Nobody ever did envisage the day when the tax saving schemes of mutual funds would become a thing of the past. After March 2012, this entire category of equity based tax saving schemes would be history. Frankly, this is a blow to investors. These schemes were the only tax saving instruments that combined tax saving with the higher return that is possible only through equity and the lowest lock-in period amongst all the other schemes. In fact, for many young investors, they were the gateway product through which they entered the stock market. It was after exploring this avenue that they began to get a taste for investing in diversified equity funds.
Fund managers certainly were fond of these products. The 3-year lock in period ensured that investors could not walk out anytime and so sudden or frequent redemptions were not a prime concern here. This enabled them to take a longer-term perspective on their portfolio.
Of all the routes available under Section 80C, the NPS is the only one that offers some sort of equity exposure; a maximum 50 per cent of an individual’s NPS corpus can be invested in equities.
Unlike the 3-year lock-in period of an ELSS, withdrawal from NPS can take place only at the time of retirement.
Imagine the plight of an affluent retired individual who currently relies on ELSS for tax savings.
Once DTC comes into force, what tax-saving options would he be left with? A PPF account? Not a wise option since it matures after 15 years and offers limited liquidity after five years. NPS? Not possible since it is only open to individuals between 18 and 55 years of age, and certainly not retired individuals. Term insurance? What is the point since it is only beneficial to your beneficiaries when you pass away. This senior citizen will have no viable option available but to pay his tax.
Tuesday, September 21, 2010
Wednesday, August 18, 2010
Sample portfolios of 3 different categories
This is an approach to portfolio planning that helps you build wealth without too much sweat while allowing some free play to your risk-taking instinct.
If one had to broadly look at three categories of investors, here’s how their Portfolios would shape up.
Aggressive investor
Core 60%
1) DSPBR Top 100 (Large Cap)
2) HDFC Top 200 (Large & Mid Cap)
3) Reliance Reg Savings Eq. (Multi Cap)
4) ICICI Prudential Dynamic (Multi Cap)
Tactical 25%
5) IDFC Premier Equity (Mid Cap)
6) Birla Sun Life Mid Cap (Mid Cap)
Debt 15%
7) JM Money Manager Super (Liquid Plus)
Conservative investor
Core 70%
1) DSPBR Balanced (Hybrid Equity)
2) Franklin India Bluechip (Large Cap)
3) ICICI Prudential Dynamic (Multi Cap)
Debt 30%
4) ICICI Pru. Income Opp. (Debt: Medium Term)
5) JM Money Manager Super (Liquid Plus)
Moderate investor
Core 70%
1) HDFC Prudence (Hybrid Equity)
2) DSPBR Top 100 (Large Cap)
3) Reliance Regular Savings Eq. (Multi Cap)
4) ICICI Prudential Dynamic (Multi Cap)
Debt 20%
5) ICICI Pru. Income Opp. (Debt: Medium Term)
6) JM Money Manager Super (Liquid Plus)
Tactical 10%
7) IDFC Premier Equity (Mid Cap)
The above can act as a general guideline and you can always mix and match to get to the portfolio that best suits your needs and keep you on track.
Conclusion
So an investor can have a portfolio of just seven funds and be very smartly diversified. It’s not a numbers game, it is quality picks that will make it for you.
Play it smart!
Note: THE IDEA BEHIND A CORE FUND IS THAT IT SHOULD BE ONE THAT IS ABLE TO
DELIVER RETURNS IN GOOD TIMES WITHOUT BEING TOO VOLATILE. THE TACTICAL FUND WILL GIVE YOU THAT EXTRA ZING IN YOUR RETURNS. THE DEBT PART IS FOR BALANCING YOUR PORTFOLIO BETWEEN EQUITY & DEBT.
If one had to broadly look at three categories of investors, here’s how their Portfolios would shape up.
Aggressive investor
Core 60%
1) DSPBR Top 100 (Large Cap)
2) HDFC Top 200 (Large & Mid Cap)
3) Reliance Reg Savings Eq. (Multi Cap)
4) ICICI Prudential Dynamic (Multi Cap)
Tactical 25%
5) IDFC Premier Equity (Mid Cap)
6) Birla Sun Life Mid Cap (Mid Cap)
Debt 15%
7) JM Money Manager Super (Liquid Plus)
Conservative investor
Core 70%
1) DSPBR Balanced (Hybrid Equity)
2) Franklin India Bluechip (Large Cap)
3) ICICI Prudential Dynamic (Multi Cap)
Debt 30%
4) ICICI Pru. Income Opp. (Debt: Medium Term)
5) JM Money Manager Super (Liquid Plus)
Moderate investor
Core 70%
1) HDFC Prudence (Hybrid Equity)
2) DSPBR Top 100 (Large Cap)
3) Reliance Regular Savings Eq. (Multi Cap)
4) ICICI Prudential Dynamic (Multi Cap)
Debt 20%
5) ICICI Pru. Income Opp. (Debt: Medium Term)
6) JM Money Manager Super (Liquid Plus)
Tactical 10%
7) IDFC Premier Equity (Mid Cap)
The above can act as a general guideline and you can always mix and match to get to the portfolio that best suits your needs and keep you on track.
Conclusion
So an investor can have a portfolio of just seven funds and be very smartly diversified. It’s not a numbers game, it is quality picks that will make it for you.
Play it smart!
