Want to earn like Warren Buffett? ...24 tips

"An investor needs to do very few things right as long as he or she avoids big mistakes. " Warren Buffett

One of the world's most successful investors, Warren Buffett is the richest man on earth. Chairman of the Berkshire Hathaway, Buffett's wealth jumped by $10 billion to hit $62 billion during 2007. Buffett's life is an inspiration for investors across the globe.

So what makes the world's wealthiest man so rich? Buffett believes that successful investing is about having common sense, patience and independent research.

'How Buffett Does It', by James Pardoe is a great guide for investing in any market. A look into Buffett's simple, yet intelligent mantras for investing and minting millions.

1. A frugal billionaire Buffett believes in simplicity. He advises investors to take easy decisions. Never buy when you are doubtful. Invest only if you understand the businesses well.

2. Focus on not losing money rather than making it. Don't own any stock for 10 minutes that you wouldn't own for 10 years.


3. A proponent of value investing, he believes that one must take decisions on his own. He doesn't believe in listening to analysts or brokers. The best investing decisions come from oneself.

"It is not necessary to do extraordinary things to get extraordinary results."

4. Buffett advises to invest in 'old economy' businesses, companies, which have been around for fifty years and will continue to have a long innings.

5. We have often heard of people suffering heart attacks when markets crash. Well, Buffett advocates a sound temperament for stock market success.

6. You don't need to be a genius to succeed in the stock markets. People who can stay cool will succeed in the long run. Always keep in mind the hidden costs, from commissions on active stock trading to high mutual fund fees.

7. Buffett always looks at businesses he can understand, look at the profits in the past, long-term potential of the company, good top level management of the company and companies that have a good value proposition. The strategy is to think about the business in the long term.

"You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right."

8. Invest in businesses with great management. Always keep a track of the management of the company. The top decision makers have a lot to do with the company's performance.

9. One of Buffet's biggest strengths is independent thinking. Many people go by what the experts says or what others do but belief in one's own judgement is the key to stock market success.

10. Patience pays, says Buffet. He says one must not worry too much about the price of the stocks. What's more important is the nature of business of the company, earnings capability and its future potential.

11. Don't target just stocks, look at businesses. How a company performs is key to its stock market performance. You must know the track record of a company before you invest in it.

"Price is what you pay. Value is what you get."

12. Prices keep changing. Don't get worried by the ups and downs. Investing is all about creating wealth. It's important to understand the value of a stock than its price.

13. He believes that franchisee businesses are good opportunities to invest in. Avoid hi-tech, complex businesses. Look for businesses that are set to diversify and grow.

14. Never be disappointed when markets fall. Take it as a buying opportunity. Buffet says one must have lesser number of investments with more money in each lot.

15. He advises to avoid diversification. Invest in companies with sound business models. Choose a few good ones and stay invested, it will give you the benefits.

"I don't look to jump over 7-foot bars; I look around for 1-foot bars that I can step over."

16. Doing nothing pays at times! One must not jump at price fluctuations and take impulsive decisions.

17. Don't get carried away by market forecasts. Ignore market swings and remain an investor with a good business sense.

18. Buffett advises to be fearful when others are greedy and greedy when others are fearful. Buy when people are selling and sell when people are buying.

19. Make a list of companies, sectors that you find safe to invest in and try to stick to the list.

20. A sound business, strong management, good fundamental and low stock price should be a must-buy.

"Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well."

21. Try to ignore stock charts, says Buffett. They may not give the right indicators. A stock which may have done well earlier may not do so in future.

22. Buffet spends a lot of time on reading and more importantly thinking. Reading helps investors, so spend a lot of time reading about the stocks, companies and markets. A good investor must have a good knowledge base.

23. A good investor also needs to be efficient. Investors may have great capabilities but many do not make use of it. One needs to hone skills to meet the targets.

24. Good investors never rush to make money. They give time, thought and work on investment decisions. The mistakes that others make should be a lesson for you.

Investors may sweat in May

While you may escape the sweltering May heat by flying to cooler climes, there may not be any escape for investors in the month of May since, after October, this is the worst month for stocks.

A study of the last 18 years demonstrates that March (-0.39 per cent), May (-0.74 per cent) and October (-1.63 per cent) are the months in which stocks have given negative returns.

But if you were to consider the last five years only, then October slips out of the list and you are left with March and May which have seen average declines of 1.17 per cent and 1.61 per cent respectively.

Let's concentrate on May alone. The month has turned negative returns in eight out of the last 18 years under study. And how can investors forget the sell-offs seen in May 2004 and May 2006?

There is another peculiarity to May. Since 1998, it has given negative returns in alternate years. We saw declines in 1998, 2000, 2002, 2004 and 2006. This is 2008, which makes it a contender for yet another fall.

Besides the dubious track record of the month, let's see whether we have other triggers that could lead to potential losses in the month.

May is the month in which the atomic energy treaty is likely to be taken out of the cupboard, dusted and given another look. The International Atomic Energy Agency meets on May 5 and 6, and the Left and the UPA will meet to take stock of where they stand on the issue.

The parliamentary session should also end by then. If the UPA wants the Left to pull the rug and force an election, then this is their chance now.

By going ahead with the nuclear deal, the UPA can force the Left to finally bite after years of barking. But with the inflation inferno still on and no fire tenders in sight, the UPA may not want to take the gamble. So a rally in capital goods will also be ruled out.

Fundamentally speaking, it will be difficult to justify any further rise in the markets. As the April derivatives have expired comfortably at the 5,000 level in the Nifty, punters have been expecting a rise to the level of 5,350 and then 5,550.

My sense is that companies reporting quarterly numbers in the month of May may not bring good tidings for the markets. Margin pressures will continue. Secondly, companies that are late to report are usually the ones that spring a nasty surprise.

More importantly, stocks have seen a substantial bounce from their March lows. While the Sensex has seen a rise of 13.9 per cent, 89 per cent of the regularly traded stocks on the BSE have given returns in excess of that. I do not remember any period in which stocks have out-performed the Sensex by such a wide margin.

Look at the returns - 73 per cent of stocks have returned more than 25 per cent from their March lows and one out of every four stocks on the BSE has returned more than 50 per cent. With so much of a rise, it may be a good idea to book profits in May. One of the methodologies to adopt is trailing to stop loss. The Nifty has serious resistance at 5,550 and 5,368.

The Fed could cut rates further by 0.25 per cent at its next meeting. Any signal emanating from the Fed that it has got into the pause mode should strengthen the dollar. A strong dollar could dampen the sentiment for commodities.

Whether it will buoy our tech stocks will be a function of what affect the fire-fighting by Dr Reddy has on the rupee.

Keep your fingers crossed for the month of May.

http://www.rediff.com/money/2008/apr/30guest1.htm

Mutual fund ‘schemes’ of a different kind

For some time now, it is a common sight to find AMCs use miscellaneous means to increase their investor/asset base. By miscellaneous, we mean all methods and ‘schemes’ unrelated to performance/track record. Ideally, an AMC should not have to talk beyond its track record over various market cycles to make investors aware of what they can gain by investing in the AMC’s funds. Unfortunately, either because their track records weren’t impressive enough or because they weren’t able to communicate their performance effectively, AMCs have had to resort to other means to draw investors.

