-term planning pays.
18) The time of maximum pessimism is the best time to buy.
19) The time of maximum optimism is the best time to sell.
20) If you can see the light at the end of the tunnel, it's too late to buy or sell.
21) You earn dividends by discounting a market's "emotional quotient".
22) Buy stocks whose prices are going down, not up.
23) If a market is down 20 percent or more from a recent peak and value can be seen, start loading up.
24) Time heals most ills.
25) Privatisation primes the pump.
Tuesday, August 5, 2008
Investment ideas that have stood the test of time
Lately there have been lots of talks on inflation being around the 11-12% mark. Personally I am of the view that inflation in India is not just around 11-12%, but much higher. Figures can be manipulated, and they always are. Just look at the prices of things we use in our daily lives. Some things they have gone up by more than 40% in a matter of few months.
Inflation, political problems, energy crisis, credit crunch, higher interest rates, sub-prime problem are all going to affect the markets. Investors are usually extremely jumpy and do not take rational decisions. Simply on hearing all this there is a flight of capital which has been bringing the markets down. Markets can go down further - I don?t know if they will or they won?t. Most retail investors who do not believe in value and do not bother too much about fundamentals are constantly grumbling and cursing everything now. Many of them have gone bankrupt due to taking leverage in the form of trading in futures. I understand their problem, however I wish that all of them learn from their mistakes and try to use this time as an opportunity to learn more. I too have made such mistakes in the past, but luckily I have learnt from them.
For value investors the markets going down is a great opportunity to buy, however the sad part is that most retail investors do not think this way and now even if they do, they might not have sufficient funds to benefit from this. Many will panic and sell and again after a few years will curse their luck for selling so low. My advice to them would be that use this opportunity as a time to start afresh. Every day is a new day and every day gives us the chance to start a new life. Once Edison had his whole lab burnt. Lots of his work and research was there in the lab, but he still was very happy. People were surprised and wondered why is he smiling even though his lab is burnt. He told them that all his mistakes have been burnt and he has the opportunity to start afresh. If you have made mistakes, do not worry and use this time to learn.
Less than around 4% of India?s savings goes into the stock markets. As more and more people are educated about investing, this figure is bound to rise. As this figures rises, unethical operators and dirty money belonging to politicians will be less likely to control the stock markets. As more and more people have a stake in our country?s growth, politicians will be more responsible to make sure that their decisions are beneficial to investors and the capital markets. This correction has been one of the best things that could have happened for any value investor. It is giving us a chance to buy assets into an economy which still has a long way to go.
I am a strong believer in the theory of Karma. If we work hard today, learn more and invest in knowledge we will be rewarded. I was at the BSE building the other day and a good friend there who has been a part of the markets as well as the BSE for several decades very beautifully told me something from the Gita, which he has used in the markets. He told me that the Gita tells us to do our duty and not worry about the fruits and rewards. If we do our duty we will get the fruits either sooner or later. The same applies to the markets. We need to do our work and not worry about the returns in the short term. If a business is good, it shall be discovered by the masses sooner or later. These ideas are not very popular, but these are the very ideas which have stood the test of time. This simple idea runs into every area of our life. Let us all sow seeds of good in every area of our life.
Keep smiling and feel free to share whatever you read here with friends, family and loved ones!
Inflation, political problems, energy crisis, credit crunch, higher interest rates, sub-prime problem are all going to affect the markets. Investors are usually extremely jumpy and do not take rational decisions. Simply on hearing all this there is a flight of capital which has been bringing the markets down. Markets can go down further - I don?t know if they will or they won?t. Most retail investors who do not believe in value and do not bother too much about fundamentals are constantly grumbling and cursing everything now. Many of them have gone bankrupt due to taking leverage in the form of trading in futures. I understand their problem, however I wish that all of them learn from their mistakes and try to use this time as an opportunity to learn more. I too have made such mistakes in the past, but luckily I have learnt from them.
For value investors the markets going down is a great opportunity to buy, however the sad part is that most retail investors do not think this way and now even if they do, they might not have sufficient funds to benefit from this. Many will panic and sell and again after a few years will curse their luck for selling so low. My advice to them would be that use this opportunity as a time to start afresh. Every day is a new day and every day gives us the chance to start a new life. Once Edison had his whole lab burnt. Lots of his work and research was there in the lab, but he still was very happy. People were surprised and wondered why is he smiling even though his lab is burnt. He told them that all his mistakes have been burnt and he has the opportunity to start afresh. If you have made mistakes, do not worry and use this time to learn.
