Investing in Low Risk Mutual Funds to avoid Choppy Markets

Posted on November 9, 2011 by Ranjan

This is a guest post by Karan Batra.Karan is a Chartered Accountant and lives in New Delhi.

When Recession came in the year 2008, many of us didn’t even know what Recession was and how it could impact the economy. Slowly and steadily everyone realised that the Recession has actually stepped in and the world won’t grow and the same pace as it did earlier.

It’s been a few years since the Recession came in 2008 and it till date the Stock Markets have not turned stable but are still volatile. Highly Volatile markets are the most risky as you never know at what stage to enter as they keep increasing and decreasing at a very rapid pace.

Despite the fact that Mutual funds are safe as compared to investing directly in Shares, but even the Mutual funds seem to have been caught in the ambit of Recession with the NAV’s decreasing constantly. In such circumstances, it is highly advisable to invest in low risk mutual funds such as debt oriented funds (e.g. Monthly Income Plans abbreviated as MIP’s and Gold Exchange Traded funds or Gold ETF’s)

As the fate of the economy still uncertain, it is highly advisable to have such Low Risk Mutual funds in your debt portfolio as Debt Oriented Mutual Funds are low on risk as compared to Equity Oriented Mutual Funds. And in the debt category, short term bonds and ultra short term bonds are even safer.

Despite the presence of such instruments in the market, many investors have either liquidated their investments or are planning to do so, in order to have a portfolio that is more of cash. Though it is not a bad strategy considering the way things have been of late, always remember that your gains would be limited to the Interest the bank can offer you in case you opt for liquid investments like Fixed Deposits. Adjusting for Inflation and taxes, it doesn’t cut a fetching picture at all with your real returns plunging into the negative territory.

Selecting the right Investment

If you are open to taking a significant amount of risk for capital appreciation, equity and equity related mutual funds are your best bet. That means if you are investing in equity MF’s through the systematic investment plan (SIP) route for your long term objectives, do not discontinue the existing SIP’s.

However, if you are conservative and think that the safety of capital is paramount, but still want returns better than what fixed deposits can offer, debt MF’s is the right fund for you. You can diversify across debt paper of varied maturity periods which will ensure safety of capital as well as optimum returns.

Selecting the right fund according to your risk appetitive is a very important aspect of investing as you yourself are going to enjoy the profits earned.

This article has been authored by CA Karan Batra who is a finance and tax blogger on http://www.charteredclub.com

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The Wall Street Dirty Business of Insider Trading

Posted on October 30, 2011 by Ranjan

You must read this story on NewYorker about Wall Street crimes. A bit long, but a gripping story. Worth making a movie!

Excerpts:

In the language of hedge funds, Galleon’s strategy was to “arbitrage reality” with the consensus on the Street—to find information about a given company that diverged from Wall Street’s view, allowing Galleon to cash in when the company’s stock price rose or fell. At Galleon, this was known as “getting an edge.” The analyst or portfolio manager with the best read on a company was called the “axe” on that stock. The surest way to become the axe was to have a source who passed on information about a company’s earnings, upcoming deals, and other confidential matters.

The ultimate edge was insider trading—the acquisition of nonpublic information about a company—and Rajaratnam was the king axe. At Galleon’s daily 8:30 A.M. meeting, he always had more information than his employees and didn’t hesitate to let them know it. By the mid-aughts, hedge funds accounted for nearly half of all stock trades, and there was ferocious competition for wealthy investors and the business of investment banks.

Lightly regulated and nearly opaque, hedge funds played a central role in the creation of credit-default swaps and other financial exotica that led to the economic collapse of 2008.

Rajaratnam’s goal was to be running a ten-billion-dollar fund by the end of 2009. In seducing Kumar, he made a valuable addition to the network that he had built up over the years.

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Pictures Are Worth Thousand Words

Posted on March 22, 2011 by Ranjan

Hemant Beniwal has 5 well researched images on TFL, that lucidly explains the basic and critical questions in personal finance.

Check 5 Important Charts that you must understand.

Another admirer of the above post, Madhupam said it succinctly:

……the simplest explanation to the 5 basic questions, which bother an investor. And these are:
1) Where to invest? (India)
2) Which asset to invest? (Equity)
3) How to invest? (SIP)
4) What minimum return to aim? (Alteast above inflation)
5) When to invest? (Always, with no timing)

Thanks Hemant.

