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Tuesday, January 29, 2008

Mutual Funds: Returns Are Not All

5 points that matter while buying MF

More often than not meritocracy of investments is often decided by the returns. Quite simply then a fund generating more returns than the other is considered better than the other. But this is just half the story.

What most of us would appreciate is the level of risk that a fund has taken to generate this return? So what is really relevant is not just performance or returns. What matters therefore are Risk Adjusted Returns.

The only caveat whilst using any risk-adjusted performance is the fact that their clairvoyance is decided by the past. Each of these measures uses past performance data and to that extent are not accurate indicators of the future.

As an investor you just have to hope that the fund continues to be managed by the same set of principles in the future too.

Following are the 5 Points:



The most basic of all measures- Standard Deviation allows you to evaluate the volatality of the fund.

Put differently it allows you to measure the consistency of the returns.

Volatility is often a direct indicator of the risks taken by the fund. The standard deviation of a fund measures this risk by measuring the degree to which the fund fluctuates in relation to its mean return, the average return of a fund over a period of time.

A security that is volatile is also considered higher risk because its performance may change quickly in either direction at any moment.

A fund that has a consistent four-year return of 3%, for example, would have a mean, or average, of 3%. The standard deviation for this fund would then be zero because the fund's return in any given year does not differ from its four-year mean of 3%. On the other hand, a fund that in each of the last four years returned -5%, 17%, 2% and 30% will have a mean return of 11%. The fund will also exhibit a high standard deviation because each year the return of the fund differs from the mean return. This fund is therefore more risky because it fluctuates widely between negative and positive returns within a short period.


Beta is a fairly commonly used measure of risk.

It basically indicates the level of volatility associated with the fund as compared to the benchmark.

So quite naturally the success of Beta is heavily dependent on the correlation between a fund and its benchmark. Thus, if the fund's portfolio doesn't have a relevant benchmark index then a beta would be grossly inadequate

A beta that is greater than one means that the fund is more volatile than the benchmark, while a beta of less than one means that the fund is less volatile than the index. A fund with a beta very close to 1 means the fund's performance closely matches the index or benchmark.

If, for example, a fund has a beta of 1.03 in relation to the BSE Sensex, the fund has been moving 3% more than the index. Therefore, if the BSE Sensex increased 10%, the fund would be expected to increase 10.30%.

Investors expecting the market to be bullish may choose funds exhibiting high betas, which increase investors’ chances of beating the market. If an investor expects the market to be bearish in the near future, the funds that have betas less than 1 are a good choice because they would be expected to decline less in value than the index.


The success of Beta is dependent on the correlation of a fund to its benchmark or its index. Thus whilst considering the beta of any security, you should also consider another statistic- R squared that measures the Correlation.

The R-squared of a fund advises investors if the beta of a mutual fund is measured against an appropriate benchmark.

Measuring the correlation of a fund's movements to that of an index, R-squared describes the level of association between the fund's volatility and market risk, or more specifically, the degree to which a fund's volatility is a result of the day-to-day fluctuations experienced by the overall market.

R-squared values range between 0 and 1, where 0 represents no correlation and 1 represents full correlation. If a fund's beta has an R-squared value that is close to 1, the beta of the fund should be trusted. On the other hand, an R-squared value that is less than 0.5 indicates that the beta is not particularly useful because the fund is being compared against an inappropriate benchmark.


Alpha = (Fund return-Risk free return) - Funds beta*(Benchmark return- risk free return).

Alpha is the difference between the returns one would expect from a fund, given its beta, and the return it actually produces. An alpha of -1.0 means the fund produced a return 1% higher than its beta would predict. An alpha of 1.0 means the fund produced a return 1% lower.

If a fund returns more than its beta then it has a positive alpha and if it returns less then it has a negative alpha. Once the beta of a fund is known, alpha compares the fund's performance to that of the benchmark's risk-adjusted returns. It allows you to ascertain if the fund's returns outperformed the market's, given the same amount of risk.

The higher a funds risk level, the greater the returns it must generate in order to produce a high alpha.

Normally one would like to see a positive alpha for all of the funds you own. But a high alpha does not mean a fund is doing a bad job nor is the vice versa true. Because alpha measures the out performance relative to beta. So the limitations that apply to beta would also apply to alpha.

Alpha can be used to directly measure the value added or subtracted by a fund's manager.