Less than around 4% of India?s savings goes into the stock markets. As more and more people are educated about investing, this figure is bound to rise. As this figures rises, unethical operators and dirty money belonging to politicians will be less likely to control the stock markets. As more and more people have a stake in our country?s growth, politicians will be more responsible to make sure that their decisions are beneficial to investors and the capital markets. This correction has been one of the best things that could have happened for any value investor. It is giving us a chance to buy assets into an economy which still has a long way to go.
I am a strong believer in the theory of Karma. If we work hard today, learn more and invest in knowledge we will be rewarded. I was at the BSE building the other day and a good friend there who has been a part of the markets as well as the BSE for several decades very beautifully told me something from the Gita, which he has used in the markets. He told me that the Gita tells us to do our duty and not worry about the fruits and rewards. If we do our duty we will get the fruits either sooner or later. The same applies to the markets. We need to do our work and not worry about the returns in the short term. If a business is good, it shall be discovered by the masses sooner or later. These ideas are not very popular, but these are the very ideas which have stood the test of time. This simple idea runs into every area of our life. Let us all sow seeds of good in every area of our life.
Keep smiling and feel free to share whatever you read here with friends, family and loved ones!
Monday, August 4, 2008
Tax & Money Saving Tips, Investment Resources for Indian investers
you can find various tips and resources that will help you saving your hard earned money. There are lots of financial schemes available in India. Many of them provides you guaranteed returns, high interest rates, tax savings under various sections of Indian Income Tax Act and much more benefits.
These financial plans not only provide you money growth but also provide you with financial security at various steps in your life.It depends on your needs which product suits you best.What are your requirements? i.e. short term or long term planningHow much risk you can take? i.e. you need assured returns or not. [less risk less returns]How would you like to invest? [one time or regular savings]How much do you know about the product? i.e. are you aware of ifs and buts of your instements?
Just for an example if you are looking for short term savings then you can invest your money in post offices , government bonds, mutual funds, and if you are concentrated to long term savings then public provident funds (PPF ), life insurance, long term bank deposits (FDs, RDs) can help you.
Bank Savings
1. Bank Fixed Deposits, [Term Deposit]
In a Fixed Deposit Saving Scheme a certain sum of money is deposited in the bank for a specified time period with a fixed rate of interest.
When you want to invest your hard earned money for a longer period of time and get a regular income, Fixed Deposit Scheme is ideal. It is SAFE, LIQUID and FETCHES HIGH RETURNS.
Loan / Overdraft facility is available against bank fixed deposits. Now many banks don’t charges for premature withdrawal.
2. Recurring Deposits
Under a Recurring Bank Deposit Saving Scheme, investor invests a specific amount in a bank on a monthly basis for a fixed rate of return. The deposit has a fixed tenure, at the end of which you get your principal sum as well as the interest earned during that period.
Recurring Deposit provides you the element of compulsion to save at high rates of interest applicable to Term Deposits alongwith liquidity to access that savings any time.
Government Tax Savings
RBI Bonds, or RBI Relief Bonds
RBI Bonds are tax saving bonds that have a special provision that allows the investor to save on tax. These Bonds are instruments that are issued by the RBI.
The interest is compounded half-yearly. Maturity period of RBI Bonds is five years, and interest received is tax-free in the hands of the investor.
Post Office Savings
Post Office Time Deposits
Post Office Recurring Deposits
Post Office Monthly Income Scheme [Post office MIS ]
National Savings Certificates [NSC ]
National Savings Scheme [NSS]
Kisan Vikas Patra - [KVP ]
Public Provident Funds [PPF ]
Other Savings
1. Infrastructure Bonds,
Infrastructure bonds are available through issues of ICICI and IDBI, brought out in the name of ICICI Safety Bonds and IDBI Flexibonds. These provide tax-saving benefits under Section 88 of the Income Tax Act, 1961, for the investor. You can reduce your tax liability by upto Rs 16,000 per annum
2. Company Fixed Deposits
Fixed deposits in companies that earn a fixed rate of return over a period of time are called Company Fixed Deposits. Financial institutions and Non-Banking Finance Companies (NBFCs) also accept such deposits.
