No doubt that investing in equity seems to be very attractive option for investment. Why it so? We hear many stories, some true, some fictitious, of people who have become millionaire overnight. But the fact is, earning money is not at all easy on the stock market. Let’s accept this simple fact that it is not everybody’s cup of tea. So, we have to be very objective about it.

It is well understood universally that a diversified portfolio is less risky and much safe than a concentrated portfolio.

In India, small-time investors usually have a very limited capital for investment. Therefore, it follows that it is a lot more difficult for this investor with limited capital to have a diversified portfolio. In other words it is not possible for small-time investors to invest directly in the market and to make their portfolio diverse.

So, how can small investors get the opportunity to make their portfolio diverse? The only option left is investing in mutual fund. Mutual funds offer a well-diversified portfolio even with just Rs 100.

A concentrated portfolio, also, could deliver high or low returns. This means that, again, it is against the small investors’ investment appetite normally. It would suit only selected expert investors with high net-worth.

One more thing to notice is that with limited capital it is difficult for small investors to buy shares with high prices like ICICI Bank, Infosys, Reliance, L&T, and other blue chip shares.
Again mutual funds seem to be the better route.
Let’s now discuss equity and mutual funds from a different perspective keeping in mind the common man’s objective.

Let us be honest as far as possible. Ask yourself the following Yes/No questions:

• Reading balance sheet of the company as a fund manager might do
• Identifying up-coming sectors
• Knowledge about companies, market, economics, and politics as a well-experienced professional fund manager might have
• Identifying the risk elements in an investment
• Predicting the future of the market as per any given scenario

If you have all of the above capabilities, go on and make wealth! In most cases, however, the answers would be “No.” Most of us do not have time to learn all these aspects of investment. Even if we do, we may not be able to do it regularly. Mutual funds are well-equipped with fund managers to do all the above activities.
Let us just concentrate on our jobs and leave our wealth management to the pros.

The full story is at:
http://economictimes.indiatimes.com/Personal_Finance/Mutual_Funds/Trail_fees_by_any_other_name_pinches_as_much/rssarticleshow/3299673.cms

The story is about MF houses charging illegal fees to their investors.
“In a bid to boost their profitability, several MF houses are now charging trail fees (even for direct investors) under the other expenses head, disguising it with names like miscellaneous marketing expenses or other operating charges,” says a financial planner, who is empanelled with several fund houses.
Why are the fund houses fooling the investor? This shows clearly that the MF houses are only looking at their own benefits. Why is the regulator silent on all these wicked strategies of mutual fund houses? Why is no action being taken? Why is SEBI not taking this seriously?
There will be people who might think that this is a small issue; but my dear friends, this is a very serious issue as the MF houses are eating up investors’ money. They are committing fraud as no one is stopping them. Not even the regulator! I would request all the people who read this to complain to SEBI about it.

http://economictimes.indiatimes.com/Personal_Finance/Insurance/Insurance_news/UTI_may_stop_Ulip_sale_after_cos_agree_to_keep_MFs_out/articleshow/3495777.cms

Unit linked insurance plans (ULIPs) are today being sold both by life insurance companies as well as mutual funds. ULIPs offer insurance and investment in one product as compared to general products sold by mutual funds that offers only the investment avenue.

At mutual funds, these policies are being sold by agents who do not have the license to sell insurance. This leads to miss-selling as they lack in the product knowledge on insurance, as they haven’t passed the required IRDA exam. (Asset management company folk have to pass the AMFI exam, not the IRDA one). So, the Life Insurance Council has opposed mutual fund companies selling ULIPs. The group selling of ULIP and mutual funds is going against life insurance companies’ business.

The protest by the Life Insurance Council against this practice will protect customer interest and will help the life insurance companies in respect of product development.

In my last article I had mentioned that there are several methods, or styles, to investing profitably in the equity markets.

Let me start with suggesting that you, the potential investor, spend some time analysing your investments. If one were to assume that your money is indeed “hard earned”, would it not be unfortunate if is easily lost?