Of course, not all AMCs use such marketing schemes; certain AMCs have told us that they would have preferred to keep an arm’s length from these tactics, but their hand was forced by other AMCs. The bottom line is that investors/agents are regularly bombarded with rewards/incentives by AMCs and core factors like the fund’s investment proposition and track record are conveniently pushed to the background.

Listed below some of the most popular carrots dangled by AMCs to their investors/agents:

1) Waiver of entry load
This is the most common trick in the AMC’s marketing manual. AMCs usually have a marketing plan to mobilise assets in a particular mutual fund scheme. The easiest way to elicit interest in that scheme is to give investors an ‘entry load waiver’. This means that for investments made over a specified time period, investors will not incur an entry load (which is usually used towards the agent’s commission); so his entire money is invested in the scheme.

The entry load is waived off either on SIPs (systematic investment plans) or lumpsum investments. Until some time ago, it was usual for most AMCs to waive entry loads on SIPs. It took a few AMCs to start this trend and sure enough other AMCs followed suit. The principle advanced by AMCs for waiving off entry loads was to encourage mutual fund investing and financial planning. Over time the entry load waiver had garnered considerable assets for AMCs. On the flipside, the waiver was proving to be an expensive proposition (since in such a scenario, AMCs had to pay commissions from their own pockets); so they reversed the trend of waiving off entry loads.

2) Star fund manger
Another marketing ploy that usually does the trick with gullible investors is the ‘Star fund manager’ carrot. Most AMCs when they have a track record are happy to project it to investors. Some times, AMCs take the easy way out; more than their track record they like to talk about their Star fund manager and his past exploits. The message for investors is clear – invest in the AMC’s funds and benefit from the expertise of the Star fund manager.


3) Bundling other services/products
AMCs are quick to identify opportunities that could be potential areas of interest to their investors. And for most investors, getting insurance (health/life/child) is very important. Many AMCs bundle insurance with their offerings and are happy to make that a talking point rather than the scheme itself. While some of these features may be innovative, they nonetheless detract from the scheme and its performance, which should be the talking point, rather than the add-on benefit.


4) Incentives for mutual agents
You would have noticed that the persuasive tactics we have discussed so far are aimed at the investor. AMCs also employ indirect means to woo the investor. These indirect means use the agent as leverage. So the AMC woos the agent, who in turn pitches the AMC’s schemes to the investor. Some of the more common agent incentives include higher commissions on specific schemes or on specific targets or on specific initiatives (like getting US64 bondholders to invest the redemption proceeds of their investments in mutual fund schemes from the parent AMC). Of course, everyone knows about the offsite ‘training’ meets arranged for select agents in the most exotic locations.

In conclusion, there are a lot of distractions for investors looking to make an unbiased and informed investment decision. As always, our advice to investors is to ignore the persuasive tactics and invest in mutual funds based on track records over the long-term and across market cycles.

Make Money in Real Estate

promising, to say the least. Over the past few years, a number of real estate companies were listed and foreign money poured into real estate funds. India's largest IPO - DLF in 2007 - was from this sector. The listing of DLF even benefited existing players like Ansal Properties and Unitech which witnessed a sharp rise in their stock prices. A new index was developed to track the performance of the sector. And as the Sensex soared, the real estate sector too delivered impressively.

BSE Realty, the index for the real estate sector in India, witnessed a sharp rise, gaining nearly 84% in just a span of six months starting from July 2007. The index reached an all time high of 13,647 on January 14, 2008. But when the Sensex crashed and lost nearly 20% (between January 21, 2008 and April 22 2008), BSE Realty lost nearly 41%. Despite this, investors in the ING Global Real Estate Fund were far from sorry. The fund came out with flying colours and stole the show. It outperformed the BSE Realty Index by a significant margin. The fund not only survived the jolt and took the crash in its stride, but delivered a return of 8% over the same time period.

If you had invested Rs 10,000 separately in the Sensex, BSE Realty and the ING Global Real Estate Fund on January 10, 2008, your investment would be worth Rs 7,900, Rs 5,500 and Rs 10,800 respectively (as on April 22, 2008).

The fund offered a return of around 11% for the one-month period ended April 22, 2008.

Simultaneously, ICICI Pru Real Estate Fund delivered a negative return of 1% over the same period. Of course, a blanket comparison is unfair since the latter is a domestically invested fund while ING Global Real Estate, a globally invested fund, is primarily a feeder fund to foreign equity fund ING Real Estate Securities.

Lesson to be learnt: Its not just asset diversification that matters. Geographical diversification too helps in enhancing the overall portfolio returns.

Banking Funds Outperform The Market

There was a sigh of relief on Dalal Street with the bulls coming out in hordes on Friday. For the week ended April 25, the Sensex gained 3.91% and the Nifty 3.09%. The market shrugged off negative sentiments, like rising inflation and average to below-average results; and defying all odds the Sensex surpassed the psychological level of 17,000 and 5,000 level for the Nifty.
The banking funds category gained the most this week with a category average of 5.03%. However, it was lower than the BSE Bankex index gain of 6.9%. For the one-year period ended on April 25, the banking category too topped the chart with 37.13%. Ironically, the Gold ETF category followed with a gain of 24.68% making it the second-best one-year performer but the worst performer for the week.
Coming back to the week's performance, tax-saving funds followed the banking category's average with a return of 2.79%. In the Equity: Index category, Banking BeES gained 6.28 per cent, followed by 4.54 per cent of Nifty Junior BeEs. The best funds were LICMF Tax Plan (4.48%), Franklin India Taxshield (4.06%) and Principal Tax Savings (4.04%).
Diversified equity funds followed closely behind the tax-saving funds with a category average of 2.77%. In the equity diversified category, the best performers were ICICI Prudential Infrastructure (4.84%), Franklin India Flexi cap (4.80%) and Taurus Starshare (4.63%).
The main highlight of the week was the announcement of much-awaited real estate mutual fund guidelines. SEBI has given a go-ahead to existing mutual funds and new mutual funds for launching real estate branded schemes Guidelines on Real Estate MFs.
On Monday, the RBI will announce the annual monetary policy. Taking the cue from RBI Governor - Mr. Y.V. Reddy's assessment of the economy, the markets will then decide whether to swing with the bulls or with the bears.

Birla Mutual Fund Revises Load Structure of few debt & equity schemes

Birla Mutual Fund has revised the load structure of Birla Dynamic Bond Fund, an open ended income scheme. With effect from 28 April 2008, the scheme will charge an exit load of 0.20% of applicable NAV for units redeemed/switched out within 30 days from the date of allotment. Earlier the scheme charged an exit load of 2.00% of applicable NAV for units redeemed/switched out within 180 days from the date of allotment.

However there is no change in entry load. As earlier the entry load in the scheme is nil.

They do not charge entry load for purchase made through SIP in few equity schemes.

ICICI Pru In Outsourcing Deal

In a unique deal, ICICI Prudential AMC has outsourced its fund administration for over 100 schemes to HSBC Securities Services. With an AUM of Rs 54321.87 crore as of 31 March 2008, this is the largest and most complex third party outsourcing project ever undertaken in Indian fund industry.

HSBC Named Fund Administrator For ICICI Pru AMC

MUMBAI: ICICI Prudential Asset Management Company has outsourced its fund administration for over 100 schemes to HSBC Securities Services. With assets under management of Rs 54,321.87 crore as of March 31, this is the largest and most complex third party outsourcing project ever undertaken in the Indian funds industry. The successful implementation of this initiative demonstrates our ability to infuse in customisation of global solutions for the Indian market.