The accuracy of an alpha rating depends on two factors:

1) the assumption that market risk, as measured by beta, is the only risk measure necessary;

2) the strength of fund's correlation to a chosen benchmark such as the BSE Sensex or the NIFTY.


Sharpe Ratio = Fund return in excess of risk free return/ Standard deviation of Fund

So what does one do for funds that have low correlation with indices or benchmarks? Use the Sharpe ratio. Since it uses only the Standard Deviation, which measures the volatility of the returns there is no problem of benchmark correlation.

The higher the Sharpe ratio, the better a funds returns relative to the amount of risk taken.

Sharpe ratios are ideal for comparing funds that have a mixed asset classes. That is balanced funds that have a component of fixed income offerings.

Monday, January 28, 2008

Insurance Premium Payment

Missing the premium payment date does not mean you have to cancel your insurance policy. Check out its status with your agent and get it revived

OPTING for the right insurance cover is like taking your first step towards financial planning. But if you want to keep this security cover intact then you need to be financially disciplined and make those timely payments towards the premium amount. Many times because of sheer negligence or unforeseen circumstances, you miss upon making the payments on time. And when you find those bills, reminders stacked in one corner of the house, you are not sure whether to make a call to the company and revive your policy or simply let it go. Well, if you have been deliberating the same, here is a lowdown on how you can revive your policy.


There is a misconception that once you miss your due date for paying premium, the insurance company cancels the policy. It is advisable that before you decide to forego your policy, you should check out with your agent or the insurance company what’s the status of your policy. All insurance companies give a grace period of 30 days after the due date.

Nonetheless, even then if you are not able to utilise this grace period, it doesn’t mean that it’s all over. You can revive the policy till six months from the due date (including grace period) is over. You will be required to pay interest on outstanding premium amount as penalty. The interest, in our case, is 10.33% per annum or higher depending upon the policy that you hold and this vary from company to company and policy to policy. Any policy can be revived during the life time of the life assured, but before the date of expiry of policy term. You need to submit proof of continued insurability to the satisfaction of the insurance company and make the requisite payments of all the arrears of premium together with interest to revive your policy.


If you believe that reviving the old policy is not a good idea, then you are wrong. Financial planners believe that under no circumstances, you should discontinue the old policy and apply for a newer one. A person who defaults on a policy payment is generally in financial lurch. You need to take into consideration age factor, since you bought your old policy at a young age so the benefits acrrued till date will go away if you take a new policy. Same is the case with ULIPs where the commission charges are higher in the first few years and lesser amount is invested.

This theory doesn’t holds true if the policy has been in a state of lapse for over five years, reviving may not be the best option. “If a policyholder wants to revive a policy after five years, we suggest that he take up a new policy, since the fine on premium may be very high by that time.

In case of a pure term policy, if the premiums are not paid within due date and the grace period of the policy lapses, then in case of a death claim nothing is payable to the nominee of the policyholder. But if you hold a unit-linked policy, ULIP, the rules are different. In ULIPs, a portion of your premium is deducted as a payment towards your life cover or sum assured, a part of it is used for administrative charges and the rest is put into your fund account. In case of death during the term, the higher of sum assured and fund value is paid out. If premiums are paid for less than three full years, the risk cover will cease immediately at the end of the grace period. However, applicable charges are recovered (except mortality charges) from the fund till the end of the revival period. But if the premiums are paid for at least for three full years — the risk cover will continue till the end of the revival period and all applicable charges will be recovered from the fund.


In case of conventional polices like endowment, money back, and whole life policies, if the payment of premium ceases after three years the policy automatically becomes a paid-up policy and acquires a paid value, wherein the sum assured is reduced proportionately and the bonuses declared till date. Such reduced paid-up policy is not entitled to participate in the bonus declared thereafter but the bonuses already declared on the policy will remain attach, provided the policy is converted in to a paid-up policy after the premiums are paid for five years. Therefore if the policy acquires a paid up value in case of death or at maturity the paid value is paid to the policyholder.

However, in ULIPs as long as there is sufficient fund in your ULIP account to sustain the cost of insurance, the policy continues and in case of death the fund value or the sum assured, which ever is higher, it is paid to the nominee of the policyholder. Hence, it is in your interest that even if you’ve not been able to make the payments on time, you should check with your insurance company about the benefits that you still can avail.


