The fund's history may be relatively short, but it appears to be long on potential. In its six-year existence, the fund house has maintained a strong focus towards debt funds with some good liquid funds. It was only in 2008 that Deutsche Mutual Fund came out of obscurity on the equity front.
Undoubtedly, its performances have impressed, but not at an opportune time. It did well in the bull run but did not dazzle. It actually made its mark in a sliding market and shot to prominence from January onwards.
The most compelling aspect about this fund family has been its resolve to steer clear of the greed to launch funds just to bloat up the asset size, particularly in recent times when equity markets have been firing from all cylinders. The fund family has not shown any signs of impatience to script an overnight success story. Rather, its fund launches seem to be well thought out. Its four equity funds were launched in different years (2003, 2004, 2006, 2007). In 2005, it only launched three fixed tenure plans.
DWS Alpha Equity has been the oldest, launched in January 2003. Though its performance was acceptable, on a relative basis it lagged behind its peers. However, in May 2007, the fund house and the funds have seen a sharp improvement in performance.
DWS Alpha Equity and DWS Investment Opportunity both boast of 5-star ratings while the other two are not yet rated. DWS Tax Saving has also been a good performer but has recently fallen harder than its siblings.This is an AMC that is working from the inside out. Not obsessed with NFOs, over the past few years they have been working on their distribution angle, client servicing and investor communication. They have also focussed on putting processes in place, maintaining checks and balances in their investment process and implementing risk control measures.
While all that is good and we certainly do like the edge that fund manager gives, questions do arise over the very tight equity team which comprises of just three: a fund manager, an analyst and a dealer. There has been no indication from the AMC that they plan to increase the number on this front. Will just one fund manager and analyst be able to consistently deliver?
The saving grace right now seems to the wide research base that the group boasts of internationally and which the India team can avail of. Deutsche Asset Management was established in India in 2002. In 2006, they brought in their retail brand DWS Investments. DWS Investments is part of the Deutsche Bank Group and is a leading mutual fund company in Germany.
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Thursday, April 30, 2009
The fund's history may be relatively short, but it appears to be long on potential. In its six-year existence, the fund house has maintained a strong focus towards debt funds with some good liquid funds. It was only in 2008 that Deutsche Mutual Fund came out of obscurity on the equity front.
Wednesday, April 29, 2009
Investors are concerned about the change in ownership and whether it is linked to the current global crisis and Merrill Lynch's financial woes. It is not. This fund house remains as appealing as ever. DSP Merrill Lynch Asset Management (India) Limited was a joint venture between DSP Merrill Lynch Limited and Merrill Lynch Asset Management L.P. In 2006, the asset management business of Merrill Lynch (Merrill Lynch Investment Managers) was combined with BlackRock. The stake (40%) held by DSP Merrill Lynch Limited in DSP Merrill Lynch Fund Managers Limited, is to be transferred to BlackRock while the balance would continue to be held by the DSP Group (60%). Consequent to the transfer, DSP Merrill Lynch Mutual Fund will be renamed "DSP BlackRock Mutual Fund".
Despite the change in ownership, there is no indication of a shift in strategy - and that's good for investors. Neither is there any change in the fund management team. In fact, this fund house is known to retain its talent, a trait also visible in Franklin Templeton Mutual Fund.
Unlike other fund houses that swelled their assets through a flurry of new fund launches, DSP Merrill Lynch always preferred to stay on the sidelines. But in the last two years, there has been substantial activity on this front. There have been 'institutional option' launches in four equity schemes and four new funds - DSPML Small and Mid Cap, DSPML Micro Cap, DSPML World Gold Fund and DSPML Natural Resources and New Energy.
Over the years, DSP Merrill Lynch has developed into a full range open-ended fund family and one of the better players. Overall, its funds have delivered above average performance. The star performers have been DSPML T.I.G.E.R., DSPML Equity and DSPML Top 100 Equity.
Tuesday, April 28, 2009
Private Insurers & Mutual FundsWith Experience Of Long-Term Funds May Take Lead
BANKS, insurance companies and mutual funds will soon have the opportunity to manage pension funds. The Pension Fund Regulatory & Development Authority (PFRDA) sought applications from entities wishing to float pension funds to manage retirement assets of all Indian citizens, other than government employees already covered under the pension scheme.
The criteria set out by PFRDA entitles government institutions, banks, insurance companies and mutual funds to sponsor a pension fund. One important condition is that the sponsor must have at least five years’ experience in running debt and equity funds and should have managed average monthly assets of Rs 8,000 crore for 12 months ending November 30, 2008.
Insurance companies, being the only manager of long-term finance, are perhaps best suited to manage pension funds. We are very keen to participate in pension fund management. Among private life insurers only a couple of companies besides ICICI Prudential may be eligible. The number would be higher among mutual funds.
Joint ventures can also apply to handle pension funds. The selected sponsors shall be required to incorporate the pension fund as a separate company in which direct or indirect foreign investment should not exceed 26% of the paid-up share capital, according to the information memorandum on the regulator’s website. Existing PFs regulated by PFRDA are also eligible to apply.
Who can run the fund?
- Govt institutions, banks, insurance cos & Mutual Funds
- Doors now open to several entities within a group
- Existing PFs regulated by PFRDA
What are the eligibility criteria?
- At least 5 yrs’ experience in running debt & equity funds
- Should have managed average monthly assets of Rs 8,000 cr for 12 months ended Nov 30, 2008
How does it help you?
Private fund management will help you invest your retirement funds in assets of your choice You can also shift your portfolio across fund managers
Pension fund co net worth should be Rs 10 cr
The newly-incorporated pension fund management company must have a minimum net worth of Rs 10 crore. The entry of private fund managers will enable even workers in the unorganised sector to invest their retirement funds, however small, in assets of their choice (equity, debt or balanced).
They will also have the freedom to shift their portfolio across licensed fund managers.
So far, PFRDA has licensed pension funds sponsored by State Bank of India, Life Insurance Corporation and Unit Trust of India to manage funds collected under the new pension scheme for government employees.
Monday, April 27, 2009
Credit cards offer both convenience and benefits. Careful use can enable you to manage your budget and save.
That piece of plastic in your wallet can be a blessing, depending on how you use it. It can get you great deals. It can let you monitor your spending and thus help with budgeting. It can be a saviour in a cash emergency. A credit card not only lets you shop on- and offline, but also lets you earn rewards and discounts. That's the reason most middle-class people have credit cards.
There are several other advantages. A credit card is easier to carry in your wallet than hard cash, you get interest-free credit for around 45 days - one of the biggest benefits your credit card offers you - and a family member can get a free add-on card.
Cash when you need it
Making big-ticket purchases is easy with a credit card. You don't even need to pay the entire amount at one go. You can convert it into equated monthly instalments. But there's a price to pay - an interest rate that could be as high as 50 percent a year.
In a financial emergency, your card can come in handy to get cash from an ATM. But be sure it's really an emergency, because cash on a credit card is expensive - there is a Rs 350 fee, plus 3.5 percent interest per day. Also, the amount you can withdraw depends on your credit limit.
Some cards offer reward points on purchases. You can accumulate these and redeem them later. Of late, co-branded cards have gained popularity. Card issuers tie up with reputed brands to distribute products and services at attractive rates for a niche audience. Based on your buying habits, you can pick from petro cards, shopping, entertainment, and the like.
Many cards have cash back offers. A percentage of what you spend during a given period is credited back to your card.
Several cards offer free insurance that usually covers rail, road and air accidents, accident related hospitalisation, and so on. But it's important to read the fine print carefully, and to ensure that you have adequate cover.
Don’t roll over balances
Always keep track of your billing cycle. This is the time period - about 30 days - from one billing date to the next. All transactions made during this period will show up in your bill. If you paid only part of your outstanding balance last month, the remainder, plus new purchases and finance charges, will all appear in your next statement. For instance, suppose you made purchases worth Rs 30,000 in October, and paid only the minimum amount due of Rs 1,500. Then, suppose you made purchases in November worth Rs 5,000. At the end of November, you'd be paying your previous balance (Rs 28,500), plus interest, a late payment fee and penalties, plus the amount of your new purchases (Rs 5,000) and interest on it.
Making a partial payment and rolling over balances is called revolving credit - something to be avoided. Always pay up entirely or you'll end up paying up to 50 percent interest a year on the outstanding amount.
Credit cards are safer than cash. If you lose your card, just inform your bank as soon as possible. You're not liable for unauthorised transactions that occur after you reported the loss. Always scan your credit card statements for unauthorised transactions. If you've been defrauded, contact the card issuer immediately. If the bank can't resolve it, approach the banking ombudsman.
A credit card is a useful budgeting tool, and offers other benefits. Pick yours based on your lifestyle needs. And use it carefully.