Most professional advisors compare their performance to benchmarks, which are indices. For example, if a fund generated returns of 20%, while its benchmark’s returns were 15%, this “outperformance” of the index by 5% is called an ‘Alpha’. This is a good measure to evaluate fund performance, provided the benchmark is reliable. If reliable, it would be a good measure to evaluate even personal portfolios returns.

The BSE Sensitivity Index of 30 shares is the most popular Indian stock market index. If one were to track this over 5 year periods, starting in 1992 (this is the year of the infamous Harshad Mehta boom, which is a relevant beginning simply because this is the first time there was retail participation in the capital markets), we would find that pre-2003 (the start of the latest boom), the index returned less than bank FDs. Even if we go from 1992 to the current date, the index returns are disappointing. This should indicate that equities are a poor long term investment, but are actually among the best options!

In fact, a well diversified portfolio, built over time and given a few years, at reasonable valuations (PE of close to 10, certainly lower than the Sensex’s long term average of 14 times) will outperform the benchmark or almost any other investment. The great Warren Buffet, however, considers that “wide diversification is only required when investors do not understand what they are doing”. If you know, and you need to know, why you make an investment, you should also have guts to invest plenty in it. Again, quoting Mr. Buffet, “Why not invest your assets in the companies you really like? As Mae West said, “Too much of a good thing can be wonderful.””

Diversification or concentration of portfolios can be achieved through investments in mutual funds. Concentration is through sectoral or thematic funds. Concentration is good only if you are an expert and can time your entry and, more importantly, your exits. Avoid being carried away by the noise. Most fund managers consider themselves to be God’s Greatest Gift to Investments (GGGI) in a bull market. However, when they crash with the markets they are quick to point to outperformance, if any, on the index, i.e. “The index has fallen 30%, but I have been brilliant and have lost only 25% of your money”. I have not met any investor who hands out money to be lost, whatever the market conditions. My advice is to ignore the froth from the fund managers, or brokers. If you are convinced the market is cheap, put in all your money. In an uncertain market do an SIP. But when the market seems overvalued sell. (By the way, have you ever heard a fund manager advice you to sell, or redeem your units in a bull market?) A crash always follows a euphoric bubble. Cash is supreme in bad times. It is a good feeling, and also very profitable to buy when the market is down 70%!!

Is this a good time to invest? Yes and no. An important lesson from Joseph Kennedy, almost a century old, is to sell when the shoe-shine boy gives stock tips. I believe this is true today. When the taxi driver is thrilled to take you to the share bazaar and asks for stock tips en route, the stranger at the party gives you sure shot stock bets and the daily newspaper has headlines of the local housewives club betting their grocery money on stocks – GET OUT. This is the best signal to sell your shares.

And buying? This would be when that party animal with best buys stops partying, the Big Bull has jumped off the 13th Floor and there is a funereal feeling at Dalal Street. Buy when the mention of a good company has people grit their teeth and give you dirty looks. And, of course, the index has a low, mouth watering PE!

One of my own gurus told me never to confuse the market with stocks. “The market is irrelevant”, he said, “buy the right stocks and you will always make money.” If you have his stock picking skills, which I do not, this article is not for you. If you are one of the simple folk, hoping to beat inflation and make a little money on your savings, the market at over 18 PE all this week (18.80 on Nifty on September 4, 2008) remains expensive. Look then for gems that might become multi-baggers.

Otherwise hang on to your precious cash. A better day to buy will dawn, when PEs are closer to 10 than 20. Get into SIP mode then. Market corrections can be both deep and long. Losing opportunity (interest cost of your money) is about as unfortunate as losing capital.

Naveen Fernandes is a Certified Financial Planner and Vice-president, Orbis Financial Corporation Ltd, Mumbai. Orbis Financial is a SEBI-approved custodian.

As competition hots up between insurance companies and mutual funds, both are finding innovative ways of getting business. First it was insurance companies who launched ULIP plans to snatch away business from mutual funds by promising returns and risk cover end assured customer that his/her long term goals would be achieved even if he/she was not there to contribute. He/she would be convinced that his loved ones will not be put to hardships after he/she was no more. Although the unsuspecting client is never made aware of the high cost of ULIPs.

