Prajna Capital - An Investment Guide

A joke in the personal finance industry is that investors are more willing to buy insurance policies than mutual funds. When quick profits become more challenging or losses become the order of the day, it's probably natural for investors to take shelter under safety. But then can insurance be a supplement for investors. The question assumes significance, as it is not the job of an insurance policy to provide capital or yield comfort. However, in the last 3-4 years, insurance is being sold as an investment option rather than as a risk cover and hence, investors too have begun to expect insurance to do the job of wealth creation. One of the reasons could be due to the fact that the middle income segment, till the current decade, used insurance as a savings product. The legacy seems to have passed on over the years and products like the unit-linked insurance plan ( ULIP ) have only strengthened the belief of investors that insurance is for investment. However, investors can go for ...

Mutual funds are a convenient way to invest in the markets. Numerous fund houses offer a wide platter of schemes. The choice before the investor is so wide, that he is often baffled. Some investors who have tasted attractive returns in the past believe that all funds can work the magic for them. When they get mediocre results, they realise that their time and money are wasted. Today, the stock markets are badly beaten. People with low risk appetite are locking away their savings in debt instruments. Some investors consider mutual funds a safer route to remain invested in the markets. How does an investor evaluate the performance of mutual funds? How do you ensure that your money is not locked in a low or no return scheme? Don’t rely on past performance A fund that was yielding consistent returns over the past few years can disappoint the investors next year. Past performance is no guarantee for good future performance. Compare its performance over varying timeframes against the b...

This article explains how hedge funds use different strategies to mitigate risk Hedging means managing risk. A fund manager employs a particular hedging technique in order to mitigate a particular type of risk. For example, a market risk can be hedged against by selling a broad collection of securities short, in equal proportion to one's long exposure or by buying put options on an index. You can hedge against interest rate, inflation, currency etc. Tools for hedging include raising cash, selling short, buying or selling options, futures, commodity and currency futures etc. A hedge fund is a private investment partnership. Hedge funds tend to be skill based investment strategies that attempt to obtain returns based on a unique skill or strategy. The primary aim of most hedge funds is to reduce volatility and risk while attempting to preserve capital and deliver positive returns under all market conditions. It designs a strategy to reduce investment risks using call optio...

One of the ways in which the investing preferences in India are radically different from many of the first-world markets is our lack of interest in index funds. In the US, nine per cent of the money invested in mutual funds is in index funds, in India, this number is less than half a per cent, or about Rs 2,700 crore. However, among the investing community, index funds take a mindshare that is out of all proportion to their size. The reason is that the concept of index investing is important, and so is the availability of index funds as an option for investors. Index funds are mutual funds that aim to replicate the performance of a market index. Thus, an index fund that is based on the BSE Sensex should have exactly the same 30 companies’ stocks that the Sensex has in exactly the same proportion. Thus, investors who put their money in such a fund would find their money gaining and losing in exactly the same proportion as the BSE Sensex does. In some senses, an index fund completely rev...

You may not be always right with debt, as some products require timing just like equity While debt has always had its relevance for investors, its performance in the last one year has sent many rushing for it. Equity's under-performance in the last one year has only further made its case stronger with the equity market's weakness wiping out a few years' good performance at one go. While debt gives the comfort of capital safety and assured returns, not all debt options are safe in the real sense. In fact, debt can be a negative earner in a real sense if the choice of product is wrong. Hence, choosing the right debt product is as important as choosing the right stock, and in some cases, could be tougher too. Interestingly, the challenge for many is when to allocate for debt rather than how to choose it. While the bad performance of equity automatically forces everyone to debt, it need not be the case if the investor resorts to asset allocation. If you go by the principl...

The past few months have been difficult for investors who reposed complete faith in the stock markets. Millions of rupees of investors in the stock markets were wiped away as the index plunged. Global crisis, the foreign institutional investors' ( FII ) large-scale withdrawals and the economic slowdown affected the market performance adversely. Investors in mutual funds weren't spared either. It was a horrible fall for equity funds where as much as half of their worth was eroded. Mutual funds were considered a safe and solid investment that yielded good returns over the past few years. But this time the gains over the last two years were almost completely washed away. High interest rates and slowing economy left a huge dent behind. But some investors believe it is the right time to fish in the stock markets for value picks. For other investors who do not want to shun the markets altogether, yet play it safe, mutual funds are the only alternative. Mutual funds can be class...

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 m...

When it comes to investing, it is commonly observed that investors tend to replicate the investment strategy followed by their colleagues, friends or relatives. It is generally believed that an investment strategy that has worked for one will also work for others. However, this is the wrong approach, simply because 'one size does not fit all' while investing. Instead, investors need to build an investment portfolio that is right for them. Building an investment portfolio requires the investor to put in a fair degree of thought and time. The need for the latter is only accentuated in light of the overwhelming choices available. In this article, we present a 4-step strategy that will help investors build an investment portfolio. 1) The investment objective The first step should be to identify the investment objective and tenure. In our view, no investment must be undertaken without defining these parameters. For this, you need to ask yourself - "what am I investing for"...