Dos and don'ts
• Sign the back of your card as soon as you receive it
• Change your PIN regularly
• Do not give out your card number or CVV number (three-digit number on the back of your card) to anyone on the phone, unless you initiated the call
• Be attentive when your card is being swiped at a store or restaurant
• Tear up your ATM receipts and credit card statements before discarding them
• When shopping online, submit credit card details only through secure websites
• Check your credit card statement for unauthorised charges, and report them to your bank immediately
• If your card is lost or stolen, inform your bank immediately
• Pay bills on time to avoid late fees
Sunday, April 26, 2009
After a long period of relative inactivity, the buzz is that DBS Chola Mutual Fund has aggressive plans to rev up its offerings. Going by its two recent high-level recruitments, that may well be the case. Mohit Sachdev (ex-UTI) is now the Chief Marketing Officer while Sanjay Sinha (ex-SBI MF) is the Chief Executive Officer.
But that's no cause for celebration. Though it has been around for over a decade, the AMC has failed to make a mark in this highly competitive industry, despite attempts by earlier CEOs Ved Prakash Chaturvedi (now with Tata MF) and Rajnish Narula (now with Canara Robeco).
Neither have the funds' performances been outstanding, nor have its fund launches generated a significant response from investors.Since inception, the AMC established itself as a debt player. Its Monthly Income Plan (MIP). launched in July 2003, is a 5-star that began to impress from 2007 onwards. It had only three equity funds till 2004, seven were launched from 2005 onwards with none in 2008. Most of the equity funds are too young to be rated by Value Research, their best ones being DBS Chola Opportunities (4-star) and DBS Chola Growth (3-star).
This AMC has seen alterations in its ownership over the years. It was set up in 1997 as a joint venture with U.K.-based Cazenove Fund Management and Cholamandalam Investment & Finance, a part of the Chennai-based Murugappa Group.
A few years later, the Murugappa Group acquired Cazenove's stake. In 2006, Cholamandalam Mutual Fund was renamed as DBS Chola Mutual Fund following the conversion of the fund's sponsor into Cholamandalam DBS Finance Limited, a joint venture of the Murugappa Group with DBS Bank of Singapore.
Maybe this time around, a new team will be put into place, its research capabilities augmented, fresh products will be launched and performance will improve.
Saturday, April 25, 2009
AMCs are launching ELSS with the hope that people will invest in such funds at least for saving on tax
In fact, despite volatile and uncertain equity markets, asset management companies have begun to launch equity linked saving schemes (ELSS) with the hope that investors would invest in such funds at least for saving tax. Recently, Bharti AXA, DBS Chola, JP Morgan and Tata AMC have launched their ELSS funds.
ELSS funds are like other equity mutual funds with tax benefit. Investment in ELSS fund qualifies for deduction under 80C only if the money is invested for a minimum of three years. But in such fund investors need to stomach higher risk.
Interestingly, some of these fund houses already have existing ELSS funds in their current portfolio but have come out with new fund offers (NFOs) in the same category. For instance, Tata Mutual Fund already has a tax gain fund called Tata Tax Advantage Fund but has come out with a new ELSS fund called Tata Infrastructure Tax Saving. Same is the case with DBS Chola Mutual Fund, which has an existing tax gain fund called DBS Chola Taxsaver and has recently launched its NFO, which is again an ELSS fund.
The performance of ELSS funds are not very impressive in this year. The returns are in line of other diversified equity mutual funds and they are down by more than 40% in this year. Since 80% of the money collected through ELSS funds is necessarily to be invested in the equity market, these funds are not insulated from general equity market fall.
Due to relatively higher holding period fund managers find themselves more comfortable managing such funds as these funds give liberty to fund manager for taking either cash calls or going cautious or using specific strategy. Usually we do not take higher cash calls but since the time horizon is three year we may take cash calls. We will not take cash calls. The cash call is attractive in short term but since three year horizon is pretty long term and hence taking cash call is not necessary.
Usually investors find themselves in a fix deciding whether to invest in an NFO or existing fund. Typically investors should look to invest in a new fund only if the investment proposition is compelling.
Before investing in any fund one must look at the track record, stability of investment team, consistent performance across market cycles and investment style.
Friday, April 24, 2009
Benchmark AMC might have dared to tread on the unbeaten path and establish itself as an ETF player, but is probably ahead of its time. Though Exchange Traded Funds (ETFs) are popular abroad, they still have to catch on in India. As a result, Benchmark Mutual Fund has remained a small entity.
The fund house offers eight funds, its most popular being Banking BeES. Banking as a sector was coveted by Foreign Institutional Investors (FIIs) but due to the ceiling on FII ownership they had to resort to the BeES fund as the alternative to playing the banking story. As the price of gold surged in the past two years, Gold Benchmark ETF has also gained in popularity.
As sector and thematic funds garner significant investor interest, the AMC is coming out with four global theme-based ETFs - Global Clean Fund, Global Private Equity Fund, Global Commodity Fund and Global Water Fund. All these funds (combined offer document with SEBI) would invest in ETFs linked to indices whose constituents are the companies which are linked to the respective businesses. For example, the Global Clean Fund is going to invest in ETFs linked to indices whose constituent companies are engaged in the production of clean or alternative energy or in companies which are engaged in manufacturing or technology development for clean energy.
Besides these products being rather unconventional, the Indian investor is not too conscious about the environment or related investment opportunities. The test will be in how many takers they can find for this unique venture.
They also plan to launch a S&P CNX 500 fund, a silver and an oil ETF in the near future. If ETFs gain in popularity and become more main stream, this fund house will have a great start over all the rest.
Thursday, April 23, 2009
Birla Sun Life's standout performers tend to be its debt funds. The fund house is very strong on the debt side with the bulk of its debt assets in cash funds. Some of its gilt and short-term funds stand out. What's interesting about this fund house is that the fixed income team always takes a call and does not necessarily follow the consensus. That makes it understandable that the Birla Sun Life roster includes some of the best as well as some of the worst debt funds.
Wednesday, April 22, 2009
Bharti-AXA is a newly-launched fund company that is a joint-venture between the Bharti Ventures (Airtel) group and AXA, a French insurance company. The two partners already have an insurance joint venture that has been operational for a couple of years.
The company has just started operations and has launched one equity fund and two debt funds during this period. It has put together a small but experienced team. The only equity launch that it has made so far has some innovative features. It's possible to make an SIP investment in this fund with just Rs 300 a month. Also, the fund comes with an environment-friendly 'eco-plan', which has 0.25 lower expenses than the normal plan. The 'eco-plan' is a paperless plan under which investors receive all communications through email and the web.
Given the poor state of the markets, it can be expected that the fund house will take some time to ramp up.
Tuesday, April 21, 2009
These days, the stock markets are quite volatile in nature with a bearish bias. Rallies do not last long in the markets and peaks of market rallies are reducing. The markets are hitting fresh lows in every fall. Many blue chip stocks are trading 50 percent lower than their high levels. Many stocks are currently trading at their year's low prices or all-time low prices. Many investors have lost their hard-earned money and many others are stuck with stocks that have corrected heavily in the last few weeks.
Here are some tips for investors already invested in the stock markets:
1) Hold fundamentally strong options
The domestic macroeconomic fundamentals are strong. The GDP growth rate is expected to slow down slightly from the nine percent last year to around 7 - 7.5 percent this year. This is still quite good and encouraging in comparison to other developed countries. The current market crash can be attributed largely to foreign institutional investors' (FIIs) outflows but FIIs will come back once the global financial turmoil settles down. Therefore, investors who are invested in blue chip or fundamentally strong mid-caps should hold on to their positions.
2) Go for value picks
The current market fall is quite steep and many investors (especially small investors) did not have the time to exit from their positions. Market sentiments are quite bearish at the moment and a further fall from current levels cannot be ruled out. Market traders and analysts are expecting more negative news coming from the global as well as local macroeconomic front. Investors with a high risk appetite can look at accumulating fundamentally-strong stocks at current levels.
3) Switch sectors
Currently, the markets are looking oversold after the recent corrections. There could be some bounce back in the days to come. Investors stuck in fundamentally-weak stocks should look at switching their positions to fundamentally strong stocks and sectors.
Here are some tips for investors looking at making fresh investments in the stock markets:
- Study stock and price
First of all, it is important to identify the stocks that have fundamental value at current prices. Investing in a stock at right price differentiates between a bad investment, good investment and a great investment.
- Research stocks
The stock market requires constant study and investigation. Finding a good stock at the right price is not a onetime exercise. It is a continuous process. Active investors in stock markets should always monitor their invested stocks and other stocks with potential to invest in.
- Systematic investing
Currently, the markets are going through a bearish phase. Investors should be extra careful while making investments in a bearish phase. It is advisable to accumulate stocks by investing your funds in small lots. In a bearish market phase, even fundamentally-good stocks correct heavily at times. Therefore, it is very important to have patience and not panic in these conditions.
Liquidity and having a cash position is the key to success in a bearish market phase. Investors should start investing in identified strong stocks and continue to accumulate them on further corrections.
- Analyse risk appetite
Investors should only invest their risk capital in the stock markets. Also, investors should always have a long-term horizon while investing in the stock markets (more than one year at least). Investors should never borrow to invest in the markets.
- Avoid penny stocks
Investors should stay away from investing in penny stocks. Usually, there is very little information available and also these stocks do not have enough liquidity in the market. As a result, investors get trapped in these penny stocks and lose their capital, and any further opportunity during a correction phase.
