Did You Know | Returns must be compared with that of a benchmark to get the real picture

Returns earned from investing in any asset class or product can be looked at in two ways—absolute and relative returns

What is a benchmark?

A benchmark is a performance standard against which the returns from a security, mutual fund or portfolio manager can be assessed. For example, mutual fund products are required to showcase performance versus a suitable benchmark; a diversified equity fund uses a broad index such as BSE 500 or S&P CNX 500 as a benchmark. In fixed income, an income fund uses Crisil Composite Bond Fund index as a benchmark.

Why is a benchmark important?

Returns earned from investing in any asset class or product can be looked at in two ways—absolute and relative returns. Absolute returns are simply a return objective. This is like a minimum rate of return identified by an investor and their adviser. It is easy to understand and monitor, but not enough to evaluate performance.

As an investor you must also know how the asset class has performed and how other products within that asset class have performed. That’s why the need for a benchmark. So if your fund has given a 15% return over five years, but the benchmark to which it belongs has given 25% over the same period and the category average is also around that number, then you know your fund has underperformed and it’s better to exit.

Which benchmark is appropriate?

To be able to make a correct decision, ensure that you use the appropriate benchmark. A benchmark should ideally be in line with the risk-return profile of the product you invest in. For example, if you invest in a large-cap fund, the performance benchmark should ideally be a large-cap index such as S&P Nifty or BSE Sensex​. Crisil Liquid Fund index can be an appropriate benchmark for liquid and ultra short-term funds, which have a portfolio of certificates of deposit and commercial papers.

Compare performance only against a benchmark that is investible. This means you can’t compare the performance of listed bonds with returns offered on unlisted bonds even if you own both types of securities. Also, the benchmark should have precise and published (for investors to see) guidelines and rules. Given these, you will know the methodology of adding and deleting holdings form a benchmark and you will have historical values and holdings available for performance comparison.

Can you create a benchmark?

Where a suitable