5 reasons to say goodbye to your mutual fund

Advice on when you must invest in a mutual fund is available dime a dozen. But it takes a certain degree of expertise and proficiency to redeem your mutual fund investment at the right time. Since this is the dilemma that many investors grapple with, we have outlined the five most critical reasons for redeeming your mutual fund investment.
At the outset, it is important to note that the ‘right time to redeem’ does not mean that there is a timing element involved over here. Rather the right time to redeem means when the time is up on your mutual fund investment and it is no longer prudent to hold on to it.
While there may be several occasions to redeem your mutual fund investment, we have narrowed it down to the five most pervasive reasons.
1. When you have achieved your investment objective

A mutual fund investment is made with the intent of achieving a specific investment objective. Some of these investment objectives include, among others, planning for child’s education, planning for retirement, saving for a house/car. If you haven’t achieved your investment goal, there is no reason to redeem your mutual fund (assuming, of course, that it is performing on expected lines). When you have achieved or are close to achieving your investment objective, you should stagger your mutual fund redemptions so that you are completely liquid (i.e. in cash) when it is time to realise the investment objective (i.e. pay your child’s college fees or buy the house).
2. When your mutual fund revises its mandate

Mutual funds have an investment mandate. The mandate sets the ‘guidelines’ for fund managers about how they should manage their funds. Since the mandate is formally stated, investors know about this beforehand and invest in the fund if they believe that it will enable them to achieve their investment goals. Mutual funds are known to revise their mandates if they believe that the existing mandate does not serve the mutual fund’s interests anymore. For instance, in the recent past a leading private sector fund house converted its index fund into an actively managed fund.
From your perspective, you will have to evaluate whether the mutual fund with a revised mandate merits a place in your portfolio. If it doesn’t, then its time to redeem it. In the event of a revision in the mandate, regulations require that investors be given the option to redeem the mutual fund without an exit load, so you can redeem the investment without worrying about the exit load (if any).
3. When the star fund manager quits

A category of investors track the fund managers more than they track the fund house and its schemes. These investors invest in a mutual fund relying mainly on the star fund manager’s investment prowess and skills. While the domestic mutual fund industry does not have many star fund managers, the few who can be considered stars have a committed fan base. At Personalfn, we discourage investors from falling prey to this trend; investing in process-driven fund houses is a more reliable way of investing than betting on star fund managers. Nonetheless, if you have invested in a fund based on the star fund manager appeal, then your investment decisions should correspond with the fund manager’s migration (across fund houses). If he quits the present fund house, then there is a case for you to redeem your investments because it is unlikely that the rest of the fund management team will be able to replicate the performance in the star fund manager’s absence.
4. When your mutual fund is not performing

We often hear of investors complaining about the below par performance of their mutual fund investments. Our advice to them is to be patient and evaluate their investments over an appropriate time frame and with the right perspective. For instance, equity funds should ideally be evaluated over the long-term (at least 3 years). Taking a decision in haste without understanding the investment proposition of the mutual fund could prove counterproductive and expensive (if there is an exit load). However, all points considered, if you and your financial planner are convinced that your mutual fund is a dud, then its best that you redeem it.
5. When you have invested in a thematic fund

We recommend that investors avoid thematic funds, the reality is that thematic funds are a feature in the portfolios of many investors. Some of these investors are well-informed and have a view on the underlying theme/sector. However, for a vast majority of investors, thematic funds are an unknown entity simply because they do not have the necessary skills and resources to track the underlying sector/theme. They only got invested in them either because everyone they knew was investing in them or their agent made a compelling marketing pitch for the fund. Either ways they are invested in the fund and want to know when they can redeem. If you are one of them, then the right time to redeem your thematic fund is when the stock markets give you the opportunity. Since a rising tide lifts all boats, it is likely that the performance of the underlying theme/sector will improve in a stock market rally. That is an opportunity for you to sell that thematic/sector fund that you always wanted to redeem but could not because of unsuitable market conditions.
Another mutual fund investment that you can redeem in a stock market rally is the dud that you invested based on a ‘hot tip’ and have regretted ever since. These funds are like deadwood in your portfolio, which you should never have invested in, in the first place. But having invested in them, make the most of a stock market rally to either redeem at a profit or to minimise losses.