Focus Fund: Nifty BeES - Invest

Benchmark Mutual Fund's Nifty BeES is the first Exchange Traded Fund (ETF) in India. It is a blend of a share and a mutual fund unit with real-time trading facility on NSE. Being an Index ETF, it tracks the S&P CNX Nifty Index, priced at nearly 1/10th of the Nifty value. The scheme is a convenient and efficient way to own the 50 Nifty stocks in one's portfolio.

JM Tax Gain Fund

JM Taxgain fund opens at NAV 10.39.

Now it is open for fresh purchase.

USP: JM Financial Asset Managemnet Copany do not charge any entry load for any purchase made though SIP in any of equity schemes. (0% entry load in SIP)

At present JM has total 4 equity Fund Mangager.

Mr. Sandip Sabharwal
Mr. Ashit Bandarkar
Mr. Sandeep Nima
Mr. Sanjay Chabaria

See the performance turnaround after new fund management team joins since Dec 2006. As on 23rd April 2008 performnce in one month chart of diversified equity schemes 5 schemes are in top 20 out of 199 schemes.

What a performance....

India-Everything to play for April 2008

Read this doc on Scribd: India Everthing to play for

India''s Best Offering: Reliance Mutual Fund

Investing has become global. Today, a lot of countries are waking up to the reality that in order to gain financial growth, they must encourage their citizens to not only save but also invest. Mutual funds are fast becoming the mode of investment in the world.

In India, a mutual fund company called the Reliance Mutual Fund is making waves. Reliance is considered India’s best when it comes to mutual funds. Its investors number to 4.6 billion people. Reliance Capital Asset Management Limited ranks in the top 3 of India’s banking companies and financial sector in terms of net value.

The Anil Dhirubhai Ambani Group owns Reliance; they are the fastest growing investment company in India so far. To meet the erratic demand of the financial market, Reliance Mutual Fund designed a distinct portfolio that is sure to please potential investors. Reliance Capital Asset Management Limited manages RMF.

Vision And Mission

Reliance Mutual Fund is so popular because it is investor focused. They show their dedication by continually dishing out innovative offerings and unparalleled service initiatives. It is their goal to become respected globally for helping people achieve their financial dreams through excellent organization governance and customer care. Reliance Mutual fund wants a high performance environment that is geared at making investors happy.

RMF aims to do business lawfully and without stepping on other people. They want to be able to create portfolios that will ensure the liquidity of the investment of people in India as well as abroad. Reliance Mutual Fund also wants to make sure that their shareholders realize reasonable profit, by deploying funds wisely. Taking appropriate risks to reach the company’s potential is also one of Reliance Mutual Fund’s objectives.

Schemes

To make their packages more attractive, Reliance Mutual Fund created proposals called The Equity/ Growth scheme, Debt/Income Scheme, and Sector Specific Scheme.

The Equity/ Growth scheme give medium to long term capital increase. The major part of the investment is on equities and they have fairly high risks. The scheme gives the investors varying options like, capital augmentation or dividend preference. The choices are not deadlocked because if you want you may change the options later on.

Providing steady and regular income is one of the Debt/Income Scheme’s primary goals. The Debt/Income scheme has in its portfolio government securities, corporate debentures fixed income securities, and bonds. If you want a low risk, short term investment then this is the one for you.

The returns on Sector Specific Scheme are dependent on the performance of the industry at which your money is invested upon. Compared to diversified funds this is a lot more risky and you will need to really give your time on observing the market.

Although RMF is gaining good ground in the financial market, remember that they are a risk taking bunch. They give higher profit because they take a lot of risks. So, if you are faint hearted, then Reliance Mutual Fund is not for you.

Stocks vs Mutual Funds: Which side are you on?

It is common for investors to grapple with various investment options. So it’s not surprising that at any point of time, their ‘to do’ list usually has at least half a dozen investment options spanning across various assets. As if investing isn’t enough, they also have to make elaborate arrangements to track their investments, take revised decisions (in case investments aren’t working out as expected) and re-allocate assets (in case allocations have deviated sharply from original levels). If it looks like investing is a full-time activity, then you are right, it is. Your next question probably is – if investing is a full–time activity, how does one balance his work (which is also full-time) with investing?

The answer to this question is simple. Between the two (work and investing), focus on doing what you are good at and give up the other option in favour of someone who is adept at handling that responsibility. In industrial parlance this is referred to as division of labour, where each team does what is best suited to its own skill set and temperament. Since most investors have limited skills in managing investments/finance, it’s an easy choice to make for them about what they want to continue doing and what they want to give up.

Within the domain of investments, two options that investors regularly grapple with are stocks (i.e. direct equity investing) and mutual funds. Both have their advantages, although this note does not get in to that debate. Instead, in light of the present discussion about investing being a full-time activity, let’s see how stocks and mutual funds face off against one another.

A matter of time
Investing directly in the stock markets is a full-time activity. It may sound like a one-time activity, but trust us, it isn’t. There is research to be done pre-investment and post-investment. And research on a company does not just involve knowing its business. The investor is expected to master several subjects i.e. prospect of the sector, other companies operating in that sector and how the company (under review) is superior to them. The investor is also expected to study the economic and political climate of the country to gauge the bearing they can have on the sectors and companies in them. Having done this research before investing, the investor is expected to continue doing it even after he has invested in it so as to ensure he is invested in the right company/companies.

If you still aren’t convinced about the research workload consider this – most equity research teams have analysts studying each of these areas (economy, sector, company). So by researching on these areas all by himself, the investor is replicating the efforts of an entire team. If he has the time for it, then he can consider taking up investing as a full- time activity. Of course, he will first have to consider resigning from his present job!

On a more serious note, if you believe that you can take out time from your work to invest directly in equities, then it is advisable to invest in proportion to your free time. The free time will prove critical in tracking the companies that you wish to invest in. For instance, if you are very busy, then ideally you must either not invest at all in equities (directly) or invest sparingly, because you don’t have sufficient time to track the companies. Moreover, if you are busy today and expect to get even busier tomorrow, then re-consider whether you should be investing directly in equities at all. No point in starting something that you will unlikely find the time to finish.

Conversely, investing via the mutual funds route is far less time consuming. Sure, it might take a while to select the right mutual funds (your financial planner should be able to help you with that); however beyond that, a better part of the responsibility lies with the fund manager and your financial planner.

Investing skills
If you have the time to take up investing then you have cleared the first hurdle. There are other hurdles to be cleared like investment skills. A successful fund manager hasn’t got where he has, only because he has the time to invest; he has something even more scarce – the skill and knack of investing. And the skill sets to invest are not acquired overnight. Fund managers earn their spurs over the years after going through several market trends and cycles (ups and downs) and after making several mistakes. So apart from the time factor, investing demands a lot of skill and experience.

Access to research
Most investors who wish to take up investing as a full-time activity are likely to hit a roadblock in getting unrestricted access to quality research. While conventional wisdom suggests that the annual report should prove sufficient in this regard, the bad news is that the annual report is just the starting point. For more information you have to read up extensively on sectors and companies in those sectors. While some of this information could be available for free (in libraries or on the internet for instance), the quality inputs (read updated and insightful research) are usually available for a stiff fee.