Monday, April 20, 2009
On the face of it such worries are understandable. Over the last few months, many big names have been revealed to be quite hollow. As I'm writing these words, news has come in that the AIG group, the world's largest insurer has, for all practical purposes, been nationalised by the US government, The company's top management is in the process of being sacked. Lehman Brothers has gone bankrupt and Merrill Lynch has been sold off in a distress sale to Bank of America. Who's next? Nobody knows.
Here's what has been worrying investors: Tomorrow if Fidelity or Franklin or Prudential or Sun Life or BNP-Paribas or Morgan Stanley or any of the others go bankrupt or are nationalised or otherwise cease to exist, will there be any impact on the money that you've invested in their fund?
The simple answer is that your money is safe. In Indian law and accounting, there's a sharp distinction between the fund company's own money and the investors' money that it is managing. Investors' money does not even go to the fund company. The money stays with a custodian and is just invested under the instructions of the AMC's fund manager.
To take a concrete example, let us see what would have happened if Lehman Brothers had owned a mutual fund company in India. When Lehman went bankrupt, its creditors would have a right to the AMC's assets (like its offices for example). The creditors would not have the right to investors' money. In such a case, the AMC would either get a new owner or it would be wound up. In either case, investors would get their money back.
Of course, I'm not discussing any losses that your investments would make as a result of declining markets. That market risk of dropping NAVs remains for all funds whether they are run by an Indian AMC or a foreign one.
Sunday, April 19, 2009
Arbitrage Funds aim to capitalize on the opportunities arising from a pricing mismatch between the spot and the future markets. They constitute an asset class whose returns are not linked to the stock market. Their strategy to profit from the difference between the prices of a stock in different markets makes them immune to upswings and downswings of the stock market. They are undoubtedly less risky as compared to equity funds.
These funds are suitable for risk-averse investors as they are the least volatile in comparison to all other types of funds.
Moreover, these funds are more tax efficient than debt funds as they are treated in line with equity funds. The performance of arbitrage funds depends on the availability of arbitrage opportunities and volatile markets carry a higher potential of mis-pricing between the spot and derivatives markets. Hence, during such volatile times they form a good option to invest in.
Saturday, April 18, 2009
IN a move that could revolutionise sale and purchase of mutual fund units by investors across the country, the Association of Mutual Funds in India (AMFI) is working towards setting up an electronic platform. This would not only benefit unit holders, but also distributors and fund houses. The electronic platform will bring paperwork to a bare minimum, improve operational efficiency, provide transaction convenience and reduce cost. The proposed electronic platform will help investors trade even in open ended-mutual fund scheme units, like in the case of shares, switch between schemes of different fund houses, and also enable mutual fund investors to view their entire portfolio on a single portal. The modalities of the platform are being worked upon by an Amfi-appointed committee.
At present, if an investor wants to buy units of a scheme, online, he has to go to the web site of that fund house. He can switch between the schemes of that particular fund house, but not among schemes of different fund houses. Also, only close-ended schemes can be traded among investors, currently. To buy or sell units of an open ended scheme, the investor has to visit the distributor or approach the fund house directly. The Amfi committee last week received 15 expressions of interest (EoI) from both international and domestic companies including Canada based FundSERV, focussing on the data standards and security infrastructure.
Indian mutual fund industry has so far about 4.6 crore folios (investors), of which more than 95 per cent is held in the physical format. The electronic platform, which could take two years to implement, will not only ramp up the present model, but also benefit the next generation of mutual fund applicants, who are expected to grow exponentially.
SEBI chairman CB Bhave, who was instrumental in implementing the demat process for shares, had recently suggested that MF investors should also have a common statement for all their mutual fund holdings just like the system for equities through depositories like NSDL and CDSL.
Market players opine that in the present system, registrars don’t share any information about their clients with their competitors. The new option will co-exist with the present model, in which it takes about 3-10 days in a normal scenario depending on the location from where the application comes. Often, transaction statements are lost in transit.
The new platform is likely to be replicated on the same lines that is operational in several foreign countries such as in Canada, US and Australia. FundSERV, which is one of the interested parties to offer this service in India, is a leading provider of electronic business services to the Canadian investment fund industry.
In another investor-friendly initiative Amfi has set up a committee, headed by Vivek Kudva of Franklin Templeton, to simplify the application forms of mutual funds, in order to develop a common form. Recently, Sebi simplified the offer documents of mutual fund schemes and standardised the format of abridged, schemewise annual report.
Friday, April 17, 2009
Asset management companies (AMCs), which invest the pooled funds of retail investors in securities, are said to provide more diversification, liquidity, and professional management than individual investors can themselves manage. But a look at the stocks held by 28 asset management companies show that one-third of their assets is invested in only 10 stocks. Their favourite 10 being: RIL, SBI, Bharti, ONGC, ICICI Bank, Infosys, Bhel, L&T, HDFC Bank and HDFC.
AMCs of fund-houses such as Morgan Stanley Investment Management, Benchmark Asset Management, Deutsche Asset Management and LIC Mutual Fund Asset Management have invested funds to the tune of Rs 200 crore to Rs 1,100 crore in these 10 stocks. This means that this type of top-heavy form of AMCs' equity portfolio could be affected by a swing in just a few stocks. As per latest data, AMCs held maximum assets in form of shares in RIL (Rs 4,592 crore), followed by SBI (Rs 3,855 crore), Bharti (Rs 3,508 crore), ONGC (Rs 2,995 crore) and ICICI Bank (Rs 2,954 crore).
While these pivotal stocks are a part of sensex, these stocks account for 7% to as high as 61% of AMC assets invested in stocks.A high concentration could mean a compromise. Though 30% is a good mark which shows diversification, anything above 50% can signal weakness. A portfolio concentration skewed towards large-caps is far better than one skewed towards midcaps and small-caps. Going by that 30% cut-off, AMCs of fund houses such as Birla Sun Life, ICICI Prudential, Quantum MF, Canara Robeco, Tata MF, IDFC MF, Principal MF, ING MF and Sundaram BNP MF, among others will fall under the category.
Thursday, April 16, 2009
The constraints of managing funds that invest in a select few sectors can often prove to be demanding for fund houses. As a result, it isn't entirely uncommon to find a sector/thematic fund changing/expanding its investment objective/style in due course. This bears testimony to the intrinsic inadequacy of a sector/thematic fund in terms of sustainability over the long-term. Nonetheless sector/thematic funds continue to be launched at regular intervals. Now isn't this dichotomy interesting.
Why sector/thematic funds are launched
in that sector/theme, there is often more to it than meets the eye. Experience suggests that fund houses find it rather easy to garner monies in new fund offers (NFOs) as opposed to existing funds. Maybe, it's something to do with the Rs 10 net asset value (NAV) that attracts investors; then again, it could be the result of the higher commission payouts on NFOs vis-a-vis existing funds.
In most cases, with the exception of the investor, the NFO works out to be a lucrative option for all the other entities. And what could be a better excuse to launch an NFO than, invest in the 'next big story'.
Then again, investors need to shoulder some responsibility for the sector/thematic funds phenomenon as well. Every time there is a buzz around a new investment opportunity, investors feel the urge to participate therein, irrespective of its credibility. Often, they even fail to evaluate the aptness of the investment opportunity in their portfolios. This leads to their whole-hearted participation in sector/thematic funds.
A single sector or a theme is bound to run out of steam in due course. And thanks to the restrictive nature of sector/thematic funds, the fund manager has no alternatives for making investments. By restricting the investments to a sector/theme, the fund contravenes the very grain of mutual fund investing i.e. diversification. In effect, such funds make for perfect high risk-high return investment propositions.
So long as the underlying sector/theme experiences a purple patch, the funds are capable of delivering superlative performances. However, on the downside, they are found wanting. Statistics suggest that while sector/thematic funds can outperform diversified equity funds over the short-term, over longer frames diversified equity funds score better across the risk and return parameters.
Of course, there's always the option of the fund 'turning over a new leaf' and altering its investment style/objective. That isn't what you bargained for in the first place. Every fund is included in the portfolio to play a specific part; a fund undergoing a metamorphosis is certainly not an acceptable proposition.
And the solution lies in
It's not really difficult to guess, is it? Given that a sector/thematic fund's biggest shortcoming is lack of diversification, the solution lies in opting for a well-managed diversified equity fund. And let's not forget that a diversified equity fund can invest in the sectors/themes targeted by sector/thematic funds.
Hence, investors do not miss out on attractive investment opportunities targeted by the latter. Of course, when the tide turns, diversified equity funds can seek investment opportunities elsewhere, unlike sector/thematic funds.
What investors must do
To begin with, investors would do well to understand the rather unique investment proposition offered by sector/thematic funds. Such funds are best suited for informed investors who have a view on the underlying sector/theme; the same will enable them to time their entry into and exit from the funds.
Others would do well to steer clear of sector/thematic funds and invest in well-managed diversified equity funds with proven track records over longer time frames. Sector/thematic funds can account for a smaller portion of their portfolios (if at all), in line with their risk profiles and other holdings.