Dont stop your SIP

Mr . Mitesh started to invest through SIP in two proven equity diversified funds last June. He started of with a aim to keep investing for five years. ( a very good long term plan indeed). He was an happy man till Jan'08, as he was seeing his funds growing. Now after the downward run in the stock market, he is thinking whether he should discontinue his SIP. He is not happy because his portfolio has moved into negative territory.
Mr. Mitesh should actually be happy for the fall now because he is able to get more units at these lower prices. Instead of stopping- a better strategy would be increase the SIP , if possible. The amount you SIP in equity MF during bearish phases would yield more returns when the market turns around.
Don't stop your SIP , if you are baffled by the downturn!!!

Comment on investing

Recently there were a lot of comments from other blogs. They all talked about how the investors (??) have lost money lost in the market in the recent past.
These were a sort of advertising comments having links to the respective blogs.The comments were not published not because of this reason, but all along they did talk about traders as investors.
If one does trading and calls it an investing, its like calling an engineer ..a doctor...!!. If someone is buying and selling stocks just for a price increase/ decrease that he expects in a short term ( period of one day to a couple of years), he is a trader.
The best way to create wealth is to stay invested in the market for a longer time horizon. Mutuals funds are the best way as most of us are not experts in picking up stocks.
1) Never get swayed by any articles/comments which calls trading as investing.
2) Believe in long term investing in equity through SIP route in proven diversified MF.

Shying away from Mutual Fund New Fund Offers

After some trouble days in the stock markets, investors seems to have lost confidence a bit and trying to stay away from New Fund Offers from Mutual Funds. This is because of the fact that almost all recently launched NFOs are in the negative NAV. Of course, even the senior fund schemes too are tasting trouble times after the recent correction in both the domestic and the global markets. With the US economy in a possible recession, crude oil touching newer highs every day, just few months of Indian Elections, the stock markets, it seems, wont go in for a huge rallies at least for some time now. Needless to stay, even the most cautious Mutual Fund investor too is trying to stay cautious and this is appearing from the inflow of the Mutual Fund NFOs. Are the good days for the NFOs over for some time now? or aren’t the marketing campaigns of the mutual fund houses not looking that savvy? Let’s wait and see..

Ansal Properties’ arm gets investment of $ 55 million from HDFC AMC

HDFC Asset Management Co (HDFC AMC) has informed that it has made an investment worth US$ 55 million in Ansal Hi-Tech Townships, a subsidiary of the New Delhi-based property developer, Ansal Properties & Infrastructure (API), for a minority stake in the project.
Ansal Hi-Tech Townships, a special purpose vehicle (SPV), is building a 2,500- acre modern township with a developable area of 75 million sq ft in Greater Noida in the National Capital Region.
Presently, the project is in the land acquisition stage and is expected to be completed in the next 6-7 years. Ansal is expecting a turnover of Rs 26,000 crore from the project and expects to invest over Rs 12,000 crore in the project.

RBI may step in to contain inflation rate

Indian inflation shot above 11 per cent in early June to a 13-yearhigh following a rise in state-set fuel prices, rattling markets andprompting the finance minister to warn of stronger anti-inflationmeasures ahead.
Inflation is on the rise globally and has also reached double digitsin other countries, including Indonesia, Vietnam, Sri Lanka andPakistan as oil, food and other commodity prices soar.
What experts say about inflation Inflation rate surges to 13-yr highat 11.05%
India government bond yields jumped to their highest in nearly sevenyears after Friday's data and the finance minister's warning, whileshares fell to their lowest levels in 2008 on concern that interestrates will move up.