Note: THE IDEA BEHIND A CORE FUND IS THAT IT SHOULD BE ONE THAT IS ABLE TO
DELIVER RETURNS IN GOOD TIMES WITHOUT BEING TOO VOLATILE. THE TACTICAL FUND WILL GIVE YOU THAT EXTRA ZING IN YOUR RETURNS. THE DEBT PART IS FOR BALANCING YOUR PORTFOLIO BETWEEN EQUITY & DEBT.
Tuesday, August 10, 2010
Dangerous Advice For First Time Investors
New investors are bombarded with advice from everywhere. Financial television, magazines, websites, financial professionals, friends and family members all have advice on how to structure your investment portfolio. Beginning investors are much more likely to give credence to investment tips than experienced investors. While the advice is meant to be helpful, it may actually be detrimental to the investment newbie.
Here are five examples of the types of dangerous advice given to beginning investors:
1) "Buy Companies Whose Products You Love"
How many times has someone told you that when investing, you should buy companies that make products you love? This can be a risky and expensive proposition.
For example, let's say you want to buy shares of Bajaj Auto because you love your new bike. You buy shares of Bajaj Auto at its market price and wait to reap the rewards from all of the bike sales. The problem with this strategy is that it fails to take price into consideration. Bajaj Auto may be a great stock to buy at Rs.1500, but it could be a pricey investment at Rs. 2000.
New investors tend to overpay for companies that they really want to own. This buy-at-any-cost philosophy can leave you regretting your stock purchase at the end of the day.
2) "Invest In What You Know"
Investing in what you know is an old investment axiom. This works well for experienced investors who are familiar with lots of companies in different sectors of the economy. This is terrible advice for the investing novice, because it limits your investments to only businesses that you know a lot about.
What if the only companies you know about are in the hotel industry or retail industry? You may find yourself overinvesting in one or two sectors. Not to mention the fact that you would end up missing out on some great companies in the capital goods industry or technology sector.
3) "Diversify Your Stock Portfolio"
Diversification is supposed to help protect your portfolio from market drops and control risk. It's a great concept, but proper diversification can be difficult to achieve and expensive to do. New investors have difficulty building a properly diversified portfolio because of the costs. If not using an index fund to diversify, constructing a properly balanced portfolio in stocks requires thousands of Rupees and may require buying at least 20 individual stocks. It can also be difficult for new investors to maintain a balance between being diversified and not being overly diversified. If you aren't careful, you could end up owning 50 different stocks and 50 mutual funds. An investor could easily get overwhelmed trying to keep track of such a portfolio.
4) "Trade Your Brokerage Account"
Since the market crash of 2008, more investors are abandoning a buy-and-hold strategy and turning to short-term trading. Financial television shows and market experts have even been recommending that investors trade their accounts. Short-term trading may work for sophisticated investors, but it can crush the confidence of new investors.
Short-term trading requires the ability to time buy and sell decisions just right. It takes lots of available cash to hop in and out of positions. It can also decimate your entire portfolio because of trading fees and bad decision making. Daytrading stocks is a strategy best left to the experts.
5) "Buy Penny Stocks"
Emails, advertisements, friends and even family members often trumpet penny stock investing for new investors. The attraction of penny stock investing is that it seems like an easy way to get rich quick, since penny stocks are subject to extreme price volatility. If shares of ABC Company are selling for Rs.1.50 per share, you could buy 1,000 shares for Rs. 1,500. The hope is that the stock goes to Rs.3 or more so that you could double your money quickly.
It sounds great until you realize that penny stocks trade in the single digits for a reason. They are normally very flawed companies with large debt burdens and whose long-term viability is usually in doubt. Most penny stocks are much more likely to go to zero than to double your money.
The Bottom Line
As you can see, sometimes investment tips can do more harm to your portfolio than good. One size fits all may work for others, but it does not work when it comes to investment advice.
Here are five examples of the types of dangerous advice given to beginning investors:
1) "Buy Companies Whose Products You Love"
How many times has someone told you that when investing, you should buy companies that make products you love? This can be a risky and expensive proposition.
For example, let's say you want to buy shares of Bajaj Auto because you love your new bike. You buy shares of Bajaj Auto at its market price and wait to reap the rewards from all of the bike sales. The problem with this strategy is that it fails to take price into consideration. Bajaj Auto may be a great stock to buy at Rs.1500, but it could be a pricey investment at Rs. 2000.
New investors tend to overpay for companies that they really want to own. This buy-at-any-cost philosophy can leave you regretting your stock purchase at the end of the day.
2) "Invest In What You Know"
Investing in what you know is an old investment axiom. This works well for experienced investors who are familiar with lots of companies in different sectors of the economy. This is terrible advice for the investing novice, because it limits your investments to only businesses that you know a lot about.
What if the only companies you know about are in the hotel industry or retail industry? You may find yourself overinvesting in one or two sectors. Not to mention the fact that you would end up missing out on some great companies in the capital goods industry or technology sector.
3) "Diversify Your Stock Portfolio"
Diversification is supposed to help protect your portfolio from market drops and control risk. It's a great concept, but proper diversification can be difficult to achieve and expensive to do. New investors have difficulty building a properly diversified portfolio because of the costs. If not using an index fund to diversify, constructing a properly balanced portfolio in stocks requires thousands of Rupees and may require buying at least 20 individual stocks. It can also be difficult for new investors to maintain a balance between being diversified and not being overly diversified. If you aren't careful, you could end up owning 50 different stocks and 50 mutual funds. An investor could easily get overwhelmed trying to keep track of such a portfolio.