Wednesday, April 15, 2009
AIG is a young fund house that has had a reasonable run since its launch in mid-2007. However, its parent, the American Insurance Group, has been in the thick of the global crisis. On September 16, it was the impeding collapse and the subsequent bailout of this insurance giant that triggered the most severe phase of the global crisis.
At this point of time, AIG's future in India is completely uncertain. According to the parent company's CEO Edward M. Liddy, AIG is likely to pull out of all non-insurance businesses across the world.As a result, it looks likely that AIG's fund business in India will be sold off to someone else. The speculation is that AIG will look for a single buyer for its asset management business worldwide. However, it could take some time before AIG's future becomes clear.
Tuesday, April 14, 2009
Like your colleagues who throw a warm farewell for you when you leave after putting in substantial years, your employer too has a small, but significant, way of singing 'he's a jolly good fellow' to reward you for your service to the organisation.
He does so by giving you a free lump sum of cash - called gratuity in financial parlance - on your exit. The amount that he gives is based on the number of years of service you have put into the organisation. Read on to know more about this little-known windfall and some ideas about what you can do with the free money that comes your way.
When are you entitled?
Gratuity in earlier days was rather arbitrary and completely hostage to the whims of the employer. A wealthy, well-established employer would reward his dedicated employees and the not so rich would refuse such generosities. This led to a lot of discord and finally the government stepped in, passing the Payment of Gratuity Act, 1972, making it mandatory for all employers with more than 10 employees to give them gratuity.
Employees, as defined here, are the ones hired on company payrolls. Trainees are not eligible and gratuity is paid on the basis of the employee's basic plus dearness allowance if any.
How much can you get?
You become entitled to a gratuity on resignation or on retirement after five years or more of service. As per the Act, the gratuity amount is 15 days' wages multiplied by the number of years put in by you. Here wage means your basic plus dearness allowance. Take the monthly salary drawn by you last (basic plus dearness allowance) on resignation or retirement and divide it by 26, assuming there are four Sundays in a month. This is your daily salary. Multiply this amount by 15 days and further with the number of years you have put into service.
For instance, if your average monthly salary is Rs 50,000, the gratuity payable to you after 10 years of service would be Rs 290,000. However your employer factors in another term: 'uninterrupted service'. The term covers the service period of the employee including leaves or breaks, except periods notified as breaks in service by the employer.
For employees who do not fall under the Gratuity Act, the amount due for them is half of the average ten months' salary multiplied by the number of years of service.
As per the formula under the Act, gratuity up to Rs 350,000 is exempt from taxes. In the above example, the entire money is tax-free. However, for government employees any amount is non-taxable.
Your employer could choose voluntarily to pay you more gratuity; but any extra benefit that he pays, not coming under the formula, will be taxable. For instance, in the above example, if the employer pays you Rs 350,000, the entire money is not tax exempt; only the Rs 290,000 due under the formula is.
Be it a lump sum above the due amount, or money that you get before the stipulated five years, the employer is free to give you extra benefits. However, these sums are taxable if they exceed the specified limit under the Act.
In case of death of the employee, the heir is entitled to the gratuity immediately and the entire amount is tax-exempt. However, if death occurs after the gratuity is due then any amount above Rs 350,000 is taxable.
The employer could also offer you an extra gratuity by deducting a portion of your salary as the cost to the company. At the time of joining the organisation, ask your employer for all the details concerning gratuity and how to calculate it.
To meet its liabilities towards gratuity, a company either funds the money from its own pocket, or opens a trust and puts in money for the gratuity fund. This fund is then managed either by an insurer or an actuarial company.
Insurers also offer a life insurance in group gratuity policy which could be a standard cover or vary across employees
There are clear guidelines on how your gratuity money can be invested. Insurers, like service policyholders, have two opt-ions: traditional and unit-linked plans. While a traditional plan has little exposure to equities, a unit-linked plan can invest up to 60 per cent in equities.
Gratuity helps in strengthening your finances. Although the most tempting idea would be to splurge, a better proposition is to invest it.
Since it is a lump sum and not an income stream, using it to pay off your debts or increasing your down payment for a loan might be a good idea. It is not often that you get such free money. So a good idea would be to reduce the debt liability first and use the surplus to invest.
You could invest in equity products such as an index ETF or Funds if you are a young individual since you can easily keep this amount away for the long term. For the risk-averse, a public provident fund (PPF) is a good option. However the minimum contribution per annum is Rs 500 and maximum is Rs 70,000. Therefore, Rs 290,000 can be invested here only over the years.
If you get this money after retirement, it could be a large sum, with salaries at their maximum and several years of service accumulated. Even if retirement plans involved investing in various pension plans, equity funds and debt instruments, you can't employ all your funds to get you a monthly income stream.
You need a cash buffer for emergencies and some investments happening so that all your investments are not exhausted. Even after retirement, you need to plan for the next 30 years. So you also need to make your money grow. Putting your surplus cash in instruments like equity funds or debt instruments like PPF is advisable if you already have investments to fund your regular income.
However, for those who are banking on gratuity for a regular income stream, Senior Citizens' Savings Scheme, post office monthly income scheme or a fixed bank deposit are worthy options.
Free as it sounds and despite the splurge-instincts it arouses, gratuity is a significant sum of money and can be used effectively to further cushion your personal finance
Monday, April 13, 2009
You may have taken extra care with your insurance policy. But chances are that it may not meet the expenses resulting from an accident. So get wiser.
WHAT are the must-haves in your insurance kitty? A quick response probably could be a term cover and mediclaim. But have you thought about paying premium for a personal accident cover separately?
What is a personal accident cover? As the name suggests, it is a cover for an individual and his dependants from risks of accident. This includes the income loss resulting out of the treatment that follows. Take the example of Navin Sheth, a software professional, who drives to office everyday. Recently, he fractured his hand in an accident, which kept him out of action for a couple of months. The medical treatment cost him almost Rs 1 lakh. Thankfully, the personal accident policy came to his rescue, which compensated for the treatment as well as the loss of income.
Any accident drains out your finances as you have to meet your healthcare costs, plus there could be an income loss till your recuperate. You may have accumulated leave. But if the disability lasts for several months, then this cover could come in handy.
Mr Sheth has a term cover and also a mediclaim. But he still signed for an accident policy. The latter covers external and visible bodily injuries arising out of accidents. It basically covers contingencies such as accidental death, permanent total disability, permanent partial disability and temporary total disability.
Who needs it?
Experts say any individual who has to travel to work is prone to the risk of accident. While a term policy could cover the risk of dying, what is often neglected is the disability and consequential loss of income from an accident.
While for people practicing risky professions — circus ring master, miners, scuba divers or even a professional para glider — it is advisable to have this policy, it shouldn’t stop individuals like Navin who drive to office or are frequent travellers, the official adds.
Facts and figures
The premium (one time) for a personal accident insurance policy (PAIP) with Rs 3-lakh cover would work out to Rs 1,125 for a 3-year period, Rs 1,500 for a 4-year period and Rs 1,875 for a 5-year period. This would cover accidental death as well as permanent disability resulting from the accident. This is for people who fall in the age bracket of 5-70 years. The premiums are uniform across various age categories. However, most insurers give discounts (usually 10%) if you cover all the family members.
Usually, insurers charge a flat premium. But some state-owned insurers charge a fee according to risk profiles, which is pre-determined by the company itself. For example, desk job professionals such as teachers, accountants and lawyers are categorized as normal risk by the insurers. Field job professionals such as builders and contractors fall under medium risk category. During the policy tenure, if an individual develops a temporary disability emanating from an accident, the policy pays a fixed percentage of the sum insured as compensation. This percentage depends on the type of disablement. However, this is capped at a maximum of Rs 5,000 on a weekly basis.
Will a term cover suffice?
You have the option of signing up for a term cover and add personal accident cover as a rider. This will definitely work cheaper. Usually, if you pay an additional amount, say Rs 500, you can get an accidental death rider along with total disability. The usual limit for the rider is 10% of the sum assured for the whole life of the policy. Then, does it make sense taking an individual accident policy? The answer is that there are limitations as the extent of sum assured one could take. Second, once the claim is made, the rider ceases to exist. You cannot add that rider again to your policy. So, don’t overlook this cover. After all, it doesn’t really pinch your pocket.
Sunday, April 12, 2009
Mr & Mrs Achar, both in their early thirties, have a long list of want to-do things post-retirement. While Achar, a private banker, wants to travel a lot and write a book, Mrs Achar wants to look after their children and do some social work. The interesting part, however, is that they want to do this after 10 years, when they plan to retire! Yes, you are right, they do want to retire in their early forties and wish to pursue their passions.
Wait a minute... did we hear similar voices from you too. Alright, so let's see how this can be achieved with systematic planning that includes having reasonably aggressive investment plan, regular savings and may be a slight change in lifestyle to ensure a better and safe tomorrow. Early retirement is essentially a lifestyle issue and is proportionate to one's income and consumption pattern. To retire early one needs have to do careful planning and calibrated thinking.
Before making any retire plan, one should first prepare a balance sheet listing current assets, current as well as future liabilities, annual savings, the rate at which you can increase them, keeping in mind the growth in your income and expenditure, and major investments you plan to make (like buying a car or a house). This list can then be used to arrive at the corpus you would need to generate a regular stream of income once you stop earning.