Traders said the central bank, which raised rates just last week,stepped in to support the weakening rupee after the release of India'swholesale price index (WPI), the country's most widely watchedinflation measure.
The index showed annual inflation jumped to 11.05 per cent in the 12months to June 7, its hottest pace since May 1995 and much higher thanforecasts for 9.82 per cent.
It also marked a big jump from 8.75 per cent in the week-earlierdata.
"The number is quite intimidating and it will require some responsefrom the fiscal authorities and the Reserve Bank of India," saidAbheek Barua, chief economist at HDFC Bank.
"So I wouldn't be surprised if there is another monetary measure onits way in the next fortnight or so, and this is likely to be a reporate hike of about 25 basis points."
The double-digit inflation figure -- inflamed by a fuel price hike ofabout 10 per cent early this month when India cut subsidies, will alsoheap more pressure on a ruling coalition, which faces state andnational elections in coming months.
The coalition is already struggling to unify behind a controversialnuclear energy deal with the United States.
The central bank surprised financial markets last week by raisinginterest rates, its first increase in more than a year. It boosted itsrepo rate by 25 basis points to 8 per cent.
Economists said with inflation running significantly higher thananticipated, another increase was likely.
Reflecting such expectations, the benchmark 10-year government bondyield jumped 10 basis points to 8.64 per cent, while the benchmarkstock index was down just over 3 per cent in mid-afternoon.
Political fallout
Political worries have already rattled markets this week, fuellinglosses on Wednesday and Thursday, while surging food bills havecontributed to a string of defeats for the ruling Congress party atstate elections over the last few months.
Now the coalition's communist allies have renewed threats to withdrawsupport for the government over the nuclear deal. The government hasjust a week or so to decide if it wants to risk early polls -- atwhich rising prices will be a key battleground -- by going ahead withthe agreement.
Earlier this month, India joined a stable of Asian countries no longerable to afford big fuel subsidies in the face of rising prices,sparking street protests and calls for industrial strikes.
Where to next?
India's inflation rate was last this high in the week of May 6, 1995,when it stood at 11.11 per cent. In the latest figures, inflation forthe week of April 12 was revised up to 7.95 per cent from 7.33 percent.
Energy costs account for 14.2 per cent of the WPI index and Friday'sdata showed the index for fuel, power, light and lubricants rose 7.8per cent in the week of the price rise.
Finance Minister Palaniappan Chidambaram promised action.

"This is indeed a very difficult time and we will have to takestronger measures both on the demand side and monetary side," he toldreporters.
Food prices have been a source of concern for the Congress party-ledcoalition as these impact the poor the hardest, but the food articlesindex fell 1.1 per cent in the June 7 data.
Nonetheless, Indranil Pan, chief economist at Kotak Mahindra Bank,said inflation could go towards 12 per cent. "The next 3 to 5 monthsare going to be very crucial."
Robert Prior-Wandesforde, economist at HSBC in Singapore, saw both therepo rate and the cash reserve ratio (CRR), used by the central bankto drain surplus cash from the money market, rising by 50 and 75 basispoints respectively by year-end.

Contrarian Investing

Contrarian investment strategy can be defined as acting in a manner contrary to the conventional stock market wisdom at any particular time. It is a preference for fundamental analysis in picking individual stocks, while ignoring the overall trends in the market.
George Soros is among the most famous contrarian investors of our time. Along with Jim Rogers, he created the Quantum Fund based on a contrarian philosophy. The fund went on to give returns of about 4000% over a period of 30 years. The most famous contrarian move that George Soros made was going short on the British pound and earning US$1 billion in a single day in 1992. Rogers's famous contrarian bets were getting into the equity market in the early 1980s when most of investors avoided them and into the commodity markets in 1990s at the peak of the dot com boom.
In the conventional model, investors look favorably upon stocks that are rising in price and shy away from those stocks that are falling. This approach causes investors to overlook quality companies with prices that have fallen because of events or perceptions that are temporary in nature. Contrarians behave in a manner opposite to the majority and buy when stocks are falling in price. The philosophy behind it is that out of favor companies involve less risk, since purchase are usually made at the low end of valuation cycles.
Contrarian investment encompasses several themes such as picking up neglected stocks with strong asset values, under-owned sectors with high growth prospects, companies with latent earnings potential etc.
How to apply contrarian investment strategy
By focusing on stock selection: An investor should focus on fundamental analysis of a company rather than following the market trends. He should look for value hidden in the company and try to pick them up before others realise the potential locked in the company.
By changing the diversification strategy: A contrarian investor should reduce his over diversification and commit a large amount to few stocks where the odds weigh heavily in his favor.
By accepting market volatility: A contrarian needs to accept the volatility of equity markets. By maintaining plenty of cash through bull and bear markets, he can deploy funds during price drops.
By concentrating over absolute return than relative returns: A contrarian investor should not worry about index. An investor should plan how much cash he needs at the end of his investment time horizon and should try to perform in line with that strategy. By doing so, the investor will be more focused on his individual portfolio instead of worrying about the index performance.
A word of caution Contrary thinking is emotionally demanding. It requires courage to stand alone when there is a great deal of pressure to follow the majority. The key to contrarian investing is making independent decisions and believing in them. And finally, it requires patience.

ING Latin America Equity Fund

Theme:
Open-Ended fund of fund scheme that would primarily invest in ING Latin America Investment Fund. Generally FoF schemes returns are average and secondly when Indian secondary market has declined so much then why would I go all the way to Latin America?

