Where do I invest?

The two questions I’m often asked in these turbulent times are: ‘Where do I invest?’ and ‘How much money should go into debt and equity?’ A few years ago, investing meant putting money in a bank deposit or buying equity shares. Creating wealth meant buying property. And then came mutual funds. No wonder investors are confused.

Today, one can invest in debt funds (subclassification by quality of issuer and maturity period), equity funds (sub-divided into market cap, sectors, themes and mixed with other asset classes), real estate and commodities funds... now even strategies funds. Debt funds invest predominantly in interest (coupon)-bearing securities like CDs, CPs and debentures. Usually, such funds account for 50-90% of a portfolio depending on the risk appetite.

Equity funds account for 10-40% of one’s portfolio. For most investors, diversified equity funds are ideal. I believe sector funds should be avoided; single sectors tend to perform well for a few years, then subside for long periods. In India, index funds, ideal for the investor sensitive to costs, are not widely available. Exchange traded funds are semi-closed-ended index funds, which track the index on which they are based.

Real estate and commodity funds are ideal for people who like this asset class but want liquidity and professional advice in this sector. Ideally, high net-worth individuals should go for these.

Till recently, funds based on strategies were not available in the mutual fund format and were in the realm of hedge funds. Let me explain. Arbitrage is a strategy where the fund manager buys a stock or its derivative and sells either, making money from the spread between the prices.

Even more exciting are funds that identify the inverse correlation between the short-term performance of two companies and buy (go ‘long’ on) one while selling (go ‘short’ on) the other. Here again the fund manager is not concerned with the movement of the stock market. As long as there is a gap between long and short, his strategy helps make money. Of late, such funds have become available to Indian investors too.

As for investing, the short-term (one to five years) movement of the stock market does not change one’s risk profile or asset allocation. So the answer to the question, ‘Where should I invest in this bad market?’ is that you should act in the same way as you would in a normal market. Once the risk profile and asset allocation are determined, the portfolio should be divided into:

1. Core equity (index funds, diversified equity funds): Invest through SIP
2. Core debt (long-term debt funds, Gsec funds): Invest through SIP
3. Wraparound funds (strategies, sector funds, real estate): Invest lump sums to create an additional nest egg
4. Managing cash flows that will be required in the short term (liquidity funds (one day to two months)/short-term funds (two months to one year))

 
So work with your adviser to get a sensible risk-profiling and asset allocation plan and review it regularly.

Source:http://moneytoday.digitaltoday.in/index.php?option=com_content&task=view&issueid=53&id=3974&Itemid=1&sectionid=106

Four golden rules for today's investor

One year ago, this column ran a contrarian view on mutual funds entitled, “When the tide ceases to rise”. I raised some disturbing ideas: “A bull market has the wonderful property of making ordinary investment managers look like geniuses” and “How many of these apparently gifted money managers will spot the first signs of a mega-shift of the economy into a downturn?”

And here’s the line that puts me up there with Nostradamus: “I find the combination of severely low levels of cash in equity funds, and (over) confident bullishness on the economic prospects of this (often blighted and blundering) country a little too unrealistic for my liking.”

Today, it certainly looks like the contrarians are one up on the systematic investors. Stock markets, not only in India but around the world, are staring at the spectre of recession. Not surprisingly, mutual funds have been hit, perhaps a little worse than what could be imagined a year ago. What’s happened in the interim? Has the tide turned? And if so, what should you be doing with your mutual fund investments?

Here’s some hard thinking by Boom & Bust that will, hopefully, answer these questions and restore some sanity to the way we look at mutual funds. 

The world has changed...
Let’s face it. With oil at $125 to the barrel, there’s no way things will be the same again. Even if oil prices were to fall, the one time damage due to the oil shock (as also other commodities like iron ore and coal) will surely take many years to rectify. There’s no way the world can spend an additional 6% of its total income on buying the same quantum of oil, and not feel the pinch, even if it is only for a year.
 
Countries like India will face fiscal stress, and this will reflect in their currency movements. Our government will also find it difficult to fulfil national development objectives as the fiscal deficit balloons out of control. Off-balance sheet items like additional fuel subsidy, fertiliser subsidy, farmer loan waivers and extra wage costs will eat into the future prosperity.