4) "Trade Your Brokerage Account"
Since the market crash of 2008, more investors are abandoning a buy-and-hold strategy and turning to short-term trading. Financial television shows and market experts have even been recommending that investors trade their accounts. Short-term trading may work for sophisticated investors, but it can crush the confidence of new investors.
Short-term trading requires the ability to time buy and sell decisions just right. It takes lots of available cash to hop in and out of positions. It can also decimate your entire portfolio because of trading fees and bad decision making. Daytrading stocks is a strategy best left to the experts.
5) "Buy Penny Stocks"
Emails, advertisements, friends and even family members often trumpet penny stock investing for new investors. The attraction of penny stock investing is that it seems like an easy way to get rich quick, since penny stocks are subject to extreme price volatility. If shares of ABC Company are selling for Rs.1.50 per share, you could buy 1,000 shares for Rs. 1,500. The hope is that the stock goes to Rs.3 or more so that you could double your money quickly.
It sounds great until you realize that penny stocks trade in the single digits for a reason. They are normally very flawed companies with large debt burdens and whose long-term viability is usually in doubt. Most penny stocks are much more likely to go to zero than to double your money.
The Bottom Line
As you can see, sometimes investment tips can do more harm to your portfolio than good. One size fits all may work for others, but it does not work when it comes to investment advice.
Sunday, June 6, 2010
The Perfect Mutual Fund Portfolio
I probably don't need to convince many of you of the benefits of owning mutual funds. For investors that don't want to research, buy, sell, and keep track of dozens of individual stock holdings, funds are a great way to delegate the investment management function to a knowledgeable professional. All that time you otherwise would have spent building a stock-by-stock portfolio can be directed into other worthwhile pursuits, like gardening, stamp collecting, or building those little wooden ships inside of glass bottles.
But now the question remains -- exactly how many funds do you need to adequately diversify your portfolio?
Think outside the box
To help answer this question, the first place most investors can look at is a Style Box of “Value Research On Line” or “Morning Star India” website. For those of you not familiar with the Style Box methodology, this is a system of classifying funds according to three capitalization ranges (small, medium, or large), and also by style, or fundamental characteristics (growth, blend, or value). Thus, there are nine possible combinations of funds: small growth, small blend, small value, mid-growth, mid-blend, mid-value, large growth, large blend, and large value. Each of the nine Style Boxes represents one of these categories.
Too often, the prevailing wisdom is that investors need to own at least one fund in each style box, so as to ensure exposure to each and every corner of the market. Following this line of thought, many folks end up buying three different small-cap funds, three mid-cap funds, and three large-cap funds to cover each contrasting investment style. And that's not even taking into consideration international stocks, bonds, and alternative asset classes. So it's easy to see how, all too soon, many investors can find themselves up to their ears in a dozen or more different mutual funds. Hey, wasn't investing in funds supposed to simplify your life? Remember all those ships-in-bottles you wanted to build with your newfound time?
The problem with keeping a strict loyalty to the Style Box system is that doing so will cause your portfolio to become redundant. Having three different types of mid-cap funds will likely contribute to a decent number of overlapped holdings (different funds buying the same stocks), and in the end, probably won't add much, if anything, to your overall portfolio's returns. You want just enough mutual funds to get adequate diversification -- get rid of everything else that is not helping you reach that goal.
KISS: Keep it simple, sweetie
Investing, like so many other things in life, often works best when we remember to simplify. The truth is, most investors would be better served with a bare-bones fund structure. How bare? To start, pick one large-value fund and one large-growth fund. This will give you exposure to growth stocks and also to more value-oriented stocks. Probably the only place you will need two funds for the same market cap mandate will be in the large-cap space, considering this is where you will likely allocate the biggest share of your investment.
But now the question remains -- exactly how many funds do you need to adequately diversify your portfolio?
Think outside the box
To help answer this question, the first place most investors can look at is a Style Box of “Value Research On Line” or “Morning Star India” website. For those of you not familiar with the Style Box methodology, this is a system of classifying funds according to three capitalization ranges (small, medium, or large), and also by style, or fundamental characteristics (growth, blend, or value). Thus, there are nine possible combinations of funds: small growth, small blend, small value, mid-growth, mid-blend, mid-value, large growth, large blend, and large value. Each of the nine Style Boxes represents one of these categories.
Too often, the prevailing wisdom is that investors need to own at least one fund in each style box, so as to ensure exposure to each and every corner of the market. Following this line of thought, many folks end up buying three different small-cap funds, three mid-cap funds, and three large-cap funds to cover each contrasting investment style. And that's not even taking into consideration international stocks, bonds, and alternative asset classes. So it's easy to see how, all too soon, many investors can find themselves up to their ears in a dozen or more different mutual funds. Hey, wasn't investing in funds supposed to simplify your life? Remember all those ships-in-bottles you wanted to build with your newfound time?
The problem with keeping a strict loyalty to the Style Box system is that doing so will cause your portfolio to become redundant. Having three different types of mid-cap funds will likely contribute to a decent number of overlapped holdings (different funds buying the same stocks), and in the end, probably won't add much, if anything, to your overall portfolio's returns. You want just enough mutual funds to get adequate diversification -- get rid of everything else that is not helping you reach that goal.
KISS: Keep it simple, sweetie
Investing, like so many other things in life, often works best when we remember to simplify. The truth is, most investors would be better served with a bare-bones fund structure. How bare? To start, pick one large-value fund and one large-growth fund. This will give you exposure to growth stocks and also to more value-oriented stocks. Probably the only place you will need two funds for the same market cap mandate will be in the large-cap space, considering this is where you will likely allocate the biggest share of your investment.