3. Life Insurance:
Life insurance saving schemes for government owned Life Insurance Corporation of India and other private life insurance companies like Bajaj Allianz, Birla Sun Life Insurance, HDFC Life Insurance, ICICI Prudential
Tax Rebates under Indian Income Tax Act
Specified Investment Schemes u/s 80C
Life insurance premium payments
Contributions to Employees Provident Fund/GPF
Public Provident Fund (maximum Rs 70,000 in a year)
Nattional Saving Certificates. [NSC]
Unit Linked Insurance Plan (ULIP)
Repayment of Housing Loan (Principal)
Equity Linked Savings Scheme (ELSS)
Tuition Fees including admission fees or college fees paid for Full-time education of any two children of the assessee (Any Development fees or donation or payment of similar nature shall not be eligible for deduction).
Infrastructure Bonds issued by Institutions/ Banks such as IDBI, ICICI, REC, PFC etc.
Interest accrued in respect of NSC VIII issue.
Deduction under section 80 CCC(1)
This section allows a deduction of up to Rs. 10,000 to an individual in respect of contribution to ‘Pension’ scheme of LIC of India or any other Insurance Co.
Tax saving Pension plans available in market are LIC’s Jeevan Suraksha, ICICI Pru Life Time Pension, Aviva Life Pension Plus, Max Easy Life policy, Tata AIG’s Nirvana Plus etc.
Section 80 CCE
Aggregate deduction u/s 80 C, u/s 80 CCC and 80 CCD can not exceed Rs. 1,00,000. ( One Lac)
Deduction under section 80D.
Under This section, a deduction up to Rs 10,000 (Rs 15,000 in case of senior citizens) is allowed in respect of premium paid by cheque towards health insurance policy, like "Mediclaim". Such premium can be paid towards health insurance of spouse, dependent parents as well as dependent children.
Deduction under section 24(b)
Under this section, Interest on borrowed capital for the purpose of house purchase or construction is deductible from taxable income up to Rs. 1,50,000 with some conditions to be fulfilled.
These financial plans not only provide you money growth but also provide you with financial security at various steps in your life.It depends on your needs which product suits you best.What are your requirements? i.e. short term or long term planningHow much risk you can take? i.e. you need assured returns or not. [less risk less returns]How would you like to invest? [one time or regular savings]How much do you know about the product? i.e. are you aware of ifs and buts of your instements?
Just for an example if you are looking for short term savings then you can invest your money in post offices , government bonds, mutual funds, and if you are concentrated to long term savings then public provident funds (PPF ), life insurance, long term bank deposits (FDs, RDs) can help you.
Bank Savings
1. Bank Fixed Deposits, [Term Deposit]
In a Fixed Deposit Saving Scheme a certain sum of money is deposited in the bank for a specified time period with a fixed rate of interest.
When you want to invest your hard earned money for a longer period of time and get a regular income, Fixed Deposit Scheme is ideal. It is SAFE, LIQUID and FETCHES HIGH RETURNS.
Loan / Overdraft facility is available against bank fixed deposits. Now many banks don’t charges for premature withdrawal.
2. Recurring Deposits
Under a Recurring Bank Deposit Saving Scheme, investor invests a specific amount in a bank on a monthly basis for a fixed rate of return. The deposit has a fixed tenure, at the end of which you get your principal sum as well as the interest earned during that period.
Recurring Deposit provides you the element of compulsion to save at high rates of interest applicable to Term Deposits alongwith liquidity to access that savings any time.
Government Tax Savings
RBI Bonds, or RBI Relief Bonds
RBI Bonds are tax saving bonds that have a special provision that allows the investor to save on tax. These Bonds are instruments that are issued by the RBI.
The interest is compounded half-yearly. Maturity period of RBI Bonds is five years, and interest received is tax-free in the hands of the investor.