Secondly, the tsunamis of cheap money have subsided. Money costs more today, and this affects PEs as much as it affects the earnings of all companies, especially those that are leveraged with debt. With central banks tightening the money supply globally, the only people left with any worthwhile cash surpluses are the oil exporters. And they are still not clearly telling us where they will put this money. Meanwhile, the US continues to grapple with the subprime credit crisis, further aggravating the tension in the financial and real economies.

And yet, the world hasn’t changed
In spite of all the pain, India continues to be a country with a growth potential that is staggering. China's position as the manufacturing base for the world has not changed. The new money surpluses (in the Middle East and other OPEC countries) are eager to find the next investment Mecca. If it were cheap Japanese funds and loose American monetary policy till yesterday, it is petrodollars that will chase investment themes and ideas today.

The world will, to a large extent, innovate its way out of the energy crisis by moving towards more efficient usage, alternative energy sources and, perhaps, even finding more oil from where none was expected. (Cairn and Reliance Industries will, in less than a year, add at least two percentage points to India's GDP from their Indian oil and gas fields).

Meanwhile, your mutual fund investments (shaky as they seem today), will hopefully ride out the rough weather that has suddenly hit the world of investing. For that to happen, you will have to stick to the golden rules of mutual fund investing. These are:

1. Mutual funds are for long term
No matter how many times you hear this homily, you are not going to take it as seriously as you should. If your investing game is all about spotting the fund with the best returns and switching over every six months or a year, you will lose. Over time, the performance evens out. So a bad year with a great fund management house (or fund manager) is hardly a reason to quit. Mutual funds are a bit like marriage.if you don't consider divorce as an option when you begin, chances are that your marriage will last.

2. Choose greatness over punting
The emphasis on a great fund management house is intentional. Does your fund manager show this greatness in the way he (or she) picks and rotates stocks? The telltale signs include, but are not limited to, the following:

• Picking sector leaders in terms of size, growth, capability and return ratios
�• A studious avoidance of momentum stocks (the safety versus sexiness debate)
�• Moderate diversification (less than 50 stocks), especially in a large-cap fund
�• Low, but regular churn, especially with non-core holdings
�• A consistent approach, as elucidated in their portfolio and market reviews

3. Persist, but don't be suckered
Even the best fund managers have a bad year. And, at times such as the present, everyone might have a bad year. As a mutual fund account-holder, you should be able to distinguish between a bad year that is an exception (in an otherwise impeccable record), and a bad year that is routine. You will also find that the really great fund managers are those who lose lesser in bad years, although they might not outperform during good times. By all means, persist with this breed, even if their performance in the recent past has been uninspiring. But don't make the mistake of being fooled by a worthy candidate in the opposite category just because you made an extra buck during easy times.

4. Believe in equities
Finally, you really must have that conviction in the asset class called equity. Remember, that in the long run, equities are slaves of earnings. If you think businesses (especially the listed ones) are going to lead the world into innovation, growth and wealth, you cannot ignore the opportunity for wealth creation that equities offer. And what better way to reduce risk than by investing through mutual funds?

Source:http://moneytoday.digitaltoday.in/index.php?option=com_content&Itemid=1&task=view&id=3973&sectionid=106&issueid=49&latn=2

Think before you pick a fund

It could be financially hazardous to randomly pick a mutual fund. The five worst performers in the equity diversified category lost a third of their value in the past year. On the other hand, the best performing fund in this category, Reliance Regular Savings, contained its losses to a mere -2.5%. Among the equity tax plans, relatively newer funds faced the brunt of the market meltdown.

Index funds have not lost as much as diversified equity funds in the past one year and have even outperformed them over a three-year period. Midcap funds as a category, on an average, lost more than any other form of equity funds. In the past one year, the worst performing midcap plan has lost more than 40%, which is double of what the Sensex lost during the period.

Balanced funds try to mitigate the risks associated with equities by investing some of their corpus in debt instruments. But, the worst performing balanced funds have registered losses equal to those of equity funds, which primarily invest in stock markets. The best performing debt-oriented fund, Sundaram BNP Paribas Value Plus, has generated enviable returns of 10% in the past year.