Getting reports (premium or otherwise) is not the only thing, ideally you would like to meet the company management if possible or an authority on a particular sector. Again, these meetings are elusive, usually reserved for the elite, so retail investors are unlikely to get an audience easily. While you can meet the company management over an AGM (Annual General Meeting); meetings of reputed companies are usually well-attended and you will be lucky to get even a few questions past the huge audience.

Mutual fund managers on the other hand have no problem with these issues. For them, accessing research (regardless of the price) is never a problem. Meeting up with the company management and industry bigwigs is something they do on a regular basis. In fact, investment decisions are rarely taken without these inputs. On the other hand, the lay investor will often be compelled to take an investment decision devoid of these inputs. It is not surprising then, that there is usually a wide chasm between the quality of investments across both these categories (fund managers and lay investors).

It’s something that catches the fancy of every lay investor, but as we have seen, it’s something that is beyond most of them. The solution to this problem is that investors delegate this responsibility to a competent money manager (fund manager) who is best placed to invest their monies in the best possible manner. The investor on his part can go about his own business, which is where his expertise and skill sets lie.

Edelweiss plans to launch its Mutual Fund business by the end of June

Edelweiss is planning to launch its mutual fund business by June this year. The financial services company would start with an authorised capital of Rs 25 crore.

“We are waiting for the final approval from the Securities and Exchange Board of India (Sebi) and hopefully it would be operational by the end of this quarter in June,” said Edelweiss Chairman and Chief Executive Officer Rashesh Shah.

To begin with the company is planning a slew of new innovative products such as specific-segmented funds targeted at high networth investors (HNIs) and education sector.

“The mutual fund market has become very segmented and we would be focusing on innovative customer-specific products, targeted at the desired section of the population,” he said. The mutual fund portfolio would also include structure funds and concentrated equity funds. According to Shah, the structured products exposure in the portfolio of the HNIs is on the rise.

Anurag Mehrotra, the head of the wealth management at Edelweiss, said that at present structured products constituted not more than 10-15 per cent of portfolio of (HNI) investors.

However, the exposure of structured products would increase by 30 per cent as it could generate returns under wide a range of conditions, he added.

Also, the popularity of alternative investment options such as art and coins is also increasing among HNIs, who are willing to invest over a long period of time.

“We would also have standard products such as liquid, debt and diversified equity funds and, for the first year, we would be launching around 8-10 funds,” Shah said.

Mkts to see deep, long correction: Rakesh Jhunjhunwala

The question bothering the markets still remains - is there more pain left and what is the road ahead? To find out answers to these questions, CNBC-TV18’s Stocks Editor, Udayan Mukherjee caught up with ace investor and market expert Rakesh Jhunjhunwala in a special series called ‘Hunt for the Bottom’.


Jhunjhunwala feels that the markets have seen a bull-run since April 2003 and one cannot have a bull market without corrections. The corrections would be testing the investors’ patience and their sheer belief in the markets, he said. ”All the corrections we have had in the last four years have had been deep but they have not been deep time-wise. I think the real patience and the real belief in the equity and in the market comes when the market tests you time-wise. So I think this is going to be one of the deepest and the longest corrections that we are going to have, in what I believe is going to be a very long bull market,” Jhunjhunwala said.

Excerpts from Udayan Mukherjee’s conversation with Rakesh Jhujhunwala:



Q: Is the worst over, have we seen most of the pain or do you fear that there could be much more pain this time around?

A: We have not four but four-and-a half-years of bull market, which started in April 2003. Whatever be the quality and depth in the length of the bull market, you are not going to have a bull market without corrections, which are not going to test our patience and sheer belief in the market. All the corrections we have had in the last four years have been deep. They have not been deep timewise. The real patience and belief in equity markets comes when the market tests you timewise. This is going to be one of the deepest and longest corrections that we are going to have. However, this is going to be a very long bull market.

Q: In the middle of this phase, you expect to see some rallies which will get sold into as well?

A: Yes. You will surely see rallies and we are in the midst of one. Suppose the markets doesn’t exceed and the index doesn’t go 21,000 and Nifty doesn’t go above 6,200 for the next 18 months, I as an investors won’t bother it at all. I would happily rest with the kind of gain we have had for the last four-and-a half-years.

Q: It could be an 18 months rest you think?

A: Why not.

Q: Six quarters of market not going above the old high?

A: Why not.

Q: Is it a possibility or a probability according to you?

A: It’s both.

Q: You think it’s a highly likely event?

A: I believe in the long-term story. I am going to profit as an equity investor. As an investor, I don’t see a greater rate of return for my capital at any place other than the equity market. I watch the market everyday but I won’t be surprised. I am prepared for it.

Q: But you look at the screen very carefully as well and trade a bit? Is the screen reflecting any strength over the last few days?

A: A good part of the market has already bottomed. It may take time for the market to gain. In the midcap space, a lot of stocks have bottomed. But the price movement tells me that as of now, not much of the market is going to renew those.

Q: Which sectors are still vulnerable to downside? Some sectors had seen massive excesses, but stocks have also fallen 40-50-60%. Do you think enough correction has happened in those sectors or pockets or they may unwind further?

A: That’s a very difficult call to take. We have to play it scrip to scrip. It is difficult to take it sector to sector.

Q: You had concerns about spaces like real estate etc. Do you think they have corrected enough?

A: I have been a real estate stock bear and have been wrong earlier. I still feel there is space to go there.

Q: Any other clear space where lots of excesses have happened?

A: In the infrastructure sector, there is lot of excess valuations. Stocks will take time. It will take time for the excesses to wear off.

Q: You have been a big bull of that space and have had big holdings like Praj, and Punj Lloyd? Do you think there were excesses at the top in those kinds of areas as well?

A: Suddenly the valuations were quite high.

Q: But have they corrected enough after this big fall?

A: They have corrected. But for them to really gain their old highs it will take time.

Q: India has been one of the biggest underperformers in the last three months. Do you think there are local problems as well, which we need to content with over the next one year?

A: The way to tackle inflation is to increase supply. To keep interest rate high in the face of low interest rate worldwide, is a local problem. A friend of mine told me sometime back that the true bottom of this market will be made the day the election is announced, but that has been the history of our markets.



Q: Does politics present a threat to this market?

A: We have seen the worst of whatever the threat could be. I don’t think they are going to impose price controls anywhere. Also, India has grown a lot without the politicians. So, I am not afraid if Mayawati becomes Prime Minister, but I hope she will not. I think politics has done no good. If god were to grant me one wish, I would ask him to let anybody be the Prime Minister of this country, but let not that government be supported by Communists, because if you were to listen to the Communists we were to get everything free and don’t have to work for anything.

Q: Does government policy worry you? We have seen quite a bit of price control etc in the last one-month? Does it worry you significantly?

A: Not at all, because we have been hearing all this for so many years but India has trudged along. Do you think anything has changed in the last 12 years?

Q: What about steel? If I remember correctly, you bought some steel stocks earlier, didn’t you own Tata Steel?

A: Yes. I bought some steel stocks even lately. They are not going to impose any price controls. SAIL and Tata Steel are placed very well as far as government rules are concerned. If steel prices go up, they benefit because they have captive commodities.

Q: What is essentially different about what is going on now in the market and what you saw in 2001 and 1992?