All insurance companies give a grace period of 30 days after the due date

Any policy can be revived during the life time of the policy assured, but before the date of expiry of policy term

If the premiums are paid at least for three full years — the risk cover will continue till the end of the revival period

If a policyholder wants to revive a policy after five years, he would be better off, taking a new policy, since the fine on premium may be very high by that time

Friday, January 25, 2008

Essence of Systematic Investment Plan

In the last few days, investors in the stock markets have seen it all. From the Sensex highs of 21,000 to the steep fall to 15,700 in and the complete U-turn the markets took to recover. An investor who was convinced that the bear market was on and sold off his holdings would be a poor, wise man today.

Similarly, a person would waited for the markets to bottom out before buying stocks would have missed out the opportunity to buy stocks at lower valuations. Probably, the only investor who has benefited by the quick fall and subsequent rise of the markets is a systematic investment plan (SIP) investor. SIP is a simple, tried and tested strategy designed to help in investors' wealth creation in a disciplined manner over the long term.

A disciplined approach to investing will provide you with these benefits:

1) Power of compounding
2) Makes market timing Irrelevant
3) Rupee cost Averaging
4) Convenience

Power of compounding

Many investors delay investment decision-making, as they can be easily postponed. Such a delay, however, would prove expensive in the long run. The power of compounding underlines the importance of making your money work for you at an early age. An individual starting at age 25, having 35 years till retirement, would need to save only Rs 6,985 per month (at an interest rate of six percent) to make a crore of rupees on retirement. An individual who starts saving at age 35, having only 25 years to retirement would have to invest Rs 14,359 per month to reach a crore. As shown in the example, you would be surprised what you could achieve by saving a small sum of money regularly from an early age. The earlier you invest, the longer your money works for you and greater will be the power of compounding.

Rupee cost averaging

Investing would be simple if you could always pick the best time to buy and sell. Most are not experts on stocks and are even more out-of-sorts with stock market oscillations. But that does not necessarily make stocks a loss-making investment proposition. Studies have repeatedly highlighted the ability of stocks to outperform other asset classes (debt, gold, property) over the long-term (at least five years). They are also an effective tool to counter inflation. However, timing the market consistently can be a difficult task and you could be making negative returns sooner or later. What you need is an automatic market-timing mechanism like rupee cost averaging (RCA) that eliminates the need to time your investments. With RCA, you simply invest a fixed amount at regular intervals, regardless of the NAV of a mutual fund. The idea is that you buy fewer units when the NAV is high and more when it is low - automatically. This is in line with your natural desire to buy low and sell high. For instance, you could opt for a systematic investment plan (SIP) by investing Rs 1,000 every month into an open-ended equity scheme with an NAV of Rs 10. The average cost per unit under the SIP will always be less than the average purchase price per unit, because each installment is made at different price point. RCA, however, does not guarantee a profit. But with a sensible and long-term investment approach, it can smoothen out the market ups and downs and reduce the risk of investing in volatile markets.


If you are a professional with very little time for managing investments, SIP offers you a very economical and convenient method of being a part of the action in equity markets. You can enroll for the SIP by starting an account and providing postdated cheques of periodic investments (monthly, quarterly) based on your convenience with any mutual fund.

In a nutshell, SIP is an efficient and convenient vehicle to accumulate wealth in a time-bound and disciplined manner. So when is the best time to invest? This month, next month… every month, starting right now.

Tuesday, January 22, 2008

8 strategies of wise negotiators


CEOs who sell and negotiate successfully know that sometimes even the most valiant fight may not be worth the potential loss it entails. They know it’s up to them to assign value to the campaign they decide to take on or decline — not outside forces like sales vice-presidents or prospective customers. In other words, good CEOs are more likely to ‘walk’ when they sense there will be no alternative to a bad deal. They don’t negotiate a deal just to say they’ve negotiated something.


Once they take on a negotiating project — or any project, for that matter, — CEOs ensure everything on the ‘hot list’ gets taken care of. They can’t afford to leave any loose ends at a negotiating session, and they commit to following through on all their commitments. You’ll want to do the same.


Successful CEOs know that you can’t reap what you don’t sow. Their actions always seem to be in accordance with the ‘ebb and flow’. They get involved early in important deals, they know when to wait, and they know when to push. This trait comes in handy at negotiating sessions.


CEOs have certain values that they just won’t compromise. That’s not to say they are stubborn, but they do know how, when and where to draw a boundary. Ill-advised departures from guiding principles can carry huge costs, the most important of which are non-monetary: lower self-worth, lower esteem, damaged reputation and damaged self-image, to name just a few.