Post Office Savings
Post Office Time Deposits
Post Office Recurring Deposits
Post Office Monthly Income Scheme [Post office MIS ]
National Savings Certificates [NSC ]
National Savings Scheme [NSS]
Kisan Vikas Patra - [KVP ]
Public Provident Funds [PPF ]
Other Savings
1. Infrastructure Bonds,
Infrastructure bonds are available through issues of ICICI and IDBI, brought out in the name of ICICI Safety Bonds and IDBI Flexibonds. These provide tax-saving benefits under Section 88 of the Income Tax Act, 1961, for the investor. You can reduce your tax liability by upto Rs 16,000 per annum
2. Company Fixed Deposits
Fixed deposits in companies that earn a fixed rate of return over a period of time are called Company Fixed Deposits. Financial institutions and Non-Banking Finance Companies (NBFCs) also accept such deposits.
3. Life Insurance:
Life insurance saving schemes for government owned Life Insurance Corporation of India and other private life insurance companies like Bajaj Allianz, Birla Sun Life Insurance, HDFC Life Insurance, ICICI Prudential
Tax Rebates under Indian Income Tax Act
Specified Investment Schemes u/s 80C
Life insurance premium payments
Contributions to Employees Provident Fund/GPF
Public Provident Fund (maximum Rs 70,000 in a year)
Nattional Saving Certificates. [NSC]
Unit Linked Insurance Plan (ULIP)
Repayment of Housing Loan (Principal)
Equity Linked Savings Scheme (ELSS)
Tuition Fees including admission fees or college fees paid for Full-time education of any two children of the assessee (Any Development fees or donation or payment of similar nature shall not be eligible for deduction).
Infrastructure Bonds issued by Institutions/ Banks such as IDBI, ICICI, REC, PFC etc.
Interest accrued in respect of NSC VIII issue.
Deduction under section 80 CCC(1)
This section allows a deduction of up to Rs. 10,000 to an individual in respect of contribution to ‘Pension’ scheme of LIC of India or any other Insurance Co.
Tax saving Pension plans available in market are LIC’s Jeevan Suraksha, ICICI Pru Life Time Pension, Aviva Life Pension Plus, Max Easy Life policy, Tata AIG’s Nirvana Plus etc.
Section 80 CCE
Aggregate deduction u/s 80 C, u/s 80 CCC and 80 CCD can not exceed Rs. 1,00,000. ( One Lac)
Deduction under section 80D.
Under This section, a deduction up to Rs 10,000 (Rs 15,000 in case of senior citizens) is allowed in respect of premium paid by cheque towards health insurance policy, like "Mediclaim". Such premium can be paid towards health insurance of spouse, dependent parents as well as dependent children.
Deduction under section 24(b)
Under this section, Interest on borrowed capital for the purpose of house purchase or construction is deductible from taxable income up to Rs. 1,50,000 with some conditions to be fulfilled.
7 GREAT investment tips for BIG returns
Equity funds, if selected in the right manner and in the right proportion, have the ability to play an important role in achieving most long-term objectives of investors in different segments. While the selection process becomes much easier if you get advice from professionals, it is equally important to know certain aspects of equity investing yourself to do justice to your hard earned money.
Knowing them and by using them in the selection process can make a big difference to the end result. Here are some important investment guidelines:
1. Know your risk profile
Before you take a decision to invest in equity funds, it is important to assess your risk tolerance. Risk tolerance depends on certain factors like emotional temperament, attitude and investment experience. Remember, while ascertaining the risk tolerance, it is crucial to consider one's desire to assume risk as the capacity to assume the risk.
It helps to understand different categories of overall risk tolerance, i.e. conservative, moderate or aggressive. While a conservative investor will accept lower returns to minimise price volatility, a moderate investor would be all right with greater price volatility than conservative risk tolerances to pursue higher returns.
An aggressive investor wouldn't mind large swings in the NAVs to seek the highest returns.
Though identifying the desire for risk is a tough job, it can be made easy by defining one's comfort zone.
2. Don't have too many schemes in your portfolio
While it is true that diversification helps in earning better returns with a lower level of fluctuations, it becomes counter productive when one has too many funds in the portfolio.
For example, if you have 15 funds in your portfolio, it does not necessarily mean that your portfolio is adequately diversified. To determine the right level of diversification, one has to consider factors like size of the portfolio, type of funds and allocation to different asset classes. Therefore, it is possible that a portfolio having 5 schemes may be adequately diversified whereas another one with 10 schemes may have very little diversification.