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How To Analyse Mutual Fund Portfolio

Posted on December 15, 2010 by Ranjan

I have awesome readers! Just take a look at the question sent by Shailesh by email with a suggestion that I write a blog post:

I started investing in MFs about 1.5 years back. I use net banking for SIPs. Start of my journey I picked best performing funds using below criteria:

Allocation: Large cap/Multi cap: 60%, Mid cap/Theme: 40%, Total 8 funds
Choice: Check out Value Research Online listing of 5 star and 4 star funds with highest returns in 10, 5 yrs

Totally I invested in about 6 funds with using above principle. Along the way, I picked up 2 NFOs base on their investing principle (ex. Fidelity India Value Fund)…

Now my SIPs have come for a renewal. I tried analyzing who has performed and who has not. On a given date, I could see some performed better than others. I could not select a time frame to analyze them (since netbanking window doesn’t show these details). So technically I have compared them for approx periods and not exact periods. Some of these funds have bettered Sensex returns.

When I go back to the Value Research Online I see none of these figure in 50 Best Performing returns.

So the question is how do I evaluate my MF portfolio? What are the best ways of choosing funds? What is a good tracking window? How do I interpret the best performing funds rankings data?

Before I begin to respond to the questions, let me ask you a few more. Do you get to see such informed questions on TV/Print? Have you been able to comment/give suggestions/disagree on the questions and the answers which are posed on TV/Print? This is the power of blogs which is interactive and transparent!

And I told Shailesh that if he doesn’t like my answers, he can say that on the blog through comments . So can you! Please add to the thoughts by sharing what you know.

My thoughts
1. Tracking: It’s important that when you need to manage something, you need to measure it first. The need for tracking comes out clearly in this issue being faced by Shailesh. From the question, I can assume that Shailesh has a rough idea of the returns as his Netbanking interface does not give out all the details.

I would suggest downloading an excellent MS Excel workbook on tracking Mutual Funds from Chandoo’s Excel Blog: Link. You can easily create a table of all the mutual fund holdings and monitor the latest NAVs (Net Asset Values) to see how your investments are doing.

2. Benchmarking: Each Mutual Fund scheme comes with a benchmark. You cannot compare a debt fund with the returns of the sensex/nifty. The benchmark data is available on the BSE/NSE sites and you can see if your mutual funds investments have overperformed or underperformed.

3. Chasing returns or sticking to your asset allocation?: There’s a thin line difference between the best return schemes and the schemes that is based on your asset allocation principles. Let me elaborate.

Normally, asset allocation means deciding portions for your debt and equity investments. The debt and equity portions perform independently of each other and this makes for the diversification of your investments. Now since the returns from debt and equity investments vary, the total investment returns depend on the asset allocation decision.

In Shailesh’s case his asset allocation decision is to divide his investments between large caps and mid caps. My feeling is that he wants to maximize his returns and does not believe in putting money in debt instruments. Assuming that he has a very aggressive risk appetite, it’s fine with me, though experts recommend some debt investments for diversification purpose.

It is possible that Shailesh choice of 60% Large cap/Multi cap and 40% Midcap schemes can give the best returns. But it is not guaranteed. The largecaps and midcaps performance vary and it can impact the overall returns.

4. The Road ahead: I personally believe that setting up your investment philosophy/asset allocation is more important than chasing the best returns. Because, the top 50 mutual fund schemes change all the time. Imagine that you change your schemes according to the top 5 schemes every quarter/half year. More often than not, you will need to chop and churn your investments every quarter/halfyear!

And chopping and churning has its costs. Your MF Advisor may be the only beneficiary in the chops and churns!

Now if I have to give some actionable suggestions to Shailesh, here it is:

a. Stick to the best performing 5 schemes instead of 8. So you take out 3 non performing schemes.

b. Decide on the investment themes that you believe in and review the 5 schemes and their investment theme. Also check on the Fund Manager’s profile (I personally consider this important).

c. Screen the top 50 MF schemes on the basis of expense ratio, AUM, investment themes and Fund Managers and list another 3-5 schemes for further scanning.