Saturday, May 29, 2010
The Fundamental Mechanics Of Investing
The article demonstrates why stocks and bonds are created.
A Business Is Created
Amrut is a farmer, and he is interested in starting up an apple stand for the tourists who pass his place. Since Amrut has fairly good credit, he got a business loan to cover the costs of set up, and he now has the ideal land for apple growing. Unfortunately Amrut only set aside enough money for getting his land in shape. He forgot all about buying seeds. By a stroke of luck, he finds a store that will sell him a magic high-growth, high-yield seed for Rs.100, but Jack only has Rs.50 left.
The Initial Public Offering to Raise Capital for Growth
Our clever farmer goes to five of his closest friends (you're included) and asks if they'll each give him Rs.10 to help his business. However, Amrut doesn't know if he can take it in the form of a loan because he may not be able to pay it back if the seed doesn't turn a profit. No worries: Amrut promises everyone they'll receive a percentage of the tree's apples that is equal to the percentage they gave. In other words, Amrut has given his friends a share in his tree. They agree and the seed is in the ground.
The Distinction Between Being a Partner and Being a Shareholder
This tree, being magic and all, grows rapidly. In the first month, it is five feet tall and there are two apples. Amrut keeps one apple because he owns 50% of the business's product, which he paid for with the Rs.50 he put in for the seed. He cuts the other one into five pieces, each of which goes to each of his investors, who can sell or eat it. The investors have a quick meeting and decide they'd rather have him sell their portion of the product and give them a percentage of the profit. So Amrut makes up little papers saying, "Amrut's Apple Company: you have one share guaranteeing you 10% (10/100) of the profits."
Trading Occurs in Amrut's Undervalued Stock
So this tree really takes off now - the magic is coursing through the wood and it grows to 10 feet tall! There are 20 apples and he sells them all for Rs.10 a piece, keeping Rs.100 for himself and giving his friends Rs.20 each. He uses his Rs.100 to buy another seed and plants it. Pretty soon, he has two trees producing 40 apples and earning Rs.400 a month.
Some of his neighbors want in on the deal Amrut gave his friends, and Pravin, Jack's first investor, is interested in selling his 10% of Amrut's Apple Company. Jaya, Amrut's neighbor, wants to buy it and she offers Pravin the Rs.10 that he originally paid. However, Pravin is not stupid: he realizes that this share is producing Rs.40 a month and Amrut is about to buy another seed. So Pravin asks for Rs.40 and Jaya snaps up the share, which pays for itself immediately.
A Bit of a Bubble Forms
The other original shareholders see how much Pravin got and want to sell too, and the other neighbors notice how quickly Jaya's investment paid off so they really want to buy in. The offers steadily climb until Amrut's shares are being bought for over Rs.100 a piece - more than Amrut's trees are producing in a month. Only one original shareholder, Bharti, is still in there and holding out on offers like Rs.120 because she is still getting a regular payment that is pure profit for her. Suddenly, Amrut's trees (four in total) are ravaged by aphids (plant eating green flies). The entire month's production is ruined and several shareholders are wondering if they can pay rent since they used their savings to buy shares.
The Bubble Bursts
The shareholders that need the money sell to Bharti at a discount (Rs.40), and then the other shareholders notice, all of a sudden, that their Rs.100 shares are worth Rs.40. This is very disconcerting. The remaining shareholders offer their shares to Bharti, but she says she's quite content with three shares. The other shareholders are desperate now, so when you (one of the investor) offer them Rs.20 a piece for the shares, they take their losses and get out.
Meanwhile, the main drive of Amrut's business hasn't changed: people still want apples. He needs to get rid of these pesky aphids and he needs the money to buy insecticide.
Amrut Issues a Bond
Amrut is not too keen on issuing more stock after the fiasco with his neighbors, so he decides to go for a loan instead. Unfortunately, Amrut used up his credit with the land preparation so he is once again looking for divine inspiration. He's looking at his equipment to see what he can sell and what he can't, and then it hits him: he'll try to sell his apple crates without actually selling them. The crates are useless without aphid-free product to fill them, but as soon as the aphids are gone he'll need them back.
So Amrut calls up Jaya (in hopes of making amends) and offers her a deal, "Jaya, my good friend, I have an offer for you. I'll sell you my apple crates, which are worth Rs.100 total, for a mere Rs.60 and then buy them back next week for the full Rs.100." Jaya thinks about this and sees that in the worst case scenario, she can just sell the crates… sounds good. And a deal is made.
"But Jaya," Amrut adds, "I don't want to run my crates down there and pick them up again. Can I just write up a piece of paper? It'll save my back."
"I don't know - can we call it a promissory note?" Jaya asks enthusiastically.
"Sure can, but I was thinking more of calling it a bond or a certificate," says Amrut.
And lo and behold, Amrut eliminates the aphids, pays Jaya back, and turns a healthy profit that month and every month thereafter.
What Did We Learn?
This story will not explain everything about investing in stocks, but it does highlight one very important point: the price of Amrut's stock followed investors' opinion of the stock's value rather than just the performance of Amrut's company. Because the stock market is an auction, there is no set price for a certain stock, there is a concept that derails most people's trains of thought: the price paid for a stock is what it's "worth" until a lower or higher price is offered.