While planning early retirement one should not just think of generating a regular monthly income. It's also important to keep in mind inflation and hence the need to increase your monthly income even when you are not earning. This can be achieved easily by reinvesting a part of your returns to counter inflation. Inflation indices such as Wholesale Price Index (WPI) or the Consumer Price Index (CPI) do not reflect the actual increase in prices for a particular lifestyle. In one's retirement planning, a figure that is somewhat 30% higher than these numbers is a more realistic estimate, say experts.
Next step is to decide a realistic time frame in which you would be able to build this corpus from returns on your investment. There are several investment avenues such as equity or related products, mutual funds, insurance, debt instruments (like bonds, PPF account) or counter-inflation products like gold and real estate, available in the market for investment. Building your portfolio out of these asset classes for early retirement is like making your cup of tea.
Although there are no standard asset allocation criteria, one can follow the experts who advise to diversify one's portfolio to minimize risk and still get decent returns.
For a person who wants to retire early, suggestion would be to park around 50-60% of savings in regular income products like monthly income plans (MIPs), post office saving schemes, around 30% in equity-related products and mutual funds and the balance 10-20% in insurance products.
While fixed-income avenues, such as FDs, bonds, PPF, post-office saving schemes, give a safe return of 6-9% p.a, gold as an investment has given a compounded return of roughly 10% in the last 10 years. However, over a 20-year timeframe, returns on gold have been a paltry 2.5%. Equities and equity related products, on the other hand, are considered to be riskier but historically have given much higher returns. Take the case of Sensex, which hit the 1,000-mark in 1990. And since then it has given an compounded return of 18.7% This means if you had invested Rs 1,000 in July 1990 (when it hit 1k), the corpus would have swelled to 20,000 by now.
If Mr Achar, who has a current corpus of Rs 10 lakh, annual savings of Rs 1 lakh and expects to increase his savings by 10% every year, invests half of his current corpus (Rs 5 Lakh) and half of future savings (Rs 50,000) in equities and other half in fixed income products, he would get Rs 66 lakh after 10 years which is equivalent to today's Rs 36 lakh. Instead, if he invests all his savings in equities, his corpus would grow to around Rs 90 lakh in 10 years from now, provided he is able to generate a return similar to historical return of Sensex. This 90 lakh would be equivalent to today's Rs 50 lakh if inflation rate is taken to be 6%. This translates into a fixed monthly income of Rs 1.4 lakh at the time of retirement, which is just 10 years from now! Instead, if he wants a regular increase in his monthly income every year, by say 6% to counter inflation, he should take out only Rs 95,000 from his monthly income of Rs 1.4 lakh and reinvest the rest.
One thing that is to be remembered is that speculation has no play in getting good returns. You can't gamble your way to get higher returns. The fallout of this kind of planning can be that you won't be able to retire early and in fact would have to work for whole lifetime.
Saturday, April 11, 2009
Lists the 10 biggest financial mistakes investors make in their over-enthusiasm to make quick bucks
HAVE you lately started falling short of your investment target or having difficulty in meeting your monthly expenses? Or have you been forced to take one credit card to clear the dues of another? If yes, you’ve got some serious financial trouble ahead, which may be because of some simple financial mistakes you must have made in the past.
Surprisingly, not only common but even seasoned investors make financial mistakes, which they sometimes find difficult to rectify. For many aspects of financial planning, there is no going back, at least without some sort of penalty. The good news, however, is that it’s never too late to learn from your own mistakes or those of others. Here are the top 10 financial mistakes people generally make:
1) PUTTING OFF FINANCIAL PLANNING
Undeniably, the biggest mistake that people make is to ignore the value of financial planning. Financial planning, in fact, requires thinking and setting of lifetime financial goals which enable one to determine the appropriate asset allocation required for oneself and one’s family. Without a plan, people tend to try and ‘maximise’ returns in each and every investment and take on more than commensurate risks, thereby endangering the meeting of the goals which ought to have been simple to achieve in the first place. It’s very much like driving at 80 km per hour in a 40-kmph speed limit zone because you just don’t know how far you have to go to your destination. While there is a chance that you may reach there early, there is a possibility that you may not reach there at all.
2) NOT STARTING EARLY IN LIFE
People generally think that they need not plan early. Depending upon their individual time frame, they do not like planning for more than three weeks or three months or, rarely, three years in advance. Let’s imagine that we are kicking off from the centre in the football match. We need to score a goal more than the other team to win. You can’t hope that you will defend your goal for 89 minutes and then attack in the last minute and score the winning goal. According to him, this is just like planning funds for retirement about a year before actual retirement date. Or even taking a life insurance policy a month before one’s death. No need to say that having a goal and starting early to meet that goal are absolute musts.
3) IGNORING THE POWER OF COMPOUNDING
Investors often overlook the power of compounding. After all, the first lesson in even the most basic investment guide is to let the ‘magic of compound interest’ work for you. Compounding investment earnings, in fact, can turn your small investments into a whopping sum after a period of time. Its power is so immense that your investments will multiply 30 times in 30 years, assuming a nominal return of 12% per annum. And that being a one-time investment only. What if you are investing every month or at least a year? No wonder even Albert Einstein called the power of compounding ‘the greatest discovery of all time’, and Benjamin Franklin described it as ‘the eighth wonder of the world’! A majority of investors, however, still believe that big money is made by big money only.
4) LIVING BEYOND ONE’S MEANS
Whoever advised the world to cut its coat according to its cloth was surely not an insane person. After all, people lose more than they ever gain, simply by living large or beyond their means. Lots of people, in fact, generally get seduced by big-debt, big-ticket luxury items, sometimes going all the way into bankruptcy. If you spend money on non priority assets or other things, mostly under the pressure of today’s lifestyles or driven by heavy advertisements, there is something seriously wrong with the way you manage your finances.
5) NO RAINY DAY FUND
The need for having an emergency fund, particularly keeping some cash at home or in a bank account, has always been emphasised by investment planners. Even standard financial principles suggest that you should keep aside cash to cover three to six months of living expenses, which would also be able to cover most emergency expenses. In real life, however, very few people see the importance of keeping an emergency fund in their portfolio. Forget those who can’t afford it. It’s true even for those who heavily invest in stocks, real estate and other assets — and sometimes pay heavily for their mistake.
6) ABILITY TO PAY IS ABILITY TO AFFORD
People start living on borrowed money once they confuse their ability to pay with their ability to afford. And the availability of easy money — particularly plastic money and the growing EMI culture — fuels their dream. So if today it’s a Santro, it must be a Honda City tomorrow, and a BMW the day after. Thus, people get into plastic money’s revolving credit trap as they don’t understand that it provides them just the ability to pay, not the ability to afford. It’s also because they don’t assess their long-term ability to pay before taking readily-available loan. However, paying interest as a result of failure to pay off credit card bills makes the price of the charged items a great deal more expensive, sometimes taking decades to clear the dues.
7) INADEQUATE INSURANCE COVER
Insurance is surely an asset because it works as a safety net in case of an unfortunate event. However, besides having no or inadequate insurance cover, people in today’s scenario are buying insurance as investment which may not be appropriate. Clubbing investment with insurance involves binding oneself to pay big amount of regular insurance premium, leading to a fixed liability. For best cover, individuals should take insurance on the basis of human life value (the quantum of money required by the family in case of death of the bread winner) with the advice of a qualified professional, if required.
8) RELYING ON TIPS
Too much relying on tips or on even educated professionals in a public forum (like TV channels) is another big error that people make. No expert can profess what every individual who is hearing the channel needs to follow. Beware of the glib helper who fills your head with fantasies while he fills his pockets with fees,” warns Warren Buffett, world’s greatest investor. “You should, therefore, never invest on recommendations alone. Instead, always have proper analysis before investing. If you are unable to do that, you can take the help of a qualified financial planner”.
9) PUTTING ALL EGGS IN ONE BASKET
Instead of putting all your eggs in one basket (which means that a major part of the portfolio is invested in a single or same type of financial instrument which increases risks, resulting in high losses/ profits), you should always try to diversify your portfolio as possible. This way you could earn optimum returns with minimum risk — a strategy not commonly followed by investors. Investment portfolio, however, should be diversified in accordance to one’s risk appetite.
10) HAVING UNREALISTIC EXPECTATIONS
There’s nothing wrong with hoping for the ‘best’ from your investments, but you could be heading for trouble if your financial goals are based on unrealistic assumptions. For instance, if your property prices more than doubled during 2004-2007, it doesn’t mean that you should expect 30% annual return from real estate in future also. The bursting of stock market bubbles is a case in point. Therefore, when Warren Buffett says that earning more than 12% in stock is pure dumb luck and you laugh at it, you’re surely in for trouble!
Friday, April 10, 2009
In the stock market, the bulls are constrained by concerns over the macro-economic scenario domestically, the grim global scenario, persistent Foreign Institutional Investor (FII) outflows and the possibility of another round of monetary tightening. That does not mean the bears have a free hand. The correction in commodities, especially crude, provides ample ammunition for the bulls to conduct a short-term rally.