Remember, to have a well-balanced equity portfolio, it is important to have the right level of exposure to different segments of the equity market like large cap, mid-cap and small cap. In addition, for a decent portfolio size, it is all right to have some exposure in the sector and specialty funds.
3. Longer time horizon provides protection from volatility
As an equity fund investor, you need to understand that volatility is an integral part of the stock market. However, if you remain focused on the long-term objectives and follow a disciplined approach to investing, you can not only handle volatility properly but also turn it to your advantage.
4. Understand and analyse 'Good Performance'
'Good performance' is a subjective thing. Ideally, to analyse performance, one should consider returns as well as the risk taken to achieve those returns. Besides, consistency in terms of performance as well as portfolio selection is another factor that should play an important part while analysing the performance.
Therefore, if an investment in a mutual fund scheme takes you past your risk tolerance while providing you decent returns, it cannot always be termed as good performance. In fact, at times to ensure that your investment remains within the parameters defined in the investment plan, you may to be forced to exit from that scheme.
In other words, you need to assess as to how much risk did the fund manger subject you to, and did he give you an adequate reward for taking that risk. Besides, you also need to consider whether own risk profile allows you to accept the revised level of risk
5. Sell your fund, if you need to
There is no standard formula to determine the right time to sell an investment in mutual fund or for that matter any investment. However, you can definitely benefit by following certain guidelines while deciding to sell an investment in a mutual fund scheme. Here are some of them:
You may consider selling a fund when your investment plan calls for a sale rather than doing so for emotional reasons.
You need to hold a fund long enough to evaluate its performance over a complete market cycle, i.e. around three years or so. Many of us make the mistake of either holding on to funds for too long or exit in a hurry. It is important to do a thorough analysis before taking a decision to sell. In other words, if you take a wrong decision, there is always a risk of missing out on good rallies in the market or getting out too early thus missing out on potential gains.
You should consider coming out of a fund if its performance has consistently lagged its peers for a period of one year or so.
It doesn't make sense to hold a fund when it no longer meets your needs. If you have made a proper selection, you would generally be required to make changes only if the fund changes its objective or investment style, or if your needs change.
6. Diversified vs. Concentrated Portfolio
The choice between funds that have a diversified and a concentrated portfolio largely depends upon your risk profile. As discussed earlier, a well-diversified portfolio helps in spreading the investments across different sectors and segments of the market. The idea is that if one or more stocks do badly, the portfolio won't be affected as much.
At the same time, if one stock does very well, the portfolio won't reap all the benefits. A diversified fund, therefore, is an ideal choice for someone who is looking for steady returns over the longer term.
A concentrated portfolio works exactly in the opposite manner. While a fund with a concentrated portfolio has a better chance of providing higher returns, it also increases your chances of under performing or losing a large portion of your portfolio in a market downturn. Thus, a concentrated portfolio is ideally suited for those investors who have the capacity to shoulder higher risk in order to improve the chances of getting better returns.
7. Review your portfolio periodically
It is always a good idea to review your portfolio periodically. For example, you may begin reviewing your portfolio on a half-yearly basis. Besides, you may be required to review your portfolio in greater detail when your investments goals or financial circumstances change.
While reviewing the portfolio, you must consider the following:
How is your portfolio performing from the viewpoint of your personal goals? Are you comfortable with the price fluctuations that may have occurred keeping in view your short term, medium term and long-term goals?
How are your investments performing compared with others in the same category? It is important as for example, a 15% growth in your fund may look great, but not if the average returns given by other funds in the same category is 25 per cent. However, too much emphasis shouldn't be put on the short-term performance.
Knowing them and by using them in the selection process can make a big difference to the end result. Here are some important investment guidelines:
1. Know your risk profile
Before you take a decision to invest in equity funds, it is important to assess your risk tolerance. Risk tolerance depends on certain factors like emotional temperament, attitude and investment experience. Remember, while ascertaining the risk tolerance, it is crucial to consider one's desire to assume risk as the capacity to assume the risk.
It helps to understand different categories of overall risk tolerance, i.e. conservative, moderate or aggressive. While a conservative investor will accept lower returns to minimise price volatility, a moderate investor would be all right with greater price volatility than conservative risk tolerances to pursue higher returns.