This fluctuation of worth is good and bad for investors because it allows for profit (when you buy an undervalued stock) but also makes losses possible (when you pay too much for a stock)
A Business Is Created
Amrut is a farmer, and he is interested in starting up an apple stand for the tourists who pass his place. Since Amrut has fairly good credit, he got a business loan to cover the costs of set up, and he now has the ideal land for apple growing. Unfortunately Amrut only set aside enough money for getting his land in shape. He forgot all about buying seeds. By a stroke of luck, he finds a store that will sell him a magic high-growth, high-yield seed for Rs.100, but Jack only has Rs.50 left.
The Initial Public Offering to Raise Capital for Growth
Our clever farmer goes to five of his closest friends (you're included) and asks if they'll each give him Rs.10 to help his business. However, Amrut doesn't know if he can take it in the form of a loan because he may not be able to pay it back if the seed doesn't turn a profit. No worries: Amrut promises everyone they'll receive a percentage of the tree's apples that is equal to the percentage they gave. In other words, Amrut has given his friends a share in his tree. They agree and the seed is in the ground.
The Distinction Between Being a Partner and Being a Shareholder
This tree, being magic and all, grows rapidly. In the first month, it is five feet tall and there are two apples. Amrut keeps one apple because he owns 50% of the business's product, which he paid for with the Rs.50 he put in for the seed. He cuts the other one into five pieces, each of which goes to each of his investors, who can sell or eat it. The investors have a quick meeting and decide they'd rather have him sell their portion of the product and give them a percentage of the profit. So Amrut makes up little papers saying, "Amrut's Apple Company: you have one share guaranteeing you 10% (10/100) of the profits."
Trading Occurs in Amrut's Undervalued Stock
So this tree really takes off now - the magic is coursing through the wood and it grows to 10 feet tall! There are 20 apples and he sells them all for Rs.10 a piece, keeping Rs.100 for himself and giving his friends Rs.20 each. He uses his Rs.100 to buy another seed and plants it. Pretty soon, he has two trees producing 40 apples and earning Rs.400 a month.
Some of his neighbors want in on the deal Amrut gave his friends, and Pravin, Jack's first investor, is interested in selling his 10% of Amrut's Apple Company. Jaya, Amrut's neighbor, wants to buy it and she offers Pravin the Rs.10 that he originally paid. However, Pravin is not stupid: he realizes that this share is producing Rs.40 a month and Amrut is about to buy another seed. So Pravin asks for Rs.40 and Jaya snaps up the share, which pays for itself immediately.
A Bit of a Bubble Forms
The other original shareholders see how much Pravin got and want to sell too, and the other neighbors notice how quickly Jaya's investment paid off so they really want to buy in. The offers steadily climb until Amrut's shares are being bought for over Rs.100 a piece - more than Amrut's trees are producing in a month. Only one original shareholder, Bharti, is still in there and holding out on offers like Rs.120 because she is still getting a regular payment that is pure profit for her. Suddenly, Amrut's trees (four in total) are ravaged by aphids (plant eating green flies). The entire month's production is ruined and several shareholders are wondering if they can pay rent since they used their savings to buy shares.
The Bubble Bursts
The shareholders that need the money sell to Bharti at a discount (Rs.40), and then the other shareholders notice, all of a sudden, that their Rs.100 shares are worth Rs.40. This is very disconcerting. The remaining shareholders offer their shares to Bharti, but she says she's quite content with three shares. The other shareholders are desperate now, so when you (one of the investor) offer them Rs.20 a piece for the shares, they take their losses and get out.
Meanwhile, the main drive of Amrut's business hasn't changed: people still want apples. He needs to get rid of these pesky aphids and he needs the money to buy insecticide.
Amrut Issues a Bond
Amrut is not too keen on issuing more stock after the fiasco with his neighbors, so he decides to go for a loan instead. Unfortunately, Amrut used up his credit with the land preparation so he is once again looking for divine inspiration. He's looking at his equipment to see what he can sell and what he can't, and then it hits him: he'll try to sell his apple crates without actually selling them. The crates are useless without aphid-free product to fill them, but as soon as the aphids are gone he'll need them back.
So Amrut calls up Jaya (in hopes of making amends) and offers her a deal, "Jaya, my good friend, I have an offer for you. I'll sell you my apple crates, which are worth Rs.100 total, for a mere Rs.60 and then buy them back next week for the full Rs.100." Jaya thinks about this and sees that in the worst case scenario, she can just sell the crates… sounds good. And a deal is made.
"But Jaya," Amrut adds, "I don't want to run my crates down there and pick them up again. Can I just write up a piece of paper? It'll save my back."
"I don't know - can we call it a promissory note?" Jaya asks enthusiastically.
"Sure can, but I was thinking more of calling it a bond or a certificate," says Amrut.
And lo and behold, Amrut eliminates the aphids, pays Jaya back, and turns a healthy profit that month and every month thereafter.
What Did We Learn?
This story will not explain everything about investing in stocks, but it does highlight one very important point: the price of Amrut's stock followed investors' opinion of the stock's value rather than just the performance of Amrut's company. Because the stock market is an auction, there is no set price for a certain stock, there is a concept that derails most people's trains of thought: the price paid for a stock is what it's "worth" until a lower or higher price is offered.
This fluctuation of worth is good and bad for investors because it allows for profit (when you buy an undervalued stock) but also makes losses possible (when you pay too much for a stock)
Monday, April 26, 2010
How Fidelity Mutual Fund has fared
Fidelity Mutual Fund has great brand value and has become synonymous with research, but somehow that does not translate into outstanding returns.
Schemes from this fund house are not chart toppers. Opt for them if you are
looking for stability and consistency.
Fidelity India Special Situations (2007 - 2009) has never been a first quartile performer, but has occupied positions in all the other three quartiles during the 3-year period. However, it could be argued that the inherent nature of the fund will result in periodic underperformance.