Issue Open: 19-Jun-08
Issue Close: 10-Jul-08

Entry Load: 2.25%
Exit Load: 1% within 6 months

Min Amount: INR 5000

The Investment Game Plan

A little insight into how you should invest.
1. Figure out where you are
The first thing to do is to prepare a personal balance sheet of sorts. Describe your assets - which is what you would call anything you own that is of real value. That means a house is an asset, money in the bank is an asset and stocks/mutual funds are assets. Your TV is not an asset. Your car should not be considered an asset (unless it's less than 3 years old, in which case consider the value declared to insurance).
So add all the values up and you get a list of assets, like so: Assets
Cash in bank: Rs. 50,000
Fixed Deposits: Rs. 200,000
Stocks: Rs. 150,000
Mutual Funds: Rs. 70,000
Gold: Rs. 20,000
Current value of house: Rs. 25,00,000
EPF: Rs. 8,500
TOTAL: Rs. 29,98,500
Underdeclare values of stocks, gold etc. by at least 25% since these are variable commodities.
Now figure out your liabilities. Meaning, how much do you owe other people? Liabilities
Oustanding housing loan: Rs. 20,00,000
Personal Loan: Rs. 100,000
TOTAL: Rs. 21,00,000
Don't include things you intend to pay back immediately, like credit card bills, or phone bills etc.
Subtract your LIABILITIES from your ASSETS to find out your NETWORTH: meaning, how much are you worth today. In the example above, NETWORTH = Rs. 8,98,500.
2. What's your "cash flow"?
Now find out how much you spend. Include all standard expenses (in fact, keep a record of this for about six months, and find out the real average) and also amortize your annual payments (like insurance) into the monthly amount.
Add the total income you earn (minus taxes and any other deductions) Expenditure:
Apartment Maintenance: Rs. 2,000
Phone bills: Rs. 3,000
Petrol: Rs. 2,500
Credit Cards: Rs. 5,000
Internet connection: Rs. 1,000
Interest payment on housing loan: Rs. 11,000
Insurance Amortised: Rs. 3,000
House taxes etc. amortised: Rs. 1,000
Cash expenses: Rs. 8,000
Total: Rs. 36,500
Income:
Salary: Rs. 45,000
Dividend: Rs. 2,500
Total : Rs. 47,000
Cash Flow: Rs. 10,500 per month.
If your cash flow is not positive, i.e. Expenditure is greater than Income, STOP RIGHT HERE. Go back to the drawing table and figure out how to reduce your expenses or increase your income - there is no other way around. Investments are only for cash flow positive people!
3. What and when do you need money? And How Much?

Find out any longer term requirements to fund a large one time requirement. The way to do this is: Ongoing: Liabilities, Rs. 21,00,000
After 5 years: School Donation for Child, Rs. 100,000
After 10 years: House repairs and upgrades, Rs. 10,00,000
After 15 years: College fees for Child, Rs. 10,00,000
After 20 years: Marriage costs, Rs. 10,00,000
After 25 years: Potential medical expenses, Rs. 10,00,000
After 30 years: Retirement, Need to have corpus of Rs. 30,00,000
Discount all these amounts by inflation of 6% a year.
4. The Investment Plan Recipe
Now's the time to act. You need to increase your network every single year to reach your goals. Your immediate goals for the next ten years are to build up a corpus for your child's education, and to clear out your loans. Always pay out your first house loan - that is the house you live in, so you must attempt to make that debt free. Further real estate can be financed by loans etc.
To finance the above goals, you have a sum of Rs. 10,500 a month, of which you invest Rs. 3,000 per month (say) in the principal of your housing loan. The remaining Rs. 7,500 must be invested.
What do you need? Here's an illustration:

The idea is that:
1) You get 20% on the first 10 years of investment and you increase the quantum of investment per month every five years.
2) After ten years you move money to less risky investments and get lesser return, and this goes on.
3) Every five years you withdraw the amount of money needed to finance your needs.
4) After thirty years you are left with about 3 crores, which will most likely be just enough for your current expenditure for a while.
This is an investment goal. You can see where your goals like and try to achieve them. Update your networth statement once a month, and estimate your free cash flows every three months. That way you are aware of how close you are to your immediate goals and whether you are making it or not.

Are you saving or investing?

There are two kinds of people, really - those who have extra money left over at the end of the month, and those who don't.
I'm assuming you're one of the former, otherwise you shouldn't even be here. So what do you do with what's left over?
1) Do you put it in a bank account, and spend it whenever you have a big purchase like an LCD TV, an iPod, a camera?