Investors who flocked to gold as the 'safe asset' were disappointed at the way the price dropped in August. Real estate rates too have dropped and by all indications will continue to fall. No asset seems to be a safe haven anymore.
The only asset that beckons is debt with interest rates rising. But would it make sense for an investor to move into debt? While this is a good time to reassess one's portfolio, it would not be wise to simply rush to income funds, Fixed Maturity Plans (FMPs) or fixed deposits. Read on to figure out how to make the best in such a bleak market environment.
Don't let market conditions determine your asset allocation
Unfortunately, for most investors, it is often the bull or bear run that will determine their preference for a particular asset. During a bull run, they will all flock to equities and when the market crashes, everyone is suddenly paralyzed by market uncertainty and fear. Which is really ironical, since the risk of losing money at 13,000 is much less than when the Sensex is at 20,000. In 2002, when the Sensex was around 3,200 levels, inflows into equity mutual funds were Rs 4,517 crore. In 2007, when the Sensex was in the range of 14,000 to 20,000, inflows into equity mutual funds totalled Rs 1,07,189 crore.* Investors were far more willing to buy equities at higher rather than lower prices!
Right now, when stocks are getting whipsawed and interest rates appear seductive, the instinctive reaction is to run to a safer haven. But abandoning equities now and moving to debt and cash would be a mistake. Those who under invest in stocks are left flat-footed when the market recovers. And equities, as an asset, must have a place in your portfolio. Irrespective of the state the market is in.
In fact, if your equity holdings have been beaten down substantially, then you could make some refinements to your portfolio. Check to see by how much your portfolio has deviated from your predetermined allocation. If your equity allocation has fallen substantially, you should focus on increasing it. Stay focussed on your strategy. Not on the market.
Now is a good time to consider equity
It would be wise to look at the experience of renowned investor, the late Sir John Templeton. His investing mantra was simple: Buy at the point of maximum pessimism. In other words, as an investor, he relished adversity. A typical buy-and-hold investor, Templeton identified stocks that were trading below what he estimated to be their actual worth. He then was prepared to wait till the market recognised the value of the stock and the price corrected. In reality, it is always the opposite that takes place. As the market peaks, almost anything is touted as a "can't miss" investment or fund. Consequently, traditional measures of an asset's worth go by the wayside. Instead of running to the hills, investors run in droves to the market. They buy for no other reason than the belief that the investment would go up. When the market tumbles, as it did this year, investors run to debt or hold cash.
You make most of your money during a bear market; you just don't realise it at the time. Wise words for an investor to keep in mind!
Not every beaten down stock or sector is worth buying
In the phenomenal bull run over the past few years, risk has almost been an afterthought as investors plunged headlong into growth stocks and took heavy sector bets. Now the winning formula is probably a more conservative mix that's mindful of heightened volatility. Investors would do well to gravitate towards large and stable companies that have a better chance of weathering a market storm.
But of course, that does not mean there aren't any great stocks in smaller market caps. What we are saying is that nothing will substitute smart, bottom-up stock selection.
Ditto for sectors. Between January 8 and July 15, 2008, the sectors that got hammered were real estate, construction, power, capital goods and banking. But that does mean you should run away from them. Neither does it indicate that you should mindless shop for stocks within these sectors. Only if you find good undervalued picks, go ahead and buy them.
But, if you have not done your homework on investing in a stock, you should not be investing in it.
And, don't just dump your fund if it has performed miserably. Check its performance regularly with its peers. Keep track of the portfolio to see if the fund manager is making any significant changes.
Don't try to time the market
It's difficult to predict when a bull run will peak. By the same measure, it is impossible to call the bottom. All bull and bear markets will exhibit periods that look like reversals, but are just momentary before the bull or bear regains control.
There are three things you should be absolutely clear about.
If you have been investing via a Systematic Investment Plan (SIP), please continue. There is no reason why you should stop. If you have not been investing via a SIP, please start. Don't try to invest lump sums when you think the market is at a low.
The same goes for timing the cycles of other assets. When equities are down, investors tend to find solace in what's perceived as "safer" - recently that was gold. When the price fell recently, they were a dismayed lot. If you do not have a valid reason for investing in a particular investment or asset, stay away.
You will be rewarded for staying cool
It's not easy to step back for perspective when you are gasping for air as your portfolio value plummets. But any sensible long-term investor will tell you that bear markets are setting up the next bull market. They are also keenly aware that bull markets don't run forever. So it is only natural that in a volatile market investors should expect some short-term losses in their portfolios. Even a great company's stock can get banged around in a tough market. But that does not make you a loser (though you may look like one). While the old "buy and hold" mantra may seem like cold comfort at times like this, rest assured that it has a better long-term record than market-timing.
Once again we reiterate our earlier point. Now is a good time to get into equity and you will be rewarded if you have a time frame of at least three years. With the near 30 per cent fall in the market from January 2008, Forward P/Es have fallen sharply and are now at reasonable levels. India's Fwd P/E is now 14.2x (July 2008), down from 20.4x (January 2008). Over the past 20 years (July 31, 1988 -July 31, 2008), equities, as measured by the Sensex, have given investors a return of 17.16 per cent per annum.* So the problem is not with the asset class but with the approach to equities and the investing strategy of individuals.
This too shall pass!
However bleak the scene appears, it is not here to stay forever. Bargain valuations are available only in such times. But the key is to understand whether "such" times are temporary or long lasting.
The current bearish phase has been the result of the spike in the price of crude and steel and commodities. The result was inflation, higher interest rates and the worsening of the fiscal deficit. Over time, these issues will be resolved. But as long as fundamentals remain strong, we have nothing to fear. If the fundamentals deteriorate significantly, the reverse will take place. The structure of the economy, the strong corporate balance sheet, increasing household income without too much debt on their books, rising consumption levels, high savings rate - will ensure that the slowdown in India is not severe.
Equities have fallen before and they will fall again. The last bull run ended in March 2000. The three-year bear market that followed was pushed by the tragedy of 9/11 and a recession. Finally, the market bottomed out in October 2002. From then on, it scaled impressive heights. Along the way, there have been some significant dips followed by a continuation of upward pressure. But in the end, companies with good fundamentals will weather the storms that sweep the market and the economy.
The lesson here is straightforward. Stocks are excellent long-term investments, but dangerous short-term bets.
Thursday, April 9, 2009
The Sensex is an "index".
What is an index?
An index is basically an indicator. It gives you a general idea about whether most of the stocks have gone up or most of the stocks have gone down.
The Sensex is an indicator of all the major companies of the BSE.
The Nifty is an indicator of all the major companies of the NSE.
If the Sensex goes up, it means that the prices of the stocks of most of the major companies on the BSE have gone up. If the Sensex goes down, this tells you that the stock price of most of the major stocks on the BSE have gone down.
Just like the Sensex represents the top stocks of the BSE, the Nifty represents the top stocks of the NSE.
Just in case you are confused, the BSE, is the Bombay Stock Exchange and the NSE is the National Stock Exchange. The BSE is situated at Bombay and the NSE is situated at Delhi. These are the major stock exchanges in the country. There are other stock exchanges like the Calcutta Stock Exchange etc. but they are not as popular as the BSE and the NSE. Most of the stock trading in the country is done though the BSE & the NSE.
Besides Sensex and the Nifty there are many other indexes. There is an index that gives you an idea about whether the mid-cap stocks go up and down. This is called the “BSE Mid-cap Index”. There are many other types of indexes.
There is an index for the metal stocks. There is an index for the FMCG stocks. There is an index for the automobile stocks etc. If you are interested in knowing how the SENSEX is actually calculated...you must checkout our "How to calculate BSE SENSEX?" article!
Wednesday, April 8, 2009
A RIGHTS issue is a way by which a listed company can raise additional capital. However, instead of going to the public, the company gives its existing shareholders the right to subscribe to newly issued shares in proportion to their existing holdings. For example, 1:4 rights issue means an existing investor can buy one extra share for every four shares already held by him/her. Usually the price at which the new shares are issued by way of rights issue is less than the prevailing market price of the stock, i.e. the shares are offered at a discount.
Why does a company go for it?
The basic idea is to raise fresh capital. A rights issue is not a common practise that a corporate organisation resorts to. Ideally, such an issue occurs when a company needs funds for corporate expansion or a large takeover. At the same time, however, companies also use rights issue to prevent themselves from being conked out. Since a rights issue results in higher equity base for the organisation, it also provides it with better leveraging opportunities. The company becomes more comfortable when it comes to raising debt in the future as its debt-to-equity ratio reduces.
What is the effect on the company and what if a shareholder does not exercise his right?
A rights issue affects two important elements of a company — equity capital and market capitalisation. In case of a rights issue, since additional equity is raised, the issuing company’s equity base rises to the extent of the issue. The effect on m-cap depends on the perception of the market. In theory, every new issue has some kind of diluting effect and hence as a result of a fall in the market price in proportion to an increase in the number of shares, the market capitalisation remains unaffected. However, if the market sentiment believes that the funds are being raised for an extremely positive purpose then price of the stock may just rise resulting in an increase in the market capitalisation. If a shareholder does not want to exercise the right to buy additional shares then he/she can sell the right as the rights are usually tradable. Alternatively, investors can just let the rights issue lapse.