MIPs as a category generated positive returns in the past year. Though the LIC Floater MIP is in the worst funds pack, in the past six months it has outperformed its category average. DBS Chola MIP, the top performer in this category, earned returns of 23% in the past year. The best performer in the FoF list, ICICI Pru Advisory-Very Cautious plan, generated 8.3% in the past year.

The Takeaways

• Funds have increased their exposure to the capital goods sector, which until recently was considered to be the most vulnerable to the slowing economy.

• Oil and gas companies are in the limelight. Reliance plans to pump crude oil from the KG Basin early next year. ONGC is in the process of acquiring UK-based Imperial Energy.

• An SIP of Rs 2,000 over a three-year tenure (Rs 72,000) from Sptember 2005 to August 2008 would have grown to Rs 80,040.80, a growth of 11.17%.

Source:http://moneytoday.digitaltoday.in/index.php?option=com_content&task=view&issueid=53&id=4321&Itemid=1&sectionid=106&name=Think_before_you_pick_a_fund

Protect your capital

"Anybody can create his own capital protection fund by investing 70-80% in debt funds and the rest in diversified equity funds."

The markets across the world are going through one of the roughest patches in financial history. If some of the most reputed investment banks and insurance companies can teeter and collapse, what hope is there for your investment? Little wonder that there has been a beeline for assets like gold and capital protection funds. But what exactly are capital protection funds and why have they suddenly found favour?

Capital protection funds are closed-ended funds with a maturity period of three or five years. They offer both dividend and growth options, with a minimum investment of Rs 5,000. For several years now, high net-worth individuals have had some or the other version of capital protection funds available to them. However, retail investors have been given this option only recently, with the first fund in this category launched in 2006 by Franklin Templeton. Today, many large fund houses are offering such schemes.

These funds are gaining in popularity because they not only keep your initial investment safe but also provide scope for your money to appreciate. How is your investment protected? At present, most mutual funds try to achieve this by investing a significant portion (70-80%) of the money in less risky assets such as high-rated debt instruments. The rest (20-30%) is placed in risky assets such as equity or equityrelated instruments. If the stock markets do well, your return from the fund is that much better; in a bear phase, you still get your money back from the bond investment.

“While the fixed income securities provide steady and consistent returns, the equity component enhances the return of the total portfolio for the investors,” says Nitish Gupta, fund manager, fixed income, Deutsche Asset Management. In line with the Sebi guidelines, each mutual fund house offering capital protection funds gets a credit agency to rate its portfolios on its ability to protect the initial investment.

So how are these funds different from fixed maturity plans (FMPs) or monthly income plans (MIPs)? After all, like capital protection funds, MIPs also invest 70-80% in debt and the rest in equities. The difference is that the debt component of MIPs work like a debt fund and is subject to interest rate and mark-to-market risks. On the other hand, capital protection funds invest mainly in bonds of fixed maturity and hold them till the end of the term. This protects the fund from the interest rate risk. It’s the equity component that provides the fund the potential for higher returns.

On the tax front, however, both types of funds are treated alike. The dividend income is tax-free in the hands of the investor. The long-term capital gains tax on redemption is 10% without inflation indexation and 20% with indexation.

So much for the good news. The not-so-good news is that experts and financial planners do not recommend these funds. This is because they don’t guarantee the safety of the capital; they only offer protection because of the way they are structured. Sure, there may be no interest rate risk, but there is still a credit risk. If a bond issuer defaults on repayment, the portfolio takes a big hit. Reinvestment risk is another concern. If interest rates fall after some bonds mature, a fund’s debt portion may not earn as much as planned. “If interest rates fall, they have to increase the proportion of debt to ensure capital protection,” says Zankhana Shah, a Mumbai-based financial planner.

The other problem is the returns. In the past year, these funds have managed to deliver an average return of 3.1%, far lower than the 8.16% offered by debt funds. Only one fund has given double-digit returns (see table). Apart from lower returns, you also pay a price for capital protection: a 2.5% expense and a lock-in period of three or five years. However, a year may be too short a term to judge the performance of these funds. Experts expect returns in line with debt funds in the next few years.