An aggressive investor wouldn't mind large swings in the NAVs to seek the highest returns.
Though identifying the desire for risk is a tough job, it can be made easy by defining one's comfort zone.
2. Don't have too many schemes in your portfolio
While it is true that diversification helps in earning better returns with a lower level of fluctuations, it becomes counter productive when one has too many funds in the portfolio.
For example, if you have 15 funds in your portfolio, it does not necessarily mean that your portfolio is adequately diversified. To determine the right level of diversification, one has to consider factors like size of the portfolio, type of funds and allocation to different asset classes. Therefore, it is possible that a portfolio having 5 schemes may be adequately diversified whereas another one with 10 schemes may have very little diversification.
Remember, to have a well-balanced equity portfolio, it is important to have the right level of exposure to different segments of the equity market like large cap, mid-cap and small cap. In addition, for a decent portfolio size, it is all right to have some exposure in the sector and specialty funds.
3. Longer time horizon provides protection from volatility
As an equity fund investor, you need to understand that volatility is an integral part of the stock market. However, if you remain focused on the long-term objectives and follow a disciplined approach to investing, you can not only handle volatility properly but also turn it to your advantage.
4. Understand and analyse 'Good Performance'
'Good performance' is a subjective thing. Ideally, to analyse performance, one should consider returns as well as the risk taken to achieve those returns. Besides, consistency in terms of performance as well as portfolio selection is another factor that should play an important part while analysing the performance.
Therefore, if an investment in a mutual fund scheme takes you past your risk tolerance while providing you decent returns, it cannot always be termed as good performance. In fact, at times to ensure that your investment remains within the parameters defined in the investment plan, you may to be forced to exit from that scheme.
In other words, you need to assess as to how much risk did the fund manger subject you to, and did he give you an adequate reward for taking that risk. Besides, you also need to consider whether own risk profile allows you to accept the revised level of risk
5. Sell your fund, if you need to
There is no standard formula to determine the right time to sell an investment in mutual fund or for that matter any investment. However, you can definitely benefit by following certain guidelines while deciding to sell an investment in a mutual fund scheme. Here are some of them:
You may consider selling a fund when your investment plan calls for a sale rather than doing so for emotional reasons.
You need to hold a fund long enough to evaluate its performance over a complete market cycle, i.e. around three years or so. Many of us make the mistake of either holding on to funds for too long or exit in a hurry. It is important to do a thorough analysis before taking a decision to sell. In other words, if you take a wrong decision, there is always a risk of missing out on good rallies in the market or getting out too early thus missing out on potential gains.
You should consider coming out of a fund if its performance has consistently lagged its peers for a period of one year or so.
It doesn't make sense to hold a fund when it no longer meets your needs. If you have made a proper selection, you would generally be required to make changes only if the fund changes its objective or investment style, or if your needs change.
6. Diversified vs. Concentrated Portfolio
The choice between funds that have a diversified and a concentrated portfolio largely depends upon your risk profile. As discussed earlier, a well-diversified portfolio helps in spreading the investments across different sectors and segments of the market. The idea is that if one or more stocks do badly, the portfolio won't be affected as much.
At the same time, if one stock does very well, the portfolio won't reap all the benefits. A diversified fund, therefore, is an ideal choice for someone who is looking for steady returns over the longer term.
A concentrated portfolio works exactly in the opposite manner. While a fund with a concentrated portfolio has a better chance of providing higher returns, it also increases your chances of under performing or losing a large portion of your portfolio in a market downturn. Thus, a concentrated portfolio is ideally suited for those investors who have the capacity to shoulder higher risk in order to improve the chances of getting better returns.
7. Review your portfolio periodically
It is always a good idea to review your portfolio periodically. For example, you may begin reviewing your portfolio on a half-yearly basis. Besides, you may be required to review your portfolio in greater detail when your investments goals or financial circumstances change.
While reviewing the portfolio, you must consider the following:
How is your portfolio performing from the viewpoint of your personal goals? Are you comfortable with the price fluctuations that may have occurred keeping in view your short term, medium term and long-term goals?
How are your investments performing compared with others in the same category? It is important as for example, a 15% growth in your fund may look great, but not if the average returns given by other funds in the same category is 25 per cent. However, too much emphasis shouldn't be put on the short-term performance.