Successful CEOs are happy with what they have and who they are. That doesn’t mean that they don’t want to grow and prosper. They just know the importance of being happy with what is taking place in here and now. That may not seem like a trait for successful negotiations, but it is. Envy saps energy and poisons relationships; admiration of another’s positive traits and accomplishments is a supreme compliment that helps you focus on what you need to improve in your life, your business, your relationships, your finances — and your negotiating posture.


This is a great (and simple) ‘negotiating tactic’ that many CEOs mention. This tactic is all about not inheriting someone’s unresolved problem as your own. If one had a dollar for every time one heard “We don’t have that amount of money in our budget,” or “We don’t have a budget,” or “Your price is too high,” or “I don’t have the authority,” or “We can’t move forward right now,” or “We need this by no later than next Monday,” one would be a millionaire. Look at all these typical responses again, and one will see that each is an attempt to put the buyer’s issues onto the seller’s list of problems. Instead of fighting the problem, putting it off until ‘later on’ in the negotiations or throwing a new one into the mix, what would happen if one approached the problem from the standpoint of finding a solution — of acting as a consultant with the responsibility of finding an outcome that makes both sides happy?


To think, sell and negotiate like a CEO, you must understand that more than anyone in an organisation, the CEO has the ultimate walk-away power. The power to walk away is the most profound negotiating tactic that a CEO will use. He/she basically says “I am totally willing to pass on this opportunity.” There is a big difference in that thinking Vs “I am going to get the price as low as I can before I buy.” Walk-away power takes the opportunity past the point of no return. The winning party will convince the other party that they can and will walk away from the relationship (buy or sell). Keep in mind that the goal here is not to actually ‘walk’; the goal is to get the other party to do whatever the ‘walking’ party wants them to do.


Asking for more than is expected (moving beyond expectations) is a great trait of CEOs. You’ll be able to see this one coming if you’re a salesperson because you’re already conditioned to the “do whatever it takes to get the sale” mentality. CEOs know this, too. Therefore, be prepared, and you may even want to use this yourself when you’re on the ‘seller’s’ side of the table. By doing so, you’ll be modelling an important CEO negotiating trait.

Sunday, January 20, 2008

The 9Cs which make a leader stand out from the crowd

A leader has to show Curiosity. He has to listen to people outside the ‘Yes, sir’ crowd. He has to read voraciously, because the world is a complicated place.

A leader has to be Creative, go out on a limb, be willing to try something different. You know, think outside the box. Leadership is all about managing change — whether you’re leading a company or leading a country. Things change, and you get creative. You adapt.

A leader has to Communicate. I’m not talking about running off at the mouth or spouting sound bites. I’m talking about facing reality and telling the truth. Communication has to start with telling the truth, even when it may be painful.

A leader has to be a person of Character — knowing the difference between right and wrong and having the guts to do the right thing. Abraham Lincoln once said, ‘‘If you want to test a man’s character, give him power.”

A leader must have Courage. Swagger isn’t courage. Tough talk isn’t courage. Courage in the twenty-first century doesn’t mean posturing and bravado. Courage is a commitment to sit down at the negotiating table and talk. If you’re a politician, courage means taking a position even when you know it will cost you votes.

To be a leader you’ve got to have Conviction — a fire in your belly. You’ve got to have passion. You’ve got to really want to get something done.

A leader should have Charisma. Charisma is the quality that makes people want to follow you. It’s the ability to inspire. People follow a leader because they trust him.

A leader has to be Competent. You’ve got to know what you’re doing. More importantly, you’ve got to surround yourself with people who know what

Friday, January 18, 2008



LEADERSHIP has taken on new meaning and greater challenges in the last decades. Influencing is a critical skill that must be mastered simply because we work with a multitude of people. There is no right way, nor is there only one way to influence others. In organisational life, influence is a key skill. It helps earn co-operation from colleagues, ensures your voice is heard and makes you a better leader. Remember that the real skill is learning how to influence through commitment, loyalty and trust, rather than through mere compliance or, at worst, coercion.

Know what you want:

Start with the end in mind. You must clearly know what the end state is and what outcome you desire. Then identify the key stakeholders who you need to influence. Try to discover as much as you can about them and where they are coming from by asking open-ended questions that will encourage them to talk.