A: Valuations in these times never got to 1992 levels. In 1992, we were trading at 65 times earnings, 2001 at 35-32 times earnings, and this year we peaked at 21 times maybe 2009 earnings.

Q: In some pockets like infrastructure etc we did go to 30-40 kind of P/E multiples?

A: Yes, maybe but that was not a very large part of the market. After all, the largest part of the market is the Sensex and Nifty. The bull market that started in 2003 cannot end at less than 30-35 earnings or at least 25-30 times for the index.

Q: Let me paint a bearish scenario. The bears say that interest rates go up even from here, which may not be justified. But in our country sometimes we do things which are not justified. GDP growth slows to sub-7%, earnings growth slows to 10-12%, could we have then in that kind of situation a compressed one-two year kind of a bear phase? Is that a likely scenario or even a possible scenario in your eyes?


A: 4,100-4,200 which corresponds to 12,500-13,000 on the Index is a level which we are not going to penetrate on the downward side very easily. 5,300-5,400 upside on the Nifty is a level that we will not penetrate easily. So, we could be in a 4,200 range. The range could be 4,500-5,300 instead of 4,200-5,300. We could pass a year or 18 months.



Q: Is it a good time for investors to buy stocks or do you think they won’t be rewarded in the next one-year or so?

A: I don’t think we as investors should be worried about what rewards we can get in a year. I have made the biggest money by understanding that I get the reward within a time period which is reasonable and one-year is never reasonable. If one gets good stocks at valuations which one thinks are good and feel the ultimate value of the stock will be far higher, one should buy it.

Q: How much damage has been done this time around because in our country because a very narrow section of the population invest in stocks?

A: Everybody’s portfolio is damaged, but my portfolio doubled in one-year. You went from 100-200 then, came back to 140-150 and right now are at 130-135. The increase was very severe and the fall was equally severe. I don’t think the damage has take place with those Charlie’s who came to make a fast buck. The serous investors who invested through the last four-five years have been getting very good returns.

Q: Do you think they will hold the faith, which has been seen so far in the mutual fund portfolio with no major redemptions? Do you think this whole phase will pass without significant mutual fund redemptions?

A: Why do you think these redemptions are not taking place? It’s not an act of defiance according to me. It is because may be it is supports. The amount of money that has to come to India for investing locally is far greater than what we have had. So, some people are withdrawing but every other money is going up. Prosperity is also going up. People who are running businesses are feeling the prosperity. So, may be the redemptions may not take place. It could also be that the kind of money which has come is good genuine money and not some short-term scam money.

Q: Having seen five-years of bull run and then a sharp three-month correction, do you think it is time to re-orient your investment strategy somewhat because a few things have fallen off the cliff? - Is it time to change your horses?

A: I have followed one investment strategy all my life. Good investing gives you good returns. It depends on your investment strategy. My investment methodology and strategies don’t change as markets keep changing. If I have a good stock, then it is going to give returns. One thing which supports the market is the bodyweight of solid liquidity. With these kind of high oil prices, where is all this surplus money with West Asian countries going to go?

Q: But you trade as well, do you sense that different sectors are coming back? IT has had a nice rally after a long time, They were two years out in the cold. Is it possible that some of these losers of the last couple of years could stage a comeback?

A: I am not personally so bullish on IT.

Q: You have not been for a while?

A: Yes, because they are a mature industry, all institutions own them. I think growth is going to be limited there. There are uncertainties in the principal markets. Although I have true respect and true regard for the Infosys management, I think meeting their guidance is going to be a challenge.

Q: Do you think there is a risk out there?

A: I think there is a challenge, because conditions in the US are going to get worse by the day. They are saying they expect the second quarter in the US to be better .

Q: Which is when you think the problems will start dropping in?

A: I think there will be three stages of the problem in America. First is the realisation of the subprime problem. Second, the economy will slowdown as a result. I think defaults would creep into prime housing, into credit cards and auto loans and maybe commercial real estate. I think that will be the second stage. The third stage is going to be a depression.

Q: Have you ever bought an FMCG stock in your life?

A: Yes, I have.

Q: Not Tata Tea?

A: No, not Tata Tea. I have another FMCG stock in which I own more than 5%.

Q: So, a largecap FMCG stock?

A: I won’t say largecap but fairly good company called Agro Tech Foods.

Q: But none of the ones we know like Colgate, Dabur, Marico, and Lever. You have never bought them in your life?

A: I may have bought some stocks like Colgate and sold it. I bought some shares in Lever in 2004 and sold it in 2005. I have made good money there.

Q: Have you ever been a big pharmaceutical investor?

A: I have a large investment in Lupin and made good money in Matrix. I made some small investments in Ranbaxy.

Q: Do you subscribe to the theory that capital goods or power is a sector, which was such a big leader, is on the wane and will not lead to the next rally?

A: Wane is about P/Es. Pharma P/Es are set to go up. That’s one sector which will not dip if we get a prolonged correction. If you look at some of the P/E e ratios of pharma companies, they are certainly attractive. Everybody has been so ebullient about capital goods and that’s why P/E’s are high. It will take time for earnings to catch up.

Q: What are your thoughts on oil and gas as a space? You just spoke about crude; do you think there is an oil and gas play in India from a stock market perspective?

A: Well I would Reliance is a big oil and gas play. There could be some interesting plays in the smallcaps and the midcaps.

Q: Exploration?

A: Yes, exploration.

Q: You were once a bull on Indian Oil Corporation. You lost your hope in them?

A: I will never buy them, I promise. Wherever government is involved I am going to be very careful.

Q: That's surprising coming from you because you made a lot of money from PSU companies like BEML and Bharat Electronics?

A: But at what valuations? I started buying Bharat Electronics at Rs 32, BEML at Rs 30. Also what I realized and why I sold this is that for companies to really gain at these valuations, one has got have that plus-plus. The investor has to have faith that these companies are innovative, they are going to do something new. They are going to do something different. I don't find that in the public sector. They are constrained. Indian Oil--I read Rs 450 crore is what we are losing on fuel everyday. But there are interesting opportunities in exploration. I have some investment in that sector.

Q: But they are small and midcap companies?

A: Yes.

Q: What are the chances that in 2009 you go to something much beyond the old high that you saw on the index? Do you think it is conceivable? What needs to fall into place for that to pan out?

A: America needs to go for present tense. It is important that Infosys achieves this guidance it has given. What is important to the Indian economy is the value-add that software brings. If Infosys adds 25,000 employees, it translates into 25,000 cars and 25,000 homes. Then, that in turn leads to cement and steel. It is not any small value-add. If the US grows at 4%, Indian software will grow at 40%. The sentiment of investors worldwide will be extremely bullish. If you achieve earnings of say 1,030-1,040 in March 2009, then you go to 1,200 by March 2010. So, maybe in May 2009 you are going to see a very good rise.

Q: Are you looking at 25-30 P/E multiples?

A: For that we are still 4-5 years away. We will get there.

Q: We didn’t pass it in December last year?

A: That is why the top of the bull market was not made. The top of the bull market will be made when the value of the Indian Embassy in Japan is greater than the land in Delhi. If we had continued with the real estate led bull market in December 2007 we would have reached those levels.

Q: Do you sometimes feel apprehensive with your view today that 4,200 is a bottom worst case scenario can be violated and you may be surprised?