Friday, August 1, 2008
Tips to select a good mutual fund
While equity funds are best for long-term returns, you should also plan your exit as your goals come nearer and reinvest in debt funds.
What funds must I invest in for retirement planning? What funds are ideal for my children's education planning?
Mutual funds are the ideal investment option for funding retirement and children's education. However, they must form only a part of such portfolios. Here's why. Capital protection is one of the foremost requirements of a retirement or education fund. And there is not a single mutual fund that carries a capital guarantee on your principal amount. For this reason, you cannot afford to ignore instruments such as the Public Provident Fund (PPF), National Savings Certificate (NSC) and the likes. While these instruments offer a decent risk-free return on investment, they may not suffice for your post retirement or children's education planning needs.
For this reason you could look at equity-oriented mutual funds to boost returns. But when considering equity instruments, take cognizance of one's time horizon of investment. The longer you can stay invested, the more equity allocation you can afford. Hence, if you are 27 years old and plan to retire at 60, you can invest the bulk of your portfolio in equity oriented schemes. This is true for planning children's education as well. If your child is 16 years old and you need the money in two years, you should completely avoid equity funds.
As you near your goal, you ought to start redeeming your equity investments and re-invest these in safer debt-oriented instruments. Hence when you are about 56-58 years old, you can institute a systematic withdrawal plan and reinvest the money in safer instruments.
The category of balanced funds is especially useful for such life stage planning. These funds invest at least 65 per cent of the corpus in equity and the rest is in debt instruments. When the equity segment of the fund does exceedingly well, the fund rebalances the portfolio, booking profits in equity and transferring to debt. This way, your risk exposure is kept in check.
I want to make an additional investment. Which are the new and good funds that I ought to invest in?
This one is really tricky, especially when we have no clue about the investor's portfolio. When making such a decision, take a good look at where you stand. As a first step you can use the portfolio tool on our website.
The first investment decision must be based on your asset allocation i.e how much of your money is invested in equity and debt instruments. Then you ought to look at the allocation and weightage to various funds and fund houses. In case you are overweight on a particular fund or fund house, avoid these funds. In case you are underweight on a well-performing fund, then channelise your investments to such a fund.
Assess your exposure to large-cap and mid-cap stocks. Accordingly pick a fund that will equate any such deficiency. Though these are basic steps, more often than not such a short exercise will help you plan your additional investments.
Before you consider adding more funds to your portfolio, look at current holdings and try to work with them.
One is advised to look at the offer document before investing. To me, all offer documents look similar. What should I look out for?
The offer document is an essential read before investing. In fact, all mutual fund distributors and financial planners are required to give their clients a copy of the same before the investor signs the application form.
Since these documents tend to be exceedingly lengthy and almost identical, you should at least go through the Key Information Memorandum (KIM) of the fund.
Here are some key factors that you need to keep an eye out for.
Investment Objective: This will explain the mandate and scope of investment. Whether the fund is equity or debt oriented, whether the fund will be multi-, large, mid- or small-cap specific, the level of diversification, the option to the fund manager to invest overseas and other such issues.
Type of fund: Is the fund open- or close-ended? In case of a close-end fund, look at the lock-in period, liquidity window and repurchase options.
Costs: Fees, expenses and loads are other big items to look out for.
Investment: Minimum initial investment, methods of purchasing, redeeming and making additional investments, the time taken for redemption, so forth and so on.
Fund Manager: Number of fund managers managing the fund and information on each. This information is useful to those who would like to check the antecedents of the manager. Most of this information is available in the KIM as well, but if you can spare the time, give a good look to the offer document as well.
How must I decide whether to hold on or to exit a fund?
If we had a rupee for every time we came across such a question! But this one has an easy solution. Ask yourself why you want to redeem your investment. If you need the money, go ahead. Are you apprehensive of the fund's performance? In that case, check out how the fund has done over the past three years. Look at the year-to-date performance of the fund vis-�-vis its peer group. If we are only a quarter or so into the year then look at the one-year return as against the category. Also look at the performance over the past four quarters. This will clearly specify whether the fund has been a consistent performer over the past year or just has an odd good quarter.