Mutual funds could not keep quiet for long and see their business snatched under their nose by insurance companies.

MFs came up with the novel idea of offering capital growth along with free insurance cover (there is maximum cover cap) with no medicals and disclosures to be made as demanded by insurance companies. The insurance premium to be completely born by the asset management company (AMC).

Mutual funds offer cover for unpaid installments of a systematic investment plan (SIP). If the term of SIP is 10 years and if investor dies after 3 yrs then 7 yrs unpaid SIP is risk cover. Risk cover ends as soon as the SIP stops or any withdrawal is made from investment. A fund house has come out with new plan which offers cover (100 times the monthly SIP amount) through out the tenure of the SIP provided at least 3 years of installments have been paid. The cover reduces from the original value to the fund value of SIP installments paid.

One would wonder how come MF have become so generous and offering free risk cover when there is no free lunch. Through these plans, MFs are committing investors to pay for long periods. The tenure of such plans is age 55 minus current age. If an investor is 30 yrs old he has to pay for 25 years to avail of risk benefit. In this manner, MFs have ensured that in case they have to pay death benefit, the customer will pay regularly pay for 25 years, thus ensuring regular cash flows, Part of this additional business generated can be parked in safe instruments to pay for insurance payouts.

One needs to be very sure of his/her paying capacity for such long periods because no partial withdrawals or switchovers are allowed. If either of these is done, the risk cover ends. It means one can not use his money in case of emergency. In my opinion term plans along with MF investments (where there is no long term commitment) are still the better choice.

Almost everyone is discussing about Mutual Fund (MF). What is MF? Why should one choose to invest in MF? Can it assure fixed returns? A MF is a group of investments organised by a professional manager or a team of managers. It is a pool of money that is invested as per the objectives disclosed in the offer document. It is nothing but a trust which has sponsors, trustees, Asset Management Company (AMC) and a custodian. A MF investor enjoys advantages like portfolio management by the professional fund management team, diversification of risk, higher returns as compared to fixed income avenues, transparency of Net Asset Value (NAV) on monthly basis, liquidity, flexibility and tax benefit. There are multiple products in options available to suit the diverse needs and risk profiles of the client. When an investor buys into a MF he is actually buying diverse fields of investment.

An open ended fund is the one which does not have a fixed maturity period. It is available for subscription and repurchase on continuous basis while a close ended fund has a stipulated maturity period for example 3-5 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investor can sell only at the maturity period. Each MF has a different investment objective like an equity oriented scheme invests major part in equities and a small amount in debt while in the case of debt oriented fund it is vice versa. MFs also invest in foreign companies, government securities, real estate, a particular sector like pharma fund investing only in pharma industries, commodities like gold, silver etc.

MFs collect entry load charge at the time of purchase of the MF and the exit load at the time of redemption of the MF. The returns on the MF are compared to its benchmark. Suppose the return of a fund has it benchmark Sensex. If Sensex rises by 10% over 2 months and the funds NAV by 12%the fund is said to be outperformed its benchmark. If NAV rose by just 8% then it has underperformed its benchmark. However, if Sensex drops by 10% and the NAV by 6% then the fund has outperformed.

A MF diversifies the risk of the investor by investing in different investment instruments in a certain percentage rather than investing in a single instrument. Many people are of this perception that only rich people with huge corpus can invest in MF. But such is not the case. MF is made for masses. It allows all classes to have access to equities, bonds, debts etc. without needing a deep financial knowledge. For example a housewife saving money by curtailing day to day expenses having not much knowledge about the funds can too invest in an MF starting with a small amount. A person can start investing in MF with a small amount at regular basis. This also helps an individual to build up a habit of saving regularly. MF works on a systematic Investment Plan (SIP) where an investor can invest in the funds on monthly or quarterly basis as per their convenience. It serves the purpose of Rupee Cost Averaging strategy in investments. Thus more and more people choose to invest in MF so that they can invest in small amounts without cutting down their expenses on different things and no burden on their income.