A: If it is violated, I would surely be surprised. But welcome this correction. I don’t think it is a bear market. It is a correction because had we continued at that pace we might have reached a level where we would have damaged that market beyond repair. It will still go much further. For that to happen, we have got to have this correction.

Q: How will you approach this phase if it pans out like you expected, one year of essentially rangebound movements. From your trading and investment perspective, how will you approach it?

A: I will limit my trading extremely. My trading levels will come to 10-20% of that level. We need a rangebound markets. I don’t buy anything at one price but buy at stages.

Q: What will you trade more in the next one year the Nifty or individual stocks? Where will the opportunities be?

A: Nowadays,, I tend to trade in the Nifty more because I find it very liquid.

Q: From an investment perspective?

A: I will see whatever opportunity comes. I am making investments. I made some investments in April, March, and February.

Q: Will you consider paring down some money and moving to cash in the next one-year?

A: I essentially have no debt or very little debt. So, I can always take debt if I find investments to be adequate. If I feel that I have such a great opportunity that I must invest and I don’t have the capital, I may sell some of my investments and interchange.

Q: So, your convinced that this is just a long painful correction in a bull market. It is not a bear market that you are seeing for the last three-months?

A: That’s what I think.

Q: Convinced?

A: Yes, 100%. Once America bottoms because the greater surprise is going to come from the World Cup markets. There is so much to come from India once this gas comes. More the power, more investment is needed. This will itself be such a big trigger. I cannot believe that the bull story, which is linked to India’s economy with 5-6% of Indian’s savings coming into equity and with the kind of Indian sprit and entrepreneurship, can die. If this is the end of the bull market then India really has incurred god’s wrath. But it may be long and painful.

Sundaram BNP Paribus MF Launches Select Thematic Funds Entertainment Opportunities

Sundaram BNP Paribus Mutual Fund launched Sundaram BNP Paribas Select Select Thematic Funds Entertainment Opportunities. The objective of the scheme would be to achieve long term capital appreciation by investing primarily in the equity and equity related instruments of companies that focus on opportunities in the entertainment business. As a thematic fund, the portfolio will be more diversified than a sector fund and may not be as diversified as a typical equity fund.

JM Equity schemes Presentation as on 31st March 2008

Read this doc on Scribd: Feb2008

Ideal Asset Allocation through the Midcap route

Ideal Asset Allocation through the Midcap route

The path to create wealth over the long term in the world of mutual funds is through the equity-oriented funds route - is a fact we all accept and acknowledge, but in these volatile times, asset allocation have assumed a bigger role than ever. Investment advisors and expert financial planners are busy chalking the right asset allocation model based on the investor’s age and his risk appetite to suit his overall financial planning and help him in realizing his investment objectives.
Mutual funds as a preferred investment vehicle for financial planning have gained ground pretty fast. The paradigm shift in Indian psyche from viewing mutual funds as pure returns instruments to products which can blend with their individual investment style is amazing, and is a tribute to the superior product innovation and tireless efforts of the industry as a whole.
Coming back to the subject of asset allocation, a major question which an investor faces after he has zeroed in on the amount of equity exposure, is the allocation between Large, Mid and Small cap funds.
There are a total of 168 equity-oriented schemes in the country now and approximately twenty schemes which are either dedicated to investing in midcap or large cap stocks or have a flexi/multi cap mandate. The chief reason behind the AMCs launching so many market cap-based schemes is the realization of the fact that these schemes are now looked upon as a separate category, and as the world of investing in India gets more sophisticated, these schemes will realize even more attention.
If we look at the performance of the entire equity-oriented schemes in the last one year period a midcap scheme – Sundaram Select Midcap is dominating the rankings, in an era when the general perception is that large caps have outperformed the midcap in the recent times. For example, Sensex returns for the last one year period is 46.2% and in the same time, BSE Midcap has appreciated by only 19.07%. Even in the long run, Reliance Growth which is a midcap oriented scheme is dominating the ranking in the five-year return category.
Large cap stocks typically signify stability of returns and less volatility as there is a clear earnings visibility, strong business model and long term performance record. For investors in these bluechip stocks there are plenty of advantages like liquidity and ready availability of company’s financial and other related information which makes it a little easier to track the company, these stocks generally have a large number of analysts tracking them; therefore any downward deviation comes with a lot of advance warnings, giving investors the requisite time to liquidate their holdings. Comparatively, Midcaps are less liquid and more volatile but they are still favoured by the investors, because they compensate the above handicaps by offering higher returns.
In Emerging markets and specifically in countries like India, where the markets are just coming of age, there are plenty of opportunities in the Midcap space, which is due to the fact that a booming economy gives birth to and sustains new ideas and businesses all around, and companies with the right mix of business model and people have the potential to become, as they say, large cap of tomorrow.
India is home to some of the finest technology, has become an outsourcing hub on the back of skilled and cheap labour, its management quality is fast being recognized as world class, and globalization which was initially looked upon as a threat has now been converted into an opportunity, the above factors combined with the favourable demographics of Indian population, political stability has lead to an environment which is very conducive for trade and business to flourish.
Presently, Midcaps find a place in the overall portfolio of the investors “just to spice up the returns” and even for the most aggressive of the fund investors, it may mean a 10-15% higher allocation than normal. Not surprisingly, the combined fund size of the capitalisation-oriented funds is only around 20% of the total corpus managed by equity diversified schemes.
In view of the above arguments, investors – even the most conservative of the lot, who have decided to allocate a certain portion of his hard earned money into equities, must not kill his portfolio by allocating a larger share of the pie to large cap stocks than is necessarily required and must get invested in the Indian midcap space, where the growth rate is not just phenomenal but looks sustainable as well.