Before I conclude, I must say that this post can help you with a DIY review and that a professional Mutual Fund Portfolio review is also a good option for people who don’t have the time for a DIY review.

How do you review your mutual fund investments? Any suggestions that you can add? Any areas where you disagree?

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What To Look At Before You Buy A Financial Product

Posted on December 14, 2010 by Ranjan

I posted this response to readers who were asking me where to invest on my old blog. Reposting this here. I have been guarded with my answers and start with the observation that since everyone has different financial goals and risk appetite, my recommendation may not work for him or her.

Since we are not talking about buying potatoes and onions, let me articulate on the things to look at before you make the buying decision.

Let’s take a look at some of the popular options available which are Bonds, Stocks, Real Estate, Mutual Funds (MFs), Unit Linked Insurance Policies (ULIP) and Exchange Traded Funds (ETF).

Now I’ll try to rate them on four parameters of investing. i.e. 1) Growth, 2) Liquidity, 3) Security and 4) Expenses

Growth: Stocks, MFs and ETFs top the rankings here. Over a period of over 5 years, the Compounded Annual Growth Rate (CAGR) is above 15% in comparison to 8% in Bonds. ULIPs begin to give a good growth only after 5 years or so because initially they are very expensive. Real estate is on a fairytale run these days too

Liquidity: Again, Stocks, MFs and ETFs score heavily while Bonds and ULIPs have a lock-in period or have substantial surrender charges. Real estate scores low here (You have to be lucky to get good buyers at the right time).

Security: I would rate all of them at par over a long-term of over 5 years. But you may get into a bad stock or real estate which are unsecured. Otherwise also, stocks and real estate are very volatile and can affect your blood pressure too!

Expenses: ETF is the least expensive with charges of around 0.5% compared to 2% from MFs and much more in ULIPs (especially in the initial years). Stocks too, are the least expensive, provided you get into the right stocks at the right time.

Based on the short analysis, I would recommend ETFs. Read more the 88% solution here. But as I said earlier, one man’s meat could be another man’s poison. Moreover, the diversification rule says that one should not keep all our eggs/ apples (for the vegetarians) in one basket.

So let us take a look at the various options, one at a time.

Shares: Investing in the equity market directly is exciting and sexy. You are in the thick of things and learn a lot in the process. Though the volatility and the information overload makes it a daunting task, investing in stocks is not rocket science. One should start with identifying a list of 10-15 companies out of 3-5 sectors which you know about and interests you. You can then keep a tab on their management team, financials, and future outlook and over a period of time, and will be able to take a call on them.

Real Estate: I feel that one has to be plain lucky to get into a good deal and be able to get the right buyer at the right price and time. I can’t think of any other factor other than luck. So if you feel you are blessed and have the right tip, go for it. Otherwise, it’s a no-no.

Mutual Funds: One should allocate their time to investment decisions in proportion to their income generation goals. Also, convenience and hassle free investing should be a major factor. Mutual Funds fit the bill where Fund Managers are into it full time. If you van identify fund managers who have consistently performed over last 3-5 years, nothing like it. The fund manager also has the muscle power of crores of Rupees and is able to take entry and exit decisions impartially. MFs continuously churn their portfolio. When MFs buy and sell stocks, they don’t have to pay capital gains as you would do when you churn. With Systematic Investment plans (SIP), you can start investing with as low as Rs 500 per month. But MFs have its own loading and administrative charges and the fund managers make merry on your hard earned money.

Exchange Traded Funds: Diversified equity funds usually have large expense ratios compared to index funds. For example, the expense ratio of Banking BeES, an index fund, is only 0.45, while it is anywhere between 2-2.50% for diversified equity schemes. That’s why I recommend ETFs.

ULIPs: Unit linked insurance policies combine two products, i.e. Insurance and Mutual Funds. In the initial few years, ULIPs are very expensive. But in case you don’t want any hassles of investing, and you have a tried and tested Insurance agent who is almost part of your family, then ULIPs are for you.

Bonds: For those of you who are risk averse.

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Insurance Is The Best Investment?