Fidelity Equity (2006 - 2009) just about managed a 1st quartile performance in 2006. In 2007, it dropped to 3rd quartile, which was understandable when the market got overheated and the fund manager refused to chase fads,avoided Real Estate and stayed away from stocks whose valuations were ridiculous.
But in the downturn in 2008, the fund managed a 2nd quartile performance and
stayed in that bracket in 2009 too.
Fidelity India Growth (2008 - 2009) has always had top 2nd quartile annual performances in its short history.
Fidelity Tax Advantage (2007 - 2009) has either been a 1st quartile or 2nd quartile performer.
Over a 3-year period (February 28, 2010), the annual diversified equity
category average return has been 8.30%. Fidelity Equity (10.05%)
outperformed while Fidelity India Special Situations underperformed
(5.71%). Fidelity Tax Advantage outperformed its category average
(7.96%) with a return of 11.11%.
Schemes from this fund house are not chart toppers. Opt for them if you are
looking for stability and consistency.
Fidelity India Special Situations (2007 - 2009) has never been a first quartile performer, but has occupied positions in all the other three quartiles during the 3-year period. However, it could be argued that the inherent nature of the fund will result in periodic underperformance.
Fidelity Equity (2006 - 2009) just about managed a 1st quartile performance in 2006. In 2007, it dropped to 3rd quartile, which was understandable when the market got overheated and the fund manager refused to chase fads,avoided Real Estate and stayed away from stocks whose valuations were ridiculous.
But in the downturn in 2008, the fund managed a 2nd quartile performance and
stayed in that bracket in 2009 too.
Fidelity India Growth (2008 - 2009) has always had top 2nd quartile annual performances in its short history.
Fidelity Tax Advantage (2007 - 2009) has either been a 1st quartile or 2nd quartile performer.
Over a 3-year period (February 28, 2010), the annual diversified equity
category average return has been 8.30%. Fidelity Equity (10.05%)
outperformed while Fidelity India Special Situations underperformed
(5.71%). Fidelity Tax Advantage outperformed its category average
(7.96%) with a return of 11.11%.
Saturday, April 24, 2010
ACTIVE VS PASSIVE INVESTMENT
At first glance, it would seem that most equity mutual funds are sitting pretty well on profits—last year, 99.03 per cent of active funds gave positive returns. Dig deeper and you find one in three active funds underperformed the bellwether Sensex. As compared to the Sensex’s returns of 76 per cent, some actively managed equity funds returned just 41 per cent. As in any bull market, the rising tide lifted most stocks and so it was not that difficult for fund managers to chalk up a positive performance. Yet, over the long run, most fund managers find it difficult to beat the averages consistently every year, year on year. The funds that are leaders of today could be the laggards of tomorrow.
In the quest for market-beating performance, mutual fund investors could often chase the top performers and churn their fund portfolios, but just as often find that these funds did not perform well the next year. In such a scenario, it’s best to balance out your mutual fund portfolio by including index funds—funds that only track their benchmark index.
Index funds are passively-managed funds which invest in those securities that lie in their benchmark indices and in the same proportion. There are mainly two types of funds: one that holds all the stocks which are the constituents of the chosen index in the same proportion, and the other that follows the sample of benchmark index. In India we have two widely-tracked indices: the NSE-Nifty and the BSE-Sensex. Around 34 schemes track these two indices. Out of these schemes, six are Exchange Traded Funds (ETFs). Among the rest, 19 are Nifty-based index funds, while the remaining track the Sensex. A few of them track some sector-specific indices, such as the banking and PSE indices.
Active versus passive
Index funds are still not very popular in India as they are in most developed countries. That’s because there are valuation gaps in the stockmarket and pockets where the fund manager can use his acumen to pick outperforming stocks. In the US, there are not many valuation plays that fund managers can exploit as the market is more mature and well-researched. On the other hand, mutual fund distributors were selling more actively-managed funds than index funds. But with the new distribution structure, the onus will be on investors to select funds, if they don’t want to go through a distributor. However, you need to pay the distributor for his services. It is not a very easy task to choose the right fund among around 250 actively-managed funds on your own. If you are not that much investment-savvy, or do not have the time and the resources to track the hundreds of actively-managed MF schemes that are available, you can add an index fund to your portfolio. This should help you cover the broad market.
The beauty of an index fund is passive management and, because of this, its low cost structure. If you look at the returns, index funds have performed equally well vis-a-vis other actively-managed funds. The average return of index funds on a 5-year and 3-year basis is 18.19 per cent and 6.19 per cent respectively, whereas the average return of an actively-managed equity fund are 20.92 per cent and 8.52 respectively, for the same period, on the BSE. Among index funds, some have delivered as high as 23 per cent compared to benchmark returns of 20.79 percent. Some of the actively managed funds have given returns as low as 5 per cent on a 5-year basis, which is far lower than passively-managed index funds.
Lower expenses
Selection of the right index fund is not rocket science. It is far easier than the selection of an actively-managed equity fund. Here, you need to look at the two main parameters: expense ratio and the tracking error. The lower the expense ratio, the better is the fund. For instance, assume you invest Rs 50,000 each in ING Nifty Plus and Franklin India Index-Nifty, for a period of 20 years. Note that while ING Nifty charges 2.5 per cent towards expenses, Franklin India Index charges 1.5 per cent. Assuming that the market grows by 15 per cent for the next 20 years on a compounded basis, Franklin India Index will yield you Rs 6,29,342, while ING Nifty will yield you Rs 5,27,254. That is a clear difference of Rs 1,02,088, or 19 per cent.