What should an investor be careful about in case of a rights issue?
An investor should be able to look beyond the discount offered. Rights issue are different from bonus issue as one is paying money to get additional shares and hence one should subscribe to it only if he/she is completely sure of the company’s performance. Also, one must not take up the rights if the share price has fallen below the subscription price as it may be cheaper to buy the shares in the open market.
Tuesday, April 7, 2009
Companies are rushing to buy back Foreign Currency Convertible Bonds (FCCBs) as the RBI’s deadline of March 31 draws closer. Firms such as Mahindra & Mahindra ($11 million), Uflex ($45 mn), Moser Baer ($4 mn) have announced FCCB buybacks in the past few days while others such as GV Films, Nahar Industrial, Everest Kanto have said they are considering bond repurchases. An FCCB is a convertible bond that is a mix between a debt and equity instrument. It acts like a bond by making regular coupon and principal payments, but these bonds also give the bondholder the option to convert the bond into stock.
Around 156 companies have issued FCCBs between 2006 and 2008 raising close to $15 billion, according to Reliance Money.
According to an investment banker, "now many of these bonds are trading at steep 50% discounts. So, if a seller is available then you can buy FCCB bonds worth $10 million for only $5 million”.
After buying back FCCBs worth $4 million in late January, auto major Mahindra & Mahindra on Thursday repurchased 65 FCCBs each of $100,000 aggregating $6.5 million at a discount, as per a company filing. These bought back FCCBs will now be cancelled. Likewise, packaging company Uflex has bought back 450 FCCBs at a nominal value of $100,000 each aggregating to $45 million due in 2012. Moser Baer also has bought bonds worth $1.22 million on Thursday in addition to $1.96 million it purchased earlier.
Already, many companies including Jubilant Organosys ($59 million), Reliance Communications ($35 mn), Radico Khaitan ($10 mn), Hotel Leelaventure (Euro 11 mn), Tulip Telecom ($30 mn) and Financial Technologies ($5.5 mn) have repurchased bonds worth over $175 million in the recent past, say analysts. Aggressive companies went in for the FCCB route to fund their expansion/acquisition plans because of the shorter lead times associated with the process as well as the fact that companies gained exposure to a global investor base.
In December 2008, the RBI allowed Indian companies to buy back FCCBs prematurely by raising ECBs under the automatic route at a minimum discount of 15% to that of the book value.
Monday, April 6, 2009
I remember several years ago when I asked one of my brokers to explain what 'Options' was, he told me so many things which made no sense at all to me at that time. Talks about option premiums, calls and puts can be extremely confusing for somebody who has no idea at all about all these things. I will now try explaining it to you using the simple principles of learning things the Happionaire way.
In the past as soon as I learnt about options, I got tempted and traded in them. Since the returns possible are quite high, a lot of us get tempted very easily. Sometimes we made huge profits trading in options and sometimes we made losses. In the end I don’t think I made any substantial amount of money trading in options. Luckily I didn’t risk too large an amount and learnt a lot from the mistakes I made.
'Options' explained in a very simple way by sharing a small story below.
Let us say you want to buy an apartment. After searching a lot you find a nice apartment that costs Rs 10 lakh. (I know many of you might be wondering where we can get Rs 10 lakh apartments.
Since you like the flat so much, you speak to the builder and tell him to block the flat for you. You want to consult with your family and will tell him for sure in one month. The builder tells you that you will have to give him Rs 10,000 to block the apartment. You can either pay him the entire Rs 10 lakh after one month and take the property or alternatively in case your family doesn’t like it you can let it go but you will lose your Rs 10,000.
You think about it, and decide Rs 10,000 is not too big an amount to pay for the flat. You pay the amount and the builder blocks the apartment in your name for a period of one month. Anytime you can pay him Rs 10 lakh and the apartment is yours.
In fact you have fans offering you Rs 15 lakh for the same apartment. You have blocked the flat for yourself at a price of Rs 10 lakh. This means if you sell the flat you will make a profit of Rs 5 lakh. However you have not invested Rs 10 lakh but only Rs 10,000 to block the flat in your name.
You decide to sell the flat at Rs 15 lakh. From that you give the builder Rs 10 lakh and keep the remaining Rs 5 lakh for yourself. This means you have invested Rs 10,000 and in return got Rs 5 lakh in a period of less than a month.
This is a very simple example which tries to help you understand how options work. Your maximum risk in the above case was Rs 10,000 but maximum profit potential was unlimited unlike Futures where the risk can be more than the capital invested.
The above example can be called a Call Option? This type of option increases in value when things go in the positive direction. If you buy a call option for the NIFTY, it will rise as the NIFTY rises. In the stock market, options can be used as tools to minimize risks as well as trading tools.
Options can be traded in a similar way like stocks. For instance you can tell your broker to buy a call option if you are bullish or alternatively you can tell him to buy a put option if you are bearish.
Options need you to be more aware and alert about things happening in the short term. Very few people can do both trading and investing together.
Sunday, April 5, 2009
Financial planners and bankers point out that poor credit management is becoming a common occurrence. Currently, gross domestic savings is at 30 percent of the gross domestic product. But an increasing number of families are going in for easy credit without looking at the repercussions.
Why debt counselling?
Sloppy credit assessment, the availability of easy credit, and a low level of public awareness about the financial implications of credit options are making indebtedness a serious concern. Throw in the increasing preoccupation with an affluent lifestyle, and the scenario gets bleaker. Many also borrow to speculate in stocks, realty and even to outright gamble.
People are used to a 20-25 percent increase in annual income. But what happens if there's a slowdown? Over commitments can get you in trouble. The entire family might pay the price, through domestic disharmony. This is why debt counselling - a common service in the developed world - has become an urgent requirement here. Fortunately, a few services have opened their doors, and are guiding borrowers, and offering restructuring solutions.
Counselling services don't add to an already beleaguered borrower's financial burden - their services are free. Banks offer these services as 'a goodwill gesture’; It is a corporate social responsibility initiative. Debt counselling centres offer advice for all categories of credit - credit cards, personal loans, home loans, and so on. Their services are creditor-neutral, that is, they help you out no matter what institution you borrowed from.
How to get help
Most borrowers learn about debt counselling through the Internet. A source of online help is www.money4you.in. This is an initiative of the Indian Banks' Association (IBA), India Cards Council and Mastercard, and this site offers free financial education.
How it works
Debt counsellors make a holistic assessment of your situation, and give you an appraisal of the costs involved - interest rates, fees, and all the fine print. For instance, credit cards are the most expensive kind of debt, with annual interest rates of 42 to 49.36 percent.
The next step is to list payments that you, the borrower, can make - dues, equated monthly instalments, and so on. The centre can help you request creditors to restructure loans. So, for instance, you may end up with a longer repayment schedule but more affordable EMIs.
Banks avert a messy recovery process, and get at least the principal back. And borrowers get help paying off dues. All of this, though, applies only if a bank is convinced the borrower is truly willing to repay, and genuinely cannot stick to the original schedule. Debt centres concur that banks' attitude towards creditors has softened, and many choose to cooperate with the debtor.
The borrower then has to list movable and immovable assets, such as real estate, shares, mutual funds and gold. It may be necessary to take 'hard steps' like selling gold and vehicles to reduce liabilities. Gold prices normally rise 10 to 14 percent annually - last year's 40 percent rise was exceptional - whereas personal loan interest rates are 18 to 21 percent. Getting rid of non-productive assets to pay off loans makes financial sense.
Borrowers may be advised to postpone lifestyle expenses like leisure travel, expensive gadgets, cars, and eating out too often. Painful, maybe, but sometimes the alternative is worse. The last, and most productive, option is to increase one's income.
The best strategy
If you must get into debt, do so with care.
- Don't pay the minimum due on your credit card, pay the full amount each month.
- Don't take an expensive loan to pay off a previous loan.
- If you have more than one loan, pay off the most expensive one first. So it makes sense to pay off credit cards, then personal loans, then lower-interest debts.
- If you must borrow, do so against a security such as property or shares. Such loans (14 to 16 percent interest) are cheaper than personal loans (19 to 21 percent).
- And lastly, if you can borrow from helpful relatives to pay off your debt, do so.
Saturday, April 4, 2009
A reverse mortgage is a product that’s structured around the needs of senior citizens for regular income. What’s more, the legal heirs can repay the loan and retain the property.
You may want to know what a reverse mortgage is and how it can help you remain independent. Here’re the major points.
WHAT ARE THEY?
Reverse mortgages are products that have been structured around the need of senior citizens for a regular income. Instead of approaching a bank for a loan, which you have to pay it back as installments, a reverse mortgage allows you to mortgage your house to a bank or a housing finance company, which pays you a regular amount at regular intervals. This amount can be used for fulfilling your needs excluding any speculative or trading activity. Some of the banks/housing finance companies which provide reverse mortgage services include LIC Housing Finance, Dewan Housing Finance, Punjab National Bank, State Bank of India and Axis Bank.