Posted on December 8, 2010 by Ranjan

I got the following sms this morning and if it is true then it is best to put 80% of your money in the product!! It says,

Invest in LIC’s Jeevan Saral, Save Rs 2000/- per month, Get Rs 5 Lakh cover, Get Tax Free Returns, Returns after 10 years is Rs 4.2 lakh, 15 yrs: 8.8 lakh, 20 yrs: Rs 16 lakh

Vow! That’s a 10% solid return. Add to it being tax free and also covering a risk of Rs 5 lakhs!

If all of it is true, why should you bother about any other financial product? Why even take any risk of a stock or the outperforming mutual Funds? As LIC confidently says in its branding campaign, Kahin aur kyun jaana?

But let’s go on to LIC’s website and learn a bit more about Jeevan Saral. Link

It’s a simple and straightforward product. You simply need to choose the amount and mode of premium payment. The plan provides financial protection against death starting with 250 times your monthly premium. The Maturity Sum Assured depends on the age at entry of the life to be assured and is payable on survival to the end of the policy term. It also offers the flexibility of term and a lot of liquidity.

As per the illustration, if you pay Rs 4704/- every year, you get a starting death cover of Rs 1 lakh (250 times the monthly premium of approx Rs 400/-).

At the end of the 10th year, the maturity proceeds as per the illustration is Rs 50360 when the projected investment return of the Corporation is 6%. When the returns is 10%, the return is Rs 61360/-

This essentially translates into an IRR of 1.2% and 4.7% for the policyholder. As far as I know the investment yields of Insurance Companies is around 6-8% only.

The above example also shows that when the Insurer is earning 6% on it’s investments, the yield for the customer is around 1.2%.

Similarly when the investment yield of the insurance company is 10%, the return for the customer is 4.7%.

Can we say that approx. cost of your investments in an Insurance company is 5%?

Note from LIC’s website: The non-guaranteed benefits in above illustration are calculated so that they are consistent with the Projected Investment Rate of Return assumption of 6% p.a.and 10% p.a. respectively. In other words, in preparing this benefit illustration, it is assumed that the Projected Investment Rate of Return that LICI will be able to earn throughout the term of the policy will be 6% p.a. or 10% p.a., as the case may be. The Projected Investment Rate of Return is not guaranteed.

Loyalty additions will depend on future profits and as such is not guaranteed.

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Investors Role in Building India

Posted on October 23, 2010 by Ranjan

Today, I spoke at the National Research Conference organized by Mumbai School of Business on the headline topic. I spoke on behalf of CGSI (Consumer Guidance Society of India).

The theme of the conference was “India Redined: Strategy for a Facelift” and had eminent speakers like Krishnan Khanna, Ravi Kumar (Director, KennisGroup), Amit Kapoor (SEBI).

I made the following points in my talk (Powerpoint free talk )

Started off with three questions 1. Do individual investors have a role? 2. What is the current situation and 3. How do we actually “Do It”?
While the Government and the business entities are “deficit economic units”, the individual is the surplus economic unit.
The surplus of the individual is channelised as savings and investment to the Government and business.
I interpreted Insurance as a protection against unemployment of the entire family. For example, if I die, the income of my dependents also stop and they become “Unemployed” which drags back the economy.
Investments in stocks and mutual funds channelize our savings into the business entities and thereby helping the economy.
Covering the present situation as part of question 2, I referred to the NCAER study which shows that:
- Even when 97% said that we must save, if chief earner expires, only 9% can survive more than 1 year upon the death of the chief earner.
- Even when 83% said that Health insurance is important, only 3% can manage as per their current planning.
- Even when 69% said pension planning is important, only 2% said they can manage as per their current planning.
- Even when 47% said growth is important, only 19% said that they are managing it well.
Coming to question 3 (how do we do it?), I outlined a 3 step action plan.
- Measure before you start managing it.
- Measure your assets and responsibilities.
- Measure your risk profile
- Measure your income and expenses and be aware of where’s it going.
- Search, Compare, Filter by using tools like the internet, consumer societies, forums.
- Take Action. Set Up Your Investments and Financial security.

I was the last speaker before lunch and we were running late. So I suspect that the applause was elaborate because I finished in 35 minutes and did not stand between my audience and their lunch!

Yes, I enjoyed giving the talk.

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