2) Do you make a fixed deposit every month (or once you have a large sum)?

3) Do you buy mutual funds, shares, or other investments?
1) is a Saving. 3) is an Investment. 2) is "saving" according to me (but others will think of it as an investment) There's a difference.
An Investment is where you can grow your money significantly above inflation, after tax is applied. Remember that quoted inflation is around 5% but for real terms, it's around 6.5% a year. That means your money needs to grow ABOVE That for any real returns. An investment MUST carry some amount of risk; assured returns are usually negative post-tax and post-inflation.
Savings are everything else. Money in the bank, in a fixed deposit, hidden in your pillow etc. Even bonds and debt mutual funds, in my opinion, are "savings" - they hardly return more than inflation post tax.
You might think "No! A fixed deposit can grow at 8% a year!" Reduce tax on that amount at 30%, you'll get 5.6% left over. That's still less than inflation of 6.5%.
Shares and equity/balanced mutual fund units are investments. They carry a large amount of risk, but have the potential to grow much more than inflation. Gold and other commodities are investments too, and so is real estate, paintings (art) etc.
Within investments you have two types: cash-flow and value-appreciation. Cash-flow means you get money ever so often; royalties from books, dividends, rent (from real estate) etc. Cash-flow income is usually called "passive income"; meaning you don't have to work for it.
Value appreciation is growth in the intrinsic value of what you buy. (Note: Cars, iPods etc. are not investments. They lose value from the minute you buy them!)
Most people usually buy for value appreciation, since there are limited cash-flow options available. In India for instance, both dividends and rents are around 3% post-tax, and that's no fun. But there are a few companies that consistently give 10% dividends, and places where you can get upto 7% as rents. You just have to look harder.
Investments are your future. Savings are your present. Straddle the two - keep around 40-60% of your money in investments and the rest in savings. You need your savings to build up your purchases and pay extraordinary bills (like a pregnancy or hospitalisation), but don't forego your investments either.
If you want to ensure a stable future, invest more.

Key check:

1) It should "appreciate" in value (either through cash flow of value appreciation)

2) It should have an element of risk.

3) It should have the ability to grow more than inflation.

The fundamentals of Asset Allocation

Doesn't Asset Allocation (AA) sound sophisticated? It assumes you have an asset to allocate and gives a boost to your ego. It's a smart and sexy word for something as drab and dreary as planning your personal finances. Asset allocation also gives you a feeling that you are holding some aces up in your sleeves. It specially applies to the Financial Planners or Advisors.
But seriously, asset allocation is a useful concept to know. And it's very simple too. Once you get your fundamentals clear about AA, you can use it to your advantage. It is the first step of adding value to your money or putting your money to good use.
Asset allocation is the percentage distribution of your money into equity, debt and liquid instruments. Equity, as you know, gives the highest growth but comes with the highest risk. Debt instruments are more or less guaranteed but give you a lesser return. Liquid money is your money in your savings account.
Let’s start with the thumb rule of AA. Your allocation to debt should be equal to your age. And as you age, the percentage in debt should increase too. In other words, your investments in equity should be (100 - your age).But AA should be much more dynamic than the above thumb rule. I feel that it should depend on your age and your risk appetite. Guys at 20-25 years of age may want to invest everything into equities and I think that is the right strategy.
And before you set off to do some AA for yourself, I would like you to ask the following questions to yourself:
What is your risk appetite? I mean if you are jittery with the slightest tremor in the stock market, you better be away from the stock market. Even though, stocks give the best returns on a longer run.
What are your financial goals? For example, if you believe in frugal approach to life and give a thumbs up to "Simple living, High thinking", you don't need to set very high goals with your money. In the other case, you may have to align the allocation to your goals.
When do you need the money? Is it for the car you want to buy in another 2-3 years? Or is it for the dream house 10 years from now? Ask yourself and then decide your asset allocation.
And if you love ready made formulas, here's some allocation strategies from John Bogle:Older investor in distribution phase: 50% equity; 50% debtYoung investor in distribution phase: 60% equity; 40% debtOlder investor in accumulation phase: 70% equity; 30% debtYoung investor in accumulation phase: 80% equity; 20% debt
The accumulation phase means the period when you have no use for the money and are focussed on building it on. In the distribution phase, you are also using your assets for your goals.
All said and done, AA can contribute to your financial prosperity in a big way. Studies have pointed out that the asset allocation decision is more important than the process of choosing the actual stocks, funds and even market timing. In other words, if you just replace active picks with simple asset allocation decisions, it will work just as well as, if not even better than, professional fund managers.
Do your allocations now.