The objective of index funds is to achieve the return of index they are tracking so, usually, the returns from index funds are almost the same. But, in many cases, you will find the return of index does not match the index fund you have invested in. There are plenty of reasons for this. The stocks that the fund has invested in may have declared a dividend. In other cases, the cash levels and expense ratios that the fund holds might be different. This leads to a mismatch between the net asset value of the index fund and the closing values of the index. This mismatch is also called a tracking error. The better-managed index funds are the ones that have the lowest tracking error.
You just need to look at the expense ratio of the fund and the actual return from the fund versus its benchmark return. Always go for funds having the least expense ratio and less difference between the fund's return and the benchmark's return. Usually index-based ETFs have the least expanse ratio. On an average it is around 0.71 per cent, which is around 50 per cent less than non-ETF index funds. If you are a tech-savvy investor and looking for index funds, you may choose to go the ETF way. Alternately, you could opt for non-ETF index funds.
In the quest for market-beating performance, mutual fund investors could often chase the top performers and churn their fund portfolios, but just as often find that these funds did not perform well the next year. In such a scenario, it’s best to balance out your mutual fund portfolio by including index funds—funds that only track their benchmark index.
Index funds are passively-managed funds which invest in those securities that lie in their benchmark indices and in the same proportion. There are mainly two types of funds: one that holds all the stocks which are the constituents of the chosen index in the same proportion, and the other that follows the sample of benchmark index. In India we have two widely-tracked indices: the NSE-Nifty and the BSE-Sensex. Around 34 schemes track these two indices. Out of these schemes, six are Exchange Traded Funds (ETFs). Among the rest, 19 are Nifty-based index funds, while the remaining track the Sensex. A few of them track some sector-specific indices, such as the banking and PSE indices.
Active versus passive
Index funds are still not very popular in India as they are in most developed countries. That’s because there are valuation gaps in the stockmarket and pockets where the fund manager can use his acumen to pick outperforming stocks. In the US, there are not many valuation plays that fund managers can exploit as the market is more mature and well-researched. On the other hand, mutual fund distributors were selling more actively-managed funds than index funds. But with the new distribution structure, the onus will be on investors to select funds, if they don’t want to go through a distributor. However, you need to pay the distributor for his services. It is not a very easy task to choose the right fund among around 250 actively-managed funds on your own. If you are not that much investment-savvy, or do not have the time and the resources to track the hundreds of actively-managed MF schemes that are available, you can add an index fund to your portfolio. This should help you cover the broad market.
The beauty of an index fund is passive management and, because of this, its low cost structure. If you look at the returns, index funds have performed equally well vis-a-vis other actively-managed funds. The average return of index funds on a 5-year and 3-year basis is 18.19 per cent and 6.19 per cent respectively, whereas the average return of an actively-managed equity fund are 20.92 per cent and 8.52 respectively, for the same period, on the BSE. Among index funds, some have delivered as high as 23 per cent compared to benchmark returns of 20.79 percent. Some of the actively managed funds have given returns as low as 5 per cent on a 5-year basis, which is far lower than passively-managed index funds.
Lower expenses
Selection of the right index fund is not rocket science. It is far easier than the selection of an actively-managed equity fund. Here, you need to look at the two main parameters: expense ratio and the tracking error. The lower the expense ratio, the better is the fund. For instance, assume you invest Rs 50,000 each in ING Nifty Plus and Franklin India Index-Nifty, for a period of 20 years. Note that while ING Nifty charges 2.5 per cent towards expenses, Franklin India Index charges 1.5 per cent. Assuming that the market grows by 15 per cent for the next 20 years on a compounded basis, Franklin India Index will yield you Rs 6,29,342, while ING Nifty will yield you Rs 5,27,254. That is a clear difference of Rs 1,02,088, or 19 per cent.
The objective of index funds is to achieve the return of index they are tracking so, usually, the returns from index funds are almost the same. But, in many cases, you will find the return of index does not match the index fund you have invested in. There are plenty of reasons for this. The stocks that the fund has invested in may have declared a dividend. In other cases, the cash levels and expense ratios that the fund holds might be different. This leads to a mismatch between the net asset value of the index fund and the closing values of the index. This mismatch is also called a tracking error. The better-managed index funds are the ones that have the lowest tracking error.
You just need to look at the expense ratio of the fund and the actual return from the fund versus its benchmark return. Always go for funds having the least expense ratio and less difference between the fund's return and the benchmark's return. Usually index-based ETFs have the least expanse ratio. On an average it is around 0.71 per cent, which is around 50 per cent less than non-ETF index funds. If you are a tech-savvy investor and looking for index funds, you may choose to go the ETF way. Alternately, you could opt for non-ETF index funds.
Friday, April 23, 2010
Diversification and Taxes
One investor diversifies his allocation in mutual funds by investing in 2 or 3 equity oriented balanced funds dividend payout option and another by selecting equity and debt funds dividend payout option.
What happens after one year of investing? If whenever dividends are declared, equity oriented balanced fund dividends are tax free in the hands of investor.
In effect even the debt portion of the fund (average 35%) also becomes tax free which otherwise is taxed in pure debt fund.
This makes a compelling reason to select good equity oriented balanced funds to diversify than to try and do it on your own by investing separately in equity and debt funds.
What happens after one year of investing? If whenever dividends are declared, equity oriented balanced fund dividends are tax free in the hands of investor.