Apart from this you could also look at how the fund fits in with the rest of your holdings. In case it is a theme-based fund, see if the theme still has any steam left in it. If you have other funds with a similar investment objective, pick the better performer.
What funds must I invest in for retirement planning? What funds are ideal for my children's education planning?
Mutual funds are the ideal investment option for funding retirement and children's education. However, they must form only a part of such portfolios. Here's why. Capital protection is one of the foremost requirements of a retirement or education fund. And there is not a single mutual fund that carries a capital guarantee on your principal amount. For this reason, you cannot afford to ignore instruments such as the Public Provident Fund (PPF), National Savings Certificate (NSC) and the likes. While these instruments offer a decent risk-free return on investment, they may not suffice for your post retirement or children's education planning needs.
For this reason you could look at equity-oriented mutual funds to boost returns. But when considering equity instruments, take cognizance of one's time horizon of investment. The longer you can stay invested, the more equity allocation you can afford. Hence, if you are 27 years old and plan to retire at 60, you can invest the bulk of your portfolio in equity oriented schemes. This is true for planning children's education as well. If your child is 16 years old and you need the money in two years, you should completely avoid equity funds.
As you near your goal, you ought to start redeeming your equity investments and re-invest these in safer debt-oriented instruments. Hence when you are about 56-58 years old, you can institute a systematic withdrawal plan and reinvest the money in safer instruments.
The category of balanced funds is especially useful for such life stage planning. These funds invest at least 65 per cent of the corpus in equity and the rest is in debt instruments. When the equity segment of the fund does exceedingly well, the fund rebalances the portfolio, booking profits in equity and transferring to debt. This way, your risk exposure is kept in check.
I want to make an additional investment. Which are the new and good funds that I ought to invest in?
This one is really tricky, especially when we have no clue about the investor's portfolio. When making such a decision, take a good look at where you stand. As a first step you can use the portfolio tool on our website.
The first investment decision must be based on your asset allocation i.e how much of your money is invested in equity and debt instruments. Then you ought to look at the allocation and weightage to various funds and fund houses. In case you are overweight on a particular fund or fund house, avoid these funds. In case you are underweight on a well-performing fund, then channelise your investments to such a fund.
Assess your exposure to large-cap and mid-cap stocks. Accordingly pick a fund that will equate any such deficiency. Though these are basic steps, more often than not such a short exercise will help you plan your additional investments.
Before you consider adding more funds to your portfolio, look at current holdings and try to work with them.
One is advised to look at the offer document before investing. To me, all offer documents look similar. What should I look out for?
The offer document is an essential read before investing. In fact, all mutual fund distributors and financial planners are required to give their clients a copy of the same before the investor signs the application form.
Since these documents tend to be exceedingly lengthy and almost identical, you should at least go through the Key Information Memorandum (KIM) of the fund.
Here are some key factors that you need to keep an eye out for.
Investment Objective: This will explain the mandate and scope of investment. Whether the fund is equity or debt oriented, whether the fund will be multi-, large, mid- or small-cap specific, the level of diversification, the option to the fund manager to invest overseas and other such issues.
Type of fund: Is the fund open- or close-ended? In case of a close-end fund, look at the lock-in period, liquidity window and repurchase options.
Costs: Fees, expenses and loads are other big items to look out for.
Investment: Minimum initial investment, methods of purchasing, redeeming and making additional investments, the time taken for redemption, so forth and so on.
Fund Manager: Number of fund managers managing the fund and information on each. This information is useful to those who would like to check the antecedents of the manager. Most of this information is available in the KIM as well, but if you can spare the time, give a good look to the offer document as well.
How must I decide whether to hold on or to exit a fund?
If we had a rupee for every time we came across such a question! But this one has an easy solution. Ask yourself why you want to redeem your investment. If you need the money, go ahead. Are you apprehensive of the fund's performance? In that case, check out how the fund has done over the past three years. Look at the year-to-date performance of the fund vis-�-vis its peer group. If we are only a quarter or so into the year then look at the one-year return as against the category. Also look at the performance over the past four quarters. This will clearly specify whether the fund has been a consistent performer over the past year or just has an odd good quarter.
Apart from this you could also look at how the fund fits in with the rest of your holdings. In case it is a theme-based fund, see if the theme still has any steam left in it. If you have other funds with a similar investment objective, pick the better performer.
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