Dividends from MF are tax free in the hands of the investor while there is a Dividend Distribution Tax payable by the MF. If the units of the MF are held for more than 12 months the same would be a long term capital asset else short term capital asset. Long term capital is tax free while short term is taxable flat 10%.

Indian MF industry is growing at a fast pace. The success of this is due to the trust, customer servicing, tax regime, good infrastructure and the comfort factor. Basically MF simplifies financial jargon like asset management, portfolio management, money market, risk factor and so on so that an investor can have the knowledge of how much, where and when to invest. SEBI’s waiver on load on MF is an encouragement for the people to invest in MF but one needs to analyze many factors before concluding whether this is good or bad for the investor, distributor and the investor himself. Thus MFs are attractive as they allow investor to combine the power of incomes in securing a better than average return on an investment.

What are Monthly Income Plans?
Monthly Income Plans or MIPs are mutual fund products designed with the objective of giving a regular return (in the form of dividend) in addition to capital appreciation to investors. The periodicity of return depends upon the option chosen by the investor. MIPs generally come with the monthly, quarterly, half-yearly, yearly and growth options. Investors, who choose the growth option, are not entitled for a return by way of dividend, but gains in the form of capital appreciation.

To realize its investment objective (of providing regular dividends), an MIP has the option to invest some portion of its assets (about 10-25%) in equities and the balance in debt and money-market instruments. Having exposure in debt and equity an MIP takes benefits of both equity as well as debt markets.
Since MIPs have a higher debt component, these schemes are categorised as debt-oriented hybrid funds.
However, like any mutual fund products, returns in MIPs are market-driven and dividends are declared out of the available distributable surplus only. There is no guarantee of a monthly income distribution.

How is it different from the income funds and bank FDs?

MIP vs. Income Fund:

• MIP has an option of investing a small portion in equity whereas an income fund invests only in fixed income securities i.e. corporate bonds, govt. securities and money-market instruments like Treasury Bills, commercial papers, CBLO etc. In a booming equity market, MIP with its small equity exposure rides along the trend, while income funds can’t cash on the same.

• Though income is not guaranteed, still MIPs strive to provide regular dividends as per the option of the investor. MIPs manage to do so due to the small equity portion which acts as a kicker. On a sustained basis a pure income fund would be hard pressed to distribute monthly dividends.

To present a more realistic picture, during the last few years, the average return of an MIP has been 12% p.a. as against 7% of an income fund.

MIPs Vs Fixed Deposits (FDs) of Banks:

• Returns on fixed deposits of banks are assured whereas there is no assurance on the returns on MIPs.

• Amount invested in FDs are locked-in till the term of the deposit. If withdrawn pre-maturely, then penalty is imposed on the investor. Partial withdrawal of amount is not allowed. Whereas, investment in MIPs can be withdrawn on any business day at the prevalent NAV. Even partial withdrawal of amount (units) is allowed subject to the minimum amount of investment in the scheme.

• Returns on FDs are low compared to MIPs owing to the difference in the asset allocation pattern.

• MIPs are more tax efficient than FDs. Dividends declared under MIPs are tax-free at the hands of the investors. Income from bank FDs is taxable as “income from other sources” and is taxed depending on the tax bracket of the individual. Further, if the interest income exceeds Rs 5000/- in a financial year, then TDS is applicable.

To compare the returns of FDs as against MIPs (as on 31st March 08), yield on FDs of State Bank of India (considered as risk-free return) for 1 to 3 years period were in the range of 6 % and 8.5 % p.a whereas annualized return generated by MIPs for the above corresponding period have been around 10 to 14%.

Who should invest in MIPs?

• Investors in the age group of 50+ years: MIPs are suitable for conservative investors who want to earn marginally better returns than a debt-only portfolio. Conservative investors generally remain invested in fixed income instruments, but sometimes they need returns that are above the inflation by a few points. Equity exposure is the best way to provide this meaningful return over the inflation. An MIP typically invests bulk of its assets in debt, while a small equity exposure is maintained to earn a slightly higher return.