Seven Deadly Sins of Financial Planning

Financial planning is a critical necessity for each one of us who seeks financial control of our affairs and wishes to create wealth. Then why is it that most of us do not have a Financial Plan or have not even given a thought to it? Why is it that we keep trudging along and feel that all will become right one day? Why is it that we always think of how to earn more but hardly give a thought to what our earned money is earning for us? Most of us have not even thought of having a dual income stream – one from our work and the other from our investments.Whether we accept or not, each day or each time we think about creating wealth we are imprisoned by what I call - the seven deadly sins.
Pride: Caused by excessive belief in one's own abilities, Pride happens because in school we were taught to believe in ourselves. But that belief was with knowledge. This sin is committed when we believe in ourselves and choose to act without adequate knowledge. All we want to have is only some idea of what is the best investment. And believing it to be the best for us, we commit that sin forever under the pretext of “I know how this works.”
Envy: You've just seen someone make a killing. And you think, that is reason enough for you to take the plunge as well! But then what if you have taken the plunge at the wrong time. We all know the old age wisdom, “Do not break your own hut by seeing someone else's palace.” Then why is it that we change our asset allocation and bet on something that has worked for another?
Gluttony: Have you incurred credit card debt? Well...in that case know for sure that you are committing a sin each day. Have you taken a loan for a depreciating asset? Now that’s an example of financial gluttony. But then, if you're able to manage the installments of that depreciating asset from your investment returns you're a smarty.
Lust: Whatever you do you are driven by money only. And if you're prepared to move from one job to another for a 20 per cent rise without considering the credentials of the company and the nature of job, you're far from being smart. What if you've just missed on the stock options there? Besides you could have always had the opportunity to create a niche for yourself no matter how large the organization.
Anger: This is widely seen when you are dealing with an agent to who comes to make a sales call and objects to your knowledge or when your broker did not sell when the markets were falling. In both the cases, you were to take the decision. You recall that with anger and/or arrogance you commanded that nothing be done without your consent. Know that in financial management there are two choices – either you take all decisions yourself or let your advisor take that for you. Of course given that you trust his skills and knowledge.
Greed: I hardly need to say anything here. Most people rush to invest in the stock markets when they touch an all time high. Others think markets will go up forever. Surely you cannot time the market but when the goal is achieved why not sell? After all, that's precisely the reason why you invested in the first place. Now if there is no goal and no plan to manage that goal, it is quite likely that this sin will keep revisiting you from time to time.
Sloth: This is the one that I love to talk about. The bible says, “Whatever we do in life requires effort” so if we wish to ask for tips and then act, it is a sure way to disaster. Either we must take effort to do all the hard work ourselves or take the effort to search for a trusted advisor and outsource our efforts. Finding a trusted, knowledgeable and skilled advisor is not a very easy task to do. Sins that were spoken of centuries ago are still so relevant. Needless to say, it is up to us how much we wish to cleanse

Do the high or low NAV really matter?

Nilanjan Dey writes on the perpetual argument on the low vs high NAVs in this Business Line column. He starts off with saying that waiting for corrections indefinitely may not be a good idea. Do not fret if some of your favourite equity funds have risen so much that their NAVs (net asset values) have reached stratospheric levels. That's the crux of an important message that fund houses try to convey every time you confront them with what is clearly a pet theory for some investors: sky-high NAVs are too unfriendly.
However, high NAVs are actually a matter of perception. They need not necessarily stop an investor from putting in fresh money. Instead, in a manner of speaking, they point to the way in which the funds concerned have done in recent times — a trend that is quite ably reflected in the kind of NAVs they have.
Never in the history of MFs in India was this dilemma more relevant as now. As pundits will no doubt tell you, NAVs of equity funds simply represent the state of the stock market. Lately, the latter has done superbly — mind you, it indeed has in the past few years — and NAVs have scaled new highs, crossing a number of psychological barriers in the process.Waiting for correction?
What could possibly prevent the average investor from entering at this stage, considering the sheer rise in NAVs? Well, the answer is obvious. He is waiting for the market to correct, for the NAVs to come down to what he thinks are more reasonable levels. A very astute decision, you may well think, right?
Not entirely. To put it bluntly, waiting for such corrections indefinitely may not be a good idea after all. Just in case the market goes up yet again, the investor may well lose out considerably by not joining forces. That's a very optimistic view, you will contend. There is the likelihood that sentiments may in fact turn bearish, forcing NAVs to slide. Should you then panic and start selling out? Some of us may be tempted to do just that — not paying heed to the argument that the bearishness may be transient.
Let us at this juncture quickly scan the NAV tables to find out how many funds have sailed to dizzying levels. Here goes: Birla Advantage Fund (Rs 150 or so, in the growth option), Franklin Prima (Rs 240), HDFC Prudence (Rs 135), Reliance Growth (Rs 350) and Sundaram Select Midcap (Rs 110). We have rounded the figures for convenience.The rising story
Of course, this list is not comprehensive and quite a few other funds have NAVs of, say, over Rs 100.
In fact, some of the country's older funds (we will include those with 10-year-plus track records) will easily find a place in this sub-set. And, if the longer-term India story retains its appeal, this sub-set will only grow in size. Fund managers will try to capitalise on the opportunities dished out to them by the market. And, as a result, NAVs will keep soaring.
The short point is, all this hype over high NAVs should not deter you from putting in fresh allocations.
If you are convinced about a fund's performance (and its potential), go ahead and write that cheque you have wanted to for a long time. NAVs, high or low, tell just one side of the story. What do you think?