To avail of a reverse mortgage, you either need to be a male above 60 years of age or a female who is above 55 years of age. However, if you want to jointly avail of the loan, either one of the partners needs to be above 60 years. Apart from the age of the person, the amount of the loan also depends on the time period and the value of the property. Loans are available for about 15 years. Installments could either as periodic payments (monthly, quarterly or annual payments) and sometimes as lump sum payments. However, lump sum payments generally given out only for medical needs.
Banks have their own valuation experts who will determine the value of your house. But an important criterion that banks look for is that the residential property should not have any encumbrances. You should have a clear title to the property and must be living in the house. Moreover, the property should not be involved in any type of litigation. Banks are willing to give between 40-60% of the value of the property, subject to a maximum of Rs 50 lakh. The older you are, the greater your chances of getting a higher percentage. If you live in an area where the prices are rapidly increasing, you need not fear that you will lose out on the benefits. The bank either performs annual asset verification or at least once every five years. If you desire, the bank may modify the loan amount keeping the revised rates of the property in mind.
LIVE AT HOME
A very re-assuring aspect about reverse mortgage is that it doesn’t force the couple to move out of the home as soon as the house is mortgaged with the bank. They are allowed to occupy the home till both the partners pass away or they are permanently moved to another location like an old age home. If one of the partners outlives the period of the loan, the regular amount that comes will be stopped but the person can continue to live in the house. After both partners die, the bank gives the legal heirs a chance to pay the outstanding loan amount with interest which currently ranges between 11% and 12%. If they do not show any interest, then the bank proceeds with selling the home. If the sale proceeds are above the outstanding amount, then the bank returns the excess amount to the legal heirs. The option to pre-pay the loan also exists. However, banks/ housing finance companies may/ may not levy a pre-payment penalty, depending on their discretion.
- Males - Above 60 years
- Females - Above 55 years
- Couples- One spouse above 60 years
- Home should be primary residence
- Have a clear title to the home
- Home should not be involved in litigation
- An assured income for about 15 years
- Continue to live in your home
Friday, April 3, 2009
A RECESSION can be loosely defined as a slowing down of the activity in an economy or when the economy enters a phase of negative growth. Since the GDP is a measure of the economic growth of the economy, a technical definition of recession would be a decline in the GDP growth of a country over two or more consecutive quarters of a year. This is very often accompanied by a fall in the stock markets. Many experts feel that a recession is a part of a normal business cycle after a period of growth and feel that it could last anywhere between 6-18 months. During a recession, there is generally a lowering of interest rates in order to pump liquidity back into the economy.
The line between where recession ends and depression begins is often debated. However, most experts feel that when the GDP has fallen by over 10%, then it can be defined as an economic depression.
There are, however, many who feel that GDP is not the only indicator and hence they look upon employment, industrial production, real income and wholesale-retail sales as key indicators. According to the definition of the National Bureau of Economic Research in the US, recession is the period between when business activity after reaching a peak, starts to fall and when it ultimately bottoms out.
WHAT CAUSES A RECESSION?
According to most experts, a recession is linked to a decrease in spending by consumers owing to a lack of faith in the economy. Less spending would mean a decline in the demand for products, which further leads the manufacturers to cut down on production. Lower production levels would lead to job-cuts and to a high level of unemployment, which then perpetuates the cycle owing to limited spending capacity.
Sometimes specific incidents can spark off this chain reaction. For instance, the current crisis is the US is seen to be the fall-out of the sub-prime crisis. After years of euphoria surrounding the rise in property prices, the housing bubble in the US burst in 2006 and the value of property began to decline. People found themselves unable to repay their loans, and banks were left reeling under the shock of huge defaults, foreclosures and write-offs.
Thursday, April 2, 2009
US GOVERNMENT debt, long considered the safest investment in the world, looks like it too has been hit by “bubble” fever. Prices of US Treasury bonds appear dangerously overstretched after a soaring rally, another sign of how financial markets have been turned on their head.
Treasuries are the riskiest securities on the planet.
While few fear that the US government will fail to honor its debts, many see a risk that bond prices may plunge just as spectacularly as house, commodity and stock prices have in recent months.
It looks like the Treasury market is in bubble territory.
The rally in the nearly $5 trillion US government bond market picked up speed this week when the Federal Reserve hinted it may buy longer maturity government bonds.
Fears of a bubble in Treasuries underscore how far investors have fled from risk since ballooning house price valuations popped in 2007, causing huge losses in markets across the board and sparking a global economic crisis.
Yields on long-maturing bonds are below 3 percent and only 1-2 basis points on three-month T-bills, the lowest in decades. After buying billions of dollars worth of government debt, US institutional investors and foreigners including Asian central banks could incur enormous capital losses.
Treasuries are pricing in depression and I just don't think we will dive into depression-like activity.
That said, the relentless rise in Treasury prices may continue further amid little sign of an end to the panicked exodus from stocks which are down nearly 40 percent this year, and corporate bonds, hurt by fears of default.
Data on Friday showing November as the worst month for US job losses since 1974, which prompted some economists to predict the country's recession could be longer than previously thought. Some investors and economists also fear deflation, an environment of falling prices. That would push yields, or the return for investors on bonds, yet lower than their already five-decade troughs.
The stampede into Treasuries has left the benchmark 10-year Treasury note's yield, which moves inversely to its price, at 2.51 percent this week, the lowest since the 1950s.
Think it is safe to say that Treasuries have moved into a self-destructing yield environment.
Treasuries got a hefty boost on Monday after Fed Chairman Ben Bernanke said the US central bank might buy long dated Treasuries. Such a move would help lower mortgage rates and address one of the root causes of the global credit crisis. Despite the slump in yields and fears of a new bubble, investors are reluctant to move away from their favorite safe-haven. Many fund managers are staring at huge losses in riskier markets and would be unwilling to make big bets there. You will have many hiding there, bidding up the market, because many investors can't stand to lose anymore money before closing the books this year.
The latest gains bring the US government bond market closer to the brink of a potentially vicious sell-off. It is now highly vulnerable to a surge of between $1 trillion and $2 trillion of new government issuance to pay for massive bailouts of the financial sector, bond analysts warn.
If that issuance impacts the market just when investors start venturing back into corporate bonds, the fall in prices could be rapid. Once confidence returns, which I expect over a six-month time horizon, safe-haven flows will go into some of these markets with more appealing returns such as corporate bonds. Even if rates do not change over the next 12 months, total returns from the 10-year note would be a measly 2.6 percent versus a 3.4 percent dividend yield for the Standard & Poor's 500 index of leading shares.
Doug Kass, president of Seabreeze Partners Management, told Reuters that he is shorting the government bond market, betting on a fall in prices.
Wednesday, April 1, 2009
The domestic investors are increasingly realising that it takes a combination of timing, patience and probably little bit of luck to make money from the stock markets. Those who missed the opportunity of booking profits during the earlier boom run are regretting, and even those who made an entry less than a year ago are not a happy lot. That is sure to make many wonder what it takes to be an investor in the stock markets.
Check out if you have these traits.
Equity sure lets you earn more money but not all your investments can turn into a goldmine. This is particularly true when you bet on stocks. As a result, an equity investor needs to have the ability to take risks which could be in the form of negative returns. While the prospects of loss of capital are much lower when the investment horizon is long, there are chances that some stocks may not recover even in the long term due to a change in their business prospects. In such cases, 'stop loss' becomes a strategy and investors may be forced to settle for loss of capital. As a result, equity is definitely not an option for those who can't see negativity in their portfolio.
Time to monitor
If you are one of those jet setting professionals with little time on your hands for managing money, equity investing is not the option for you. The stock markets are all about volatility and hence need careful analysis and monitoring. When you take the direct stock route, investment decisions need to be reviewed regularly. Gone are the days when you could invest in a stock and relax. Today, even market leaders are faced with the challenge of business cycles and hence, investors have to keep a tab on macro and micro factors.
For those who don't have the energy and time for regular monitoring, mutual funds may be a better option as the money you invest is managed by professional managers. Since mutual funds also take care of the diversification aspect because of their larger portfolios, the investor gets the benefit of better returns. Though in the short term, direct equity investing may prove beneficial, history has shown that mutual funds have the ability to generate higher returns over the long term because of diversified portfolios. Also, mutual funds have the advantage of holding on to cash unlike individual investors.
Stick to your conviction
It may sound contradictory but equity investors need a combination of conviction and nimble footedness to maximise gains. While the ability to book profits at regular intervals is an integral part of equity investing, an investor also needs the discipline to think long term with his investments. For instance, if you have chosen the equity option for building wealth over a period of 10 years, the aberrations in the short term should not be a constraint. Again, for long-term goal fulfilment, systematic investment plans (SIPs) in equity can do a better job when compared with direct stocks as stocks may not retain the same level of potential over a long term. On the other hand, the SIP form of investing through mutual funds can be more rewarding and less cumbersome.
While these are some traits which can help investors tide over the uncertainties of equity, the basic principle of wealth creation is discipline. Irrespective of your choice of product, be focused with your goals and the means you choose.
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