Learn more about yourself:

A heightened sense of selfawareness and the effect you have on other people is vital.

Ask yourself:

Are you viewed as analytical, or more of a sensitive, creative type? Do you have a reputation for taking risks, or are you a safe-bet decision-maker?Are you a strategic visionary or a down-to-earth pragmatist?

Be proactive and build a power base:

Build a foundation for influence before you need it. Having a good power base of relationships with others will make influencing a much easier task. Be proactive and do not wait until you need something to start showing an interest in what others are doing. Build all around positive relationships both vertically and horizontally.

Build up your leadership skills:

The success ultimately rests on leadership talent, so use every opportunity to practise, test and improve your skills. A carefully selected mentor can help you reach higher levels of self-awareness, and give insight on how you might become more influential.

Inspire cooperation:

Do your research so that you can anticipate reactions be prepared to address them. If you know in advance how people are likely to respond to your proposition or idea, you will be better prepared to deal with their reactions or resistance. Determine whose support you absolutely need to have and speak with others to clearly understand what you need to do to get their buy-in.

Build relationships:

Raising your profile and maintaining a high visibility is critical to gaining support and co-operation for your ideas. Spending more time socialising with the individuals you are trying to influence will also help cultivate trust.

Continued skill building:

Now that you’ve had experience with using this process to win someone over, continue building on your expertise. Look for small projects where you can use your influencing skills and create more wins for yourself. This will get you prepared for the grateful day that the “BIG” idea shows up. You’ll now be equipped with the skill, knowledge and confidence that you need to tackle it with ease.

Wednesday, January 16, 2008

3 Cs for growth: Character, Competence, Commitment

3 Cs for growth: Character, Competence, Commitment

SUCCESS stems, in part, from the values, wants and needs that are interwoven within individuals and an organisation, and the ways in which the individuals and the organisations resolve the many differences and conflicts that are an ongoing part of every organisation in these diverse pursuits.

Of course, one must be able to attract and retain the “best and brightest” people into an organisation in order to succeed. But, this is just the beginning. Purposes, missions and goals that stimulate and encourage people and organisations too are essential. Within each of these areas, there are differences and conflicts.

For example, just in the issue of goals with a group, there are at least four areas of potential conflict:

• The personal goals of the individual within the group,
• The goals of the individual for the group and its goals,
• The goals of the group itself within the corporation, and
• The goals of the group for the corporation and its goals.

Moreover, none of these goals are static — rather, they are quite dynamic. So, they must be continually monitored, modified and mobilised. One need only mention these four different possibilities, and various imagining of differences and conflicts can be quickly conjured into almost anyone’s imagination. If these potential conflicts are not successfully managed or harmonised into a proper and productive alignment, dissonance almost always develops. With dissonance, the energy of an organisation dissipates, while the power of synergy is reduced. Needless to say, these are difficult challenges.

Moreover, because of the dynamism involved among human beings, organisations and markets, these problems are never permanently solved. CORE VALUES WHAT core value traits can help organisations to optimise the most useful yield of their “best and brightest”?

Experience has consistently taught and surfaced three traits — over and over, year after year:

• Character,
• Competence, and
• Commitment

It requires character to act on our beliefs, competence to achieve goals, and commitment to see them through. These core values drive productivity resulting in profitability and sustainability for the benefit of Cincom and our customers. How best to describe them?


• Ethical integrity and fundamental spirituality,
• An emphasis on seeking solutions, not casting blame,
• An open environment where honest communications are encouraged and honest differences of opinion are allowed, and
• A commitment to managing on the basis of sound principles. Doing the “right thing” in a professional manner is a demand we make of ourselves.


• An entrepreneurial spirit that relentlessly seeks to innovate within bureaucratic structures,
• Creativity,
• Decisiveness,
• Initiative for self-growth,
• Leadership,
• A continuous seeking of the optimal balance between flexibility and control, and
• A disciplined organisation that continues to learn and applies methods to achieve goals.


• Commitment to one’s group, the company and to one’s fellow citizens,
• Missionary zeal in representing the company and its products,
• Sense of responsibility and personal empowerment,
• Encouraging people to grow and empowering them to do so, and
• Our promise to do what has been asked and our pledge to provide whatever assistance that is required to meet our shared commitment.

To be successful, persons and organisations must act with character, competence and commitment in a harmoniously orchestrated environment that energises all and synergises everything. As an employee or employer, these core value traits are essential minimums.

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