Why you must NOT pay entry load on mutual funds

The market regulator Securities and Exchange Board of India, SEBI, in January 2008 abolished entry load on Indian equity funds if you're investing directly. However, it is mandatory to pay an entry load of 2.25 percent if you transact through intermediaries, also known as distributors by you and me. The distributors take this charge to service investors.

How is it levied on the investor?

Investor has to be careful and aware of how this charge is levied, since nobody asks you to pay this charge separately. Instead, it is deducted upfront from your investible money right at inception.

Suppose you are investing Rs 100 and the NAV (net asset value) of the scheme that you are buying is Rs 10. This NAV is multiplied by 1.0225 (2.25 percent of Rs 10) to factor in the entry load and operative NAV for you becomes Rs 10.225 (Rs 10 as the actual NAV and Rs 0.225 as the entry load).

This takes the number of units allocated to you to 9.78 and the money invested is Rs 97.8 instead of Rs 100. The remainder Rs 2.2 (100 less 97.8) goes to the distributor and to meet other administrative expenses incurred by the mutual fund company. However, if you invest directly through that mutual fund company's website then the whole Rs 100 is invested and you hold 10 units.

Cascading effect of this cost

While you lose this money upfront, this charge literally multiplies. For example, even on a conservative basis, Indian equities can double in the 5 years. Since 2.25 percent has been deducted upfront and not been invested, what you have lost is 4.5 percent (double of 2.25 percent) from your returns.

Consequently, it is a simple decision that you should invest directly and not pay this significant charge.

New favorable development

Abolition of this load is leading to the emergence of fee-based wealth management advisories in India. Just a fraction of the money that you save through direct investment can be utilised to buy the services of such an advisory.
Rajasthan Royals and the art of creating wealth

They will facilitate your direct transactions in addition to a host of other wealth management services.

Analysis of charges

On an average we are assuming that you are paying a rate of 0.4 percent of the assets under management (AUM) annual fee to your advisor. Since timing of cash outflows is different, we will have to take the time value of money into consideration.

Paying 2.25 percent of upfront commission is equivalent to paying 0.4 per cent of AUM every year for 13 years. In other words, what you are paying for 13 years you lose in one single shot when somebody charges you 2.25 percent upfront.


Additionally, a transaction-based company which has tasted blood by getting an upfront commission of 2.25 percent is likely to turn over your portfolio very soon and many times over, even when not required.
On the contrary, a fee-based advisor wins only when you win and his interests are totally aligned with yours. Even when he reallocates, it is at zero cost to yours and at no advantage to such an advisor and therefore it will be done only when really required.

Conclusion & recommendation

Consequently, my strong recommendation will be to take full advantage of this gift and investor-friendly move from SEBI, save lots of money and bolster your returns.