In effect even the debt portion of the fund (average 35%) also becomes tax free which otherwise is taxed in pure debt fund.
This makes a compelling reason to select good equity oriented balanced funds to diversify than to try and do it on your own by investing separately in equity and debt funds.
Understanding Triggers in MF
Trigger is an event on the occurrence of which the fund will automatically
redeem/switch the units on behalf of investors.
Once you invest in a fund, there are two basic transactions that you can execute;
redeem your units or transfer them to another fund. When these transactions are automated
based on an event taking place, it is referred to as a Trigger.
So once you decide on the Trigger, the execution of the transaction is automated.
Who sets the Trigger? The investor.
Who executes the Trigger? The fund house.
When is it executed? On the day the Trigger point has been reached, which is mostly
value specified.
Let’s say you bought 100 units of Fund A when the Net Asset Value (NAV) was Rs 12.
You want to redeem all your units when the NAV touches Rs 15 (Trigger point). You
can keep track of your investment on a daily basis and send a redemption request
when that happens, or you set a Trigger. If you opt for the latter, the fund house will take over and track your investment and sell the units when the NAV touches Rs 15.
It sounds like a winner. But this concept yet has to gain momentum.
Trigger-based plans enable investors to shift conveniently between
debt and equity. The investor determines the Trigger and the portfolio
gets rebalanced accordingly. Simple, specially if he wants to just sell his
units or shift them to another scheme from the same fund house. The
hindrance is if the investor wants to shift his investment to a scheme
from a different Asset Management Company (AMC). So he may exit
from an equity scheme from Fund House A but not want to put his
money in a debt scheme in Fund House A, but rather, in Fund House B.
The Trigger will just enable him to sell his units. He will have to make
the effort to buy the units of the scheme from the other fund house.
When It Works For You...
Automated: Investors need not track their investment
or the market. It is conveniently taken care of.
Discipline: There is no emotion involved, which often
works against the investor. If you get carried away
with the stock market, a Trigger will help you stay disciplined.
Goal Based Investing: It helps you to stick to your
goals of capital appreciation.
Loss Limitation: Since limits can be assigned to
upside and downside movement of investment value,
a market slide will not take away your gains.
When it works against you...
Disturbed Asset allocation: If gains are regularly booked in equity
investments as a bull run gains momentum, the portfolio may get
skewed towards debt and restrict gains from a market rally.
Revisiting The Trigger: One cannot be totally disconnected
from their investments. A lot of these Triggers
cease to exist after being executed the first time.
Investors may need to apply for another Trigger again.
Alternatively, if the Trigger is not executed within a
certain time, it may expire and would need to be reactivated.
Aimless Profit Booking: Profits may end up getting
booked even if there is no goal in sight. Hence the
money could remain un-utilised for years to come.
Load & Taxes: Redemptions could attract taxes. For
instance, redemption in equity funds within one year of
investment will attract capital gains tax. Not to mention
exit loads if the tenure of the investment is brief.
redeem/switch the units on behalf of investors.
Once you invest in a fund, there are two basic transactions that you can execute;
redeem your units or transfer them to another fund. When these transactions are automated
based on an event taking place, it is referred to as a Trigger.
So once you decide on the Trigger, the execution of the transaction is automated.
Who sets the Trigger? The investor.
Who executes the Trigger? The fund house.
When is it executed? On the day the Trigger point has been reached, which is mostly
value specified.
Let’s say you bought 100 units of Fund A when the Net Asset Value (NAV) was Rs 12.
You want to redeem all your units when the NAV touches Rs 15 (Trigger point). You
can keep track of your investment on a daily basis and send a redemption request
when that happens, or you set a Trigger. If you opt for the latter, the fund house will take over and track your investment and sell the units when the NAV touches Rs 15.
It sounds like a winner. But this concept yet has to gain momentum.
Trigger-based plans enable investors to shift conveniently between
debt and equity. The investor determines the Trigger and the portfolio
gets rebalanced accordingly. Simple, specially if he wants to just sell his
units or shift them to another scheme from the same fund house. The
hindrance is if the investor wants to shift his investment to a scheme
from a different Asset Management Company (AMC). So he may exit
from an equity scheme from Fund House A but not want to put his
money in a debt scheme in Fund House A, but rather, in Fund House B.
The Trigger will just enable him to sell his units. He will have to make
the effort to buy the units of the scheme from the other fund house.
When It Works For You...
Automated: Investors need not track their investment
or the market. It is conveniently taken care of.
Discipline: There is no emotion involved, which often
works against the investor. If you get carried away
with the stock market, a Trigger will help you stay disciplined.
Goal Based Investing: It helps you to stick to your
goals of capital appreciation.
Loss Limitation: Since limits can be assigned to
upside and downside movement of investment value,
a market slide will not take away your gains.
When it works against you...
Disturbed Asset allocation: If gains are regularly booked in equity
investments as a bull run gains momentum, the portfolio may get
skewed towards debt and restrict gains from a market rally.
Revisiting The Trigger: One cannot be totally disconnected
from their investments. A lot of these Triggers
cease to exist after being executed the first time.
Investors may need to apply for another Trigger again.
Alternatively, if the Trigger is not executed within a
certain time, it may expire and would need to be reactivated.
Aimless Profit Booking: Profits may end up getting
booked even if there is no goal in sight. Hence the
money could remain un-utilised for years to come.
Load & Taxes: Redemptions could attract taxes. For
instance, redemption in equity funds within one year of
investment will attract capital gains tax. Not to mention
exit loads if the tenure of the investment is brief.
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