Typically, an investor who is either past his/her retirement or is nearing it may consider MIP as one of the many options. To that extent, MIPs suit the investor profile of a retiree/semi-retiree where the monthly/quarterly/half-yearly/yearly income from the scheme helps to meet their regular expenses.

• Investors in the younger age group, HNIs, institutions, and trusts: In the regime of lower interest rate, growth option of an MIP scheme becomes attractive. At present, risk-free 1 year bank deposit offers maximum rate of 9.5% per annum. Returns from MIPs will definitely yield higher if the interest rate continues to remain low. Investors in the younger age group, HNIs, institutions, and trusts etc. do not require a regular monthly/quarterly/half-yearly/yearly dividend inflow. However, capital appreciation with a controlled level of risk is an extremely important parameter for investment. The controlled equity exposure of 10 - 25% over the medium term should generate higher returns, compared to a pure debt fund, albeit with a slightly higher level of risk.

Last words
Like any mutual fund product, there is no assurance that an MIP will declare dividends regularly though they strive for the same. It becomes difficult for MIPs to keep up the regularity when the equity markets remain volatile for longer periods. In such a scenario, investors can have the option of switching into the growth option under the same scheme with a SWP (Systematic Withdrawal Plan) facility. However, a comparative study of some of the MIPs shows that despite skipping declaration of dividend for some months, the return given has been far superior to other comparable debt investments.
MIPs can be positioned aggressively to the people nearing retirement. These people would like to save so that on retirement they would get a steady flow of income at a higher real rate of interest (approximately Rate of interest minus inflation) to meet their regular expenses at the same time have capital appreciation.
Given its wide-ranging appeal to conservative and aggressive investors, MIPs have the potential to be very much there to cater to these segments. Further MIP not only offers stable returns but also provides additional incentive of higher returns (should the equity portion do well).

The author is a Fund Manager in LIC Mutual Fund.

The bulls are all securely tied in the pen. The bears are rampaging world markets, not least of all India, hacking ferociously at any attempt by markets to come up from the abyss. Pertinently then, how does one make money in such a volatile market? Every technical support level is being trashed by plunging indices; not an encouraging sign to the potential investor.

Even in such a volatile climate, asset management companies seem to come out with mutual funds that promise the earth, the sky, and everything else in between in a neatly-packed picnic basket. Most of them concentrate on a single sector, the brave few trying the diversified portfolio route.

Though in the long run most equity funds would be a good avenue to invest through, what will happen if volatile conditions remain as the US market moves towards one of its biggest recessions? What should an investor do to still get decent profits?

The one commodity that will retain its luster long-term is gold – that sweet, soft, yellow piece of…well, gold. Although not as significantly and rapidly as the equity markets, gold could be significantly stable throughout the tenure of turbulence.

One domestic firm has recently launched a gold fund that invests in gold equity as well as equity in gold-mining firms. In reality, the fund invests into a gold fund by a parent company in the United States, as in India gold is only traded as a commodity straight up. And there are no gold companies or gold-mining companies listed on our stock exchanges.

A few financial service houses in India have advised their clients not to invest in such avenues fearing that the returns delivered would not be significant. Are their doubts justified?

There is a 35% tax on investments in foreign equity that makes up more than 65% of a fund portfolio. In spite of this, and a 7.5% inflation rate, the gold fund mentioned above gave an absolute return rate of 41.6% - higher than most equity funds – since its inception. This is higher than what most equity oriented funds have achieved in the volatile conditions of the Indian stock markets and even worse conditions of the US stock markets.

The yellow metal will only become dearer as time goes on. Demand will always outstrip supply by a large margin.

A gold-oriented investment in a portfolio would not only buffer the investor’s losses in case of a sudden down swing of the markets, it would also ensure that the investor makes a good amount of profits from his/her investments even if the investment horizon is only up to a year.

Finally, like any good MF, …“Mutual fund investments are subject to market risks, please read offer documents carefully before investing.”

The author is a Relationship Manager working with the Mumbai-based SRE Financial Planners.