5 common mistakes in a typical MF portfolio

Pick up any mutual fund portfolio of an active investor and you will usually find it beset with typical problems. These can affect the overall performance. If we can understand, identify and rectify these common blunders, we can make much better returns out of our money.
A bloated Portfolio
Many people have the habit of collecting funds. Over time, therefore, you will find such portfolios having 40-50 funds. Diversification is good, but over-diversification is not.
Firstly, a large portfolio would mean that some funds in the portfolio will always be below-average, thus dragging down your total returns. Secondly, even with all the support of the computers and specialized websites, it is not possible to effectively manage a large portfolio. This again is going to impact the performance on the whole.
One should, therefore, have a limited but power-packed portfolio. The idea is to extract maximum punch with minimum cost and effort.
Chasing the Top Performers
There is too much focus on the performance and that too usually the recent one say over 3 months to 1 year. That’s why you always find this fascination among people for fund rankings.
Of course, performance matters! But making performance (and that too short-term) as the sole selection criteria can prove counter productive.
Historical evidence shows that no fund can always remain the top performer. It also shows that a fund, which has been consistently amongst the top quartile say over 3-5 years, will usually continue with its’ good performance. Similarly, a consistently poor performing fund usually finds it difficult to make it to the top.
Besides this the markets, as we all know, are highly sentiment-based. Therefore, more often than not, you will find some theme or the other being market fancy. Today it’s Infrastructure. Yesterday it was Mid-caps or Technology. Before that FMCG or Auto or Sugar! Thus at any give time you will find that most of the top performers belong to the same category.
So if you chase top performers you will end with similar schemes in your portfolio. In the process, the portfolio becomes concentrated, defeating the very idea of using MFs to diversify one’s investment.
Your focus should not only be the past performance but also reputation & management of the AMC, fund’s investing style & focus, asset size, etc., besides of course, other key factors such as your investment horizon, risk appetite and other funds in your portfolio.
Mismatched and Unbalanced
It is but natural that the money you need in the short term should be in debt, while only the long term money should be in equity. Liquidity apart, your asset allocation between debt and equity should be in line with your risk appetite.
Some people of course do not do so. Some others start in planned manner. But, as equity and debt follow different paths, over time the portfolio will become mismatched and unbalanced.
As such you may either be over-exposed to equity thus increasing risk; or under-exposed thus losing out on the benefits of equity.
Or a liquidity mismatch may happen between the investment and your need. For example equity markets may be down when you need money, thus forcing you to sell at a loss.
Thus your portfolio needs timely review and correction in tune with your risk appetite & liquidity needs.
Infested with NFOs
Thousands of pages have been devoted to pointing out the myth of NAV. Yet the logic that NAV has absolutely no bearing on the future returns, simply does not register with a common investor.
Hence one can see thousands of crores continuing to flow into NFOs, while the existing funds get practically nothing. In fact, it’s the opposite. People switch out of existing schemes to invest in NFOs under the false impression that Rs.10 NAV fund is cheaper.
As such a typical portfolio would be infested with NFOs. Higher costs in NFOs vis-à-vis existing funds will eat into the returns. Also as the so-called low NAV is why you invested in the NFO, it is quite likely that the fund’s style and focus does not fit with your needs. This also is going to hamper your returns.
Too Much Churning
Call it impatience or a false sense of being proactive or the instant-culture - we simply cannot wait and watch our portfolio grow. We always feel that we need to do something regularly.
Therefore, as soon as a fund shows good appreciation, we are quick to book profits. Or if a fund does not move for some time, we are equally prompt to dump it. This, for one, is adding to the costs in terms of capital gains taxes, entry loads, exit loads, STT, etc. But more importantly, we may be getting out too soon and thus missing out on future performance.
For example, I know investors who want to exit from some funds whose focus is on smaller or mid-sized companies. Now these are the funds, which usually will take time to show returns. It’s quite logical. A Bharti or a Suzlon or an Infosys did not become big in one day. Similarly, who knows how many such future stars are there in these funds? If we wait for 3-5 years, many such budding companies will blossom into beautiful flowers and give us super-normal returns. The question is – are we willing to wait for it?
Building and maintaining a well-diversified and balanced portfolio is no rocket science. All it needs is common sense and discipline to act prudently, promptly and purposefully.

RATIO ANALYSIS

RATIO ANALYSIS
Mere statistics/data presented in the different financial statements do not reveal the true picture of a financial position of a firm. Properly analyzed and interpreted financial statements can provide valuable insights into a firm’s performance. To extract the information from the financial statements, a number of tools are used to analyse such statements. The most popular tool is the Ratio Analysis. Financial ratios can be broadly classified into three groups: (I) Liquidity ratios, (II) Leverage/Capital structure ratio, and (III) Profitability ratios.
(I) Liquidity ratios:
Liquidity refers to the ability of a firm to meet its financial obligations in the short-term which is less than a year. Certain ratios, which indicate the liquidity of a firm, are (i) Current Ratio, (ii) Acid Test Ratio, (iii) Turnover Ratios. It is based upon the relationship between current assets and current liabilities.
(i) Current ratio = Current Assets/ Current Liabilities
The current ratio measures the ability of the firm to meet its current liabilities from the current assets. Higher the current ratio, greater the short-term solvency (i.e. larger is the amount of rupees available per rupee of liability).
(ii) Acid-test Ratio = Quick Assets/ Current Liabilities
Quick assets are defined as current assets excluding inventories and prepaid expenses. The acid-test ratio is a measurement of firm’s ability to convert its current assets quickly into cash in order to meet its current liabilities. Generally speaking 1:1 ratio is considered to be satisfactory.
(iii) Turnover Ratios:
Turnover ratios measure how quickly certain current assets are converted into cash or how efficiently the assets are employed by a firm. The important turnover ratios are: Inventory Turnover Ratio, Debtors Turnover Ratio, Average Collection
Period, Fixed Assets Turnover and Total Assets Turnover
Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
Where, the cost of goods sold means sales minus gross profit. ‘Average Inventory’ refers to simple average of opening and closing inventory. The inventory turnover ratio tells the efficiency of inventory management. Higher the ratio, more the efficient of inventory management.
Debtors’ Turnover Ratio = Net Credit Sales / Average Accounts Receivable (Debtors)
The ratio shows how many times accounts receivable (debtors) turn over during the year. If the figure for net credit sales is not available, then net sales figure is to be used. Higher the debtors turnover, the greater the efficiency of credit management.
Average Collection Period = Average Debtors / Average Daily Credit Sales
Average Debtors
Average Collection Period represents the number of days’ worth credit sales that is locked in debtors (accounts receivable).
Average Collection Period = 365 Days / Debtors Turnover
Fixed Assets turnover ratio measures sales per rupee of investment in fixed assets. In other words, how efficiently fixed assets are employed. Higher ratio is preferred. It is calculated as follows:
Fixed Assets turnover ratio = Net. Sales / Net Fixed Assets
Total Assets turnover ratio measures how efficiently all types of assets are employed.
Total Assets turnover ratio = Net Sales / Average Total Assets
(II) Leverage/Capital structure Ratios:
Long term financial strength or soundness of a firm is measured in terms of its ability to pay interest regularly or repay principal on due dates or at the time of maturity. Such long term solvency of a firm can be judged by using leverage or capital structure ratios. Broadly there are two sets of ratios: First, the ratios based on the relationship between borrowed funds and owner’s capital which are computed from the balance sheet. Some such ratios are: Debt to Equity and Debt to Asset ratios. The second set of ratios which are calculated from Profit and Loss Account are: The interest coverage ratio and debt service coverage ratio are coverage ratio to leverage risk.
(i) Debt-Equity ratio reflects relative contributions of creditors and owners to
finance the business.
Debt-Equity ratio = Total Debt / Total Equity
The desirable/ideal proportion of the two components (high or low ratio) varies from industry to industry.
(ii) Debt-Asset Ratio: Total debt comprises of long term debt plus current liabilities. The total assets comprise of permanent capital plus current liabilities.
Debt-Asset Ratio = Total Debt / Total Assets
The second set or the coverage ratios measure the relationship between proceeds from the operations of the firm and the claims of outsiders.
(iii) Interest Coverage ratio = Earnings Before Interest and Taxes /Interest
Higher the interest coverage ratio better is the firm’s ability to meet its interest burden. The lenders use this ratio to assess debt servicing capacity of a firm.
(iv) Debt Service Coverage Ratio (DSCR) is a more comprehensive and apt to compute debt service capacity of a firm. Financial institutions calculate the average DSCR for the period during which the term loan for the project is repayable. The Debt Service Coverage Ratio is defined as follows:
DSCR - Profit after tax Depreciation Other Non-cash Expenditure Interest on term loan / Interest on Term loan Repayment of term loan
(III) Profitability ratios:
Profitability and operating/management efficiency of a firm is judged mainly by the following profitability ratios:
(i) Gross Profit Ratio (%) = Gross Profit / Net Sales * 100
(ii) Net Profit Ratio (%) = Net Profit / Net Sales * 100
Some of the profitability ratios related to investments are:
(iii) Return on Total Assets = Profit Before Interest And Tax / (Fixed Assets Current Assets)
(iv) Return on Capital Employed = Net Profit After Tax / Total Capital Employed (Here, Total Capital Employed = Total Fixed Assets + Current Assets - Current Liabilities)
(v) Return on Shareholders’ Equity = Net profit After-Tax / Average Total Shareholders Equity or Net Worth
(Net worth includes Shareholders’ equity capital plus reserves and surplus) A common (equity) shareholder has only a residual claim on profits and assets of a firm, i.e., only after claims of creditors and preference shareholders are fully met, the equity shareholders receive a distribution of profits or assets on liquidation. A measure of his well being is reflected by return on equity.
There are several other measures to calculate return on shareholders’ equity of which the following are the stock market related ratios:
(i) Earnings Per Share (EPS): EPS measures the profit available to the equity shareholders per share, that is, the amount that they can get on every share held. It is calculated by dividing the profits available to the shareholders by number of outstanding shares. The profits available to the ordinary shareholders are arrived at as net profits after taxes minus preference dividend. It indicates the value of equity in the market.
EPS = Net profit AvailableToThe Shareholder / Number of Ordinary Shares Outstanding
(ii) Price-earnings ratios = P/E Ratio = Market Pr ice per Share / EPS
Abbreviations:NSE- National Stock Exchange of India Ltd.SEBI - Securities Exchange Board of IndiaNCFM - NSE’s Certification in Financial MarketsNSDL - National Securities Depository LimitedCSDL - Central Securities Depository LimitedNCDEX - National Commodity and Derivatives Exchange Ltd.NSCCL - National Securities Clearing Corporation Ltd.FMC – Forward Markets CommissionNYSE- New York Stock ExchangeAMEX - American Stock ExchangeOTC- Over-the-Counter MarketLM – Lead ManagerIPO- Initial Public OfferDP - Depository ParticipantDRF - Demat Request FormRRF - Remat Request FormNAV – Net Asset ValueEPS – Earnings Per ShareDSCR - Debt Service Coverage RatioS&P – Standard & PoorIISL - India Index Services & Products LtdCRISIL- Credit Rating Information Services of India LimitedCARE - Credit Analysis & Research LimitedICRA - Investment Information and Credit Rating Agency of IndiaIGC – Investor Grievance CellIPF – Investor Protection FundSCRA - Securities Contract (Regulation) ActSCRR – Securities Contract (Regulation) Rules