So, what should you do? Gaurav Mashruwala, certified financial planner, says, “Capital protection can be created at a much lower cost by individual investors. For instance, the debt portion (70-80%) can be invested in high-yielding FMPs, fixed deposits or PPF, which comes at a minimal or no cost. The remaining portion can be invested in a diversified equity fund or an ETF for market-linked returns.”

Besides mutual funds, the capital protection feature is also available in some Ulips like Kotak’s Safe Investment Plan, ICICI Prudential’s InvestSheild and the Capital Guaranteed Fund offered by TATA AIG’s Invest Assure. These sound good, but remember that capital protection is not on the actual annual premium but on that portion after deduction of various charges plus declared bonuses, if any. In fact, some insurers even offer a guaranteed return on investment. Aviva’s India Bond offers a guaranteed return of 7% for investments of 5 and 10 years’ tenure.

Source: http://moneytoday.digitaltoday.in/index.php?option=com_content&task=view&issueid=53&id=4306&Itemid=1&sectionid=106

MFs can now invest $7 bn overseas

The Reserve Bank of India (RBI) today raised the overall limit for overseas investment by domestic mutual funds from $5 billion to $7 billion. 

While the central bank said in a late evening statement that the decision was taken “with a view to providing greater opportunity for investment overseas”, the move is also being viewed as an effort to enhance outflows at a time when foreign capital flows could rise in the coming weeks.
 

The mutual fund industry appeared a little surprised by the sudden move since even the existing limit was not being utilised. Industry estimates peg the amount invested overseas at $1 billion to $2 billion. Only last September, RBI had raised the overseas investment limit for mutual funds from $4 billion to $5 billion.

In its statement on Thursday, RBI said the overall ceiling for investment in overseas exchange-traded funds will continue to be at $1 billion. 

“We did not demand the raising of the limit to invest overseas, but there was always an understanding that the limit would not be a constraint. People have to understand what investing overseas entails, but we have made some progress,” said A P Kurien, Chairman, Association of Mutual Funds in India (Amfi).

At present, there are about 17 schemes that invest overseas, which include equity and debt. At present, the individual investment limit per fund house is $300 million.

Let your money make more money!

We all keep talking about savings and investment, as if that is all there is to with managing money. There are a whole lot of other nifty ways to manage money properly and benefit through it. Here we go:
Liquidity Management – There are a lot of us who keep our money in the bank as we don’t want to be caught short. Hence we keep money idling there, earning 3 - 3.5% pa. Interest income earned is fully taxable. It would be good idea to keep upto three months expenses, in the bank account. If there is a need felt for more liquidity, the rest should be invested in a liquid plus fund, which can be liquidated in a matter of 24 hours. Liquid plus funds can typically give you 6.5% returns or more. Also, the tax treatment for Liquid plus funds is more benign – 14.16% is the dividend distribution tax to be paid and not the normal tax, again giving an extra kicker.
 
Providing money for Future requirements – In many cases, money may be required in future after 3-6 months or more for payment of insurance premium, buying some white good for the home, travel expenses etc. In case the time period is known, an appropriate FMP can be chosen which allows you to invest for that time period ( say 3 months ) and then bring it into either the bank account for use or sweep it into a liquid plus fund, till the time the money is required. FMPs are advised in those cases where investment can be made for a specific time period as it gives better returns as compared to Liquid plus funds. The tax treatment is also similar to liquid plus funds. Most of the FMPs available today give a return of over 9% after tax and in some cases even 10% post tax today. This ensures that your money does not idle at any point and at the same time is available to you at the right time. 
 
Investments need not wait - Many want to accumulate the money before investing. There is a feeling that investing small sums is somehow not that very worthwhile. In the process the money to be invested is accumulated in the savings account and is idling away all the time. It is a better idea to invest on a monthly basis either through SIPs or RDs. The good thing here is that the monthly investment is on auto pilot and investment goes on automatically. Hence, money does not unnecessarily lie idle in one’s account. 
 
Operating bank account – Many have multiple bank accounts and money keeps lying splintered in many accounts. Again this ensures that a lot of money lies idle due to the requirement to maintain certain minimum balance, in each account. There is no sense in having too many accounts if there is no real reason to keep them. It is better to route both investments & expenses through one or two accounts only – better still investments can be made from one account and expenses can all be routed through another, ensuring better control. 
These small measures should go a long way in managing the available money work harder for you.