Value of NAV of a Mutual Fund

A number of people think that the unit price of a mutual fund matters when they purchase; i.e. that a cheaper unit price is better. Why? They say that they will get more units for the same money, and isn't that better? We shatters this myth in his blog.
The "Number of units" does not matter at all. It is all about gain percentages. The best funds have gained some 750% in five years. What does that mean? That means if you bought that fund at Rs. 10 in 2001 its NAV will now be Rs.75 .
If you bought it at Rs. 20, NAV will be Rs. 150. There are lots of such funds whose NAV is greater than 100 or 150 because they have performed very well. What's the NAV?
The total NAV, or "Net Asset Value" is a simple concept - First you get the "Net Assets", which is the sum total of all the assets minus any liabilities of the fund. Meaning, add the current market value of all the shares, minus any open redemption requests and any applicable charges (like Daily fund management fee etc.) and you get the Net Assets. Divide the Net Assets figure by the total number of outstanding units and you get the unit price (called the "NAV Unit Price" or simply, the NAV).
Most web sites and newspapers call the unit price "NAV". It's actually the NAV unit price, so the phrase is confusing. Let me not confuse you any further: I will call the total assets as the "Net Assets" and unit price as the "NAV".
Now you might think, if you have a 10,000 rupees, is it better to buy 1,000 units of one fund quoting at Rs. 10 NAV, or 100 or those quoting at hundred? Frankly it's dependent on how the fund performs. If the second fund grows at 20%, your units are worth Rs. 12,000 at an NAV of Rs. 120. If the first one grows at 10%, your units are worth Rs. 11,000 at Rs. 11 NAV.
What is better? Obviously the second one, but over here the NAVs are still Rs 11 vs. Rs. 120! Lesser number of units is like small change
But what if you have a 1000 Rs. NAV? That's a problem, you think; if you want 2,500 rupees, you have to sell three units! That means you take out more than you want, right? Also what if you have 1200 rupees to invest? You can only buy one unit, right?
Wrong. In Mutual funds you also get "fractional" units. So if you invest Rs. 1000 in HDFC Taxsaver, whose nav is Rs. 149.44, you will get 6.692 units. (Some funds even go to fourth decimal) You can then sell fractional units also, like 1.212 units etc! Growth is important, not unit price.
What you care about is how much your money grows, not the number of units you have. It is just as difficult for a Rs. 10 fund to move to Rs. 12, as it is for a Rs. 50 fund to move to Rs. 60.

Why should we invest in Mutual Funds?

Investing in the equity market directly is exciting and glamorous. You are in the thick of things and are able to take responsibility for yourself. Though the volatility and the information overload makes it a daunting task. The present subprime quagmire makes it even more daunting.

How about investing through Mutual finds? Doesn't it have its own loading and administrative charges and the fund managers making merry on your hard earned money? And can't we see the best performing mutual funds and follow their portfolio? The performance of a scheme is reflected in its net asset value (NAV) which is disclosed on daily basis in case of open-ended schemes and on weekly basis in case of close-ended schemes. NAV of mutual funds are required to be published in newspapers.

Here are some points to ponder:

• We should allocate our time to investment decisions in proportion to our income generation goals.
• Convenience and hassle free investing should be a major factor.
• Fund managers are into it full time. If we able to identify fund managers who have consistently performed over last 3-5 years, nothing like it.
• The fund manager also has the muscle power of crores of Rupees and is able to take entry and exit decisions impartially.
• MFs continuosly churn their portfolio. When MFs buy and sell stocks, they don't have to pay capital gains as you do when you churn.
• We are likely to panic over market crashes. MFs can take advantage of a crash!
• With Systematic Investment plans (SIP), you can start investing with as low as Rs 500 per month.

The NAVs are also available on the web sites of mutual funds. All mutual funds are also required to put their NAVs on the web site of Association of Mutual Funds in India (AMFI) www.amfiindia.com and thus the investors can access NAVs of all mutual funds at one place.

The mutual funds are also required to publish their performance in the form of half-yearly results which also include their returns/yields over a period of time i.e. last six months, 1 year, 3 years, 5 years and since inception of schemes.

Investors can also look into other details like percentage of expenses of total assets as these have an affect on the yield and other useful information in the same half-yearly format. The mutual funds are also required to send annual report or abridged annual report to the unitholders at the end of the year.

Various studies on mutual fund schemes including yields of different schemes are being published by the financial newspapers on a weekly basis.

Apart from these, many research agencies also publish research reports on performance of mutual funds including the ranking of various schemes in terms of their performance. Investors should study these reports and keep themselves informed about the performance of various schemes of different mutual funds.

Investors can compare the performance of their schemes with those of other mutual funds under the same category. They can also compare the performance of equity oriented schemes with the benchmarks like BSE Sensitive Index, S&P CNX Nifty, etc. On the basis of performance of the mutual funds, the investors should decide when to enter or exit from a mutual fund scheme.