Is it right to compare only the returns of the fund with the benchmark?

No. as we have seen earlier, returns have to be studied along with the risk. This means, a fund could have earned higher return than the benchmark. But such higher return may be accompanied by higher risk. Therefore, we have to compare funds with the benchmarks, on a risk-adjusted basis. In order to do this, we compute the return and risk for both the fund and the benchmark, and find out what is the return per unit of risk, earned by each of them. For example, over the same period of a1 year, the risk and return are as follows:
Benchmark:
Return: 12%
Risk (Standard deviation) = 9%
Fund:
Return: 16%
Risk: 11%
We find that the fund has outperformed the be4nchmark in terms of the return that it has earned. However, we also notice that the return is accompanied by a higher level of risk. We can then compute return per unit of risk as follow:
Benchmark: 12/9
Return per unit of risk: 12/9 = 1.33
Fund 16/11
Return per unit of risk: 16/11 = 1.45
We find that the return per unit of risk for the fund is higher. This means that on a risk-adjusted basis, the fund has performed better than the market.

What is the Treynor ratio?

In the example of Sharp ratio, we measures return per unit of standard deviation. Instead if we measured return per unit of beta, we have the Treynor measure of performance. Treynor measure uses the market risk to rank funds, while Sharpe measure uses total return to rank funds.

What is the Sharpe Ratio?

William Sharpe created a metric for fund performance, which enables the ranking of funds on a risk-adjusted basis. This measure is based on the comparison of “excess return” per unit of risk, risk being measure4d by standard deviation. Excess return is defined as the actual return of the fund less the risk free rate. The return on the 90-day treasury bill of the government is taken as the risk-free reat.using the figures as in the example above, and assuming a risk free of 7%. We will be able to compute the Sharpe ratio as follows:
Benchmark:
(12 – 7)/9
0.55

Mutual fund:
(16 – 7) 11
0.75
Since the fund delivering a superior return compared to the benchmark, it is ranked as an out-performer.

Benefits of Investing in Mutual Funds

Mutual Funds provide the services of experienced and skilled professionals, backed by a dedicated investment research team that analyses the performance and prospects of companies and selects suitable investments to achieve the objectives of the scheme.

• Diversification
  

Mutual Funds invest in a number of companies across a broad cross-section of industries and sectors. This diversification reduces the risk because seldom do all stocks decline at the same time and in the same proportion. You achieve this diversification through a Mutual Fund with far less money than you can do on your own.

• Convenient Administration
  

Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such as bad deliveries, delayed payments and follow up with brokers and companies. Mutual Funds save your time and make investing easy and convenient.

• Return Potential
  

Over a medium to long-term, Mutual Funds have the potential to provide a higher return as they invest in a diversified basket of selected securities.

• Low Costs
  

Mutual Funds are a relatively less expensive way to invest compared to directly investing in the capital markets because the benefits of scale in brokerage, custodial and other fees translate into lower costs for investor.

• Liquidity
  

In open-end schemes, the investor gets the money back promptly at net asset value related prices from the Mutual Fund. In closed-end schemes, the units can be sold on a stock exchange at the prevailing market price or the investor can avail of the facility of direct repurchase at NAV related prices by the Mutual Fund.

• Transparency
  

You get regular information on the value of your investment in addition to disclosure on the specific investments made by your scheme, the proportion invested in each class of assets and the fund manager's investment strategy and outlook.

• Flexibility
  

Through features such as regular investment plans, regular withdrawal plans and dividend reinvestment plans, you can systematically invest or withdraw funds according to your needs and convenience.

• Affordability
  

Investors individually may lack sufficient funds to invest in high-grade stocks. A mutual fund because of its large corpus allows even a small investor to take the benefit of its investment strategy.

• Choice of Schemes
  

Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.

• Well Regulated
  

All Mutual Funds are registered with SEBI and they function within the provisions of strict regulations designed to protect the interests of investors. The operations of Mutual Funds are regularly monitored by SEBI.

Rights of a Mutual Fund Unit holder

A unit holder in a Mutual Fund scheme governed by the SEBI (Mutual Funds) Regulations, is entitled to:

• Receive unit certificates or statements of accounts confirming the title within 6 weeks from the date of closure of the subscription or within 6 weeks from the date of request for a unit certificate is received by the Mutual Fund.
  

• Receive information about the investment policies, investment objectives, financial position and general affairs of the scheme.
  

• Recive dividend within 42 days of their declaration and receive the redemption or repurchase proceeds within 10 days from the date of redemption or repurchase.
  

• Vote in accordance with the Regulations to:-
  

1. Approve or disapprove any change in the fundamental investment policies of the scheme, which are likely to modify the scheme or affect the interest of the unit holder. The dissenting unit holder has a right to redeem the investment.
2. Change the Asset Management Company.
3. Wind up the schemes.

• Inspect the documents of the Mutual Funds specified in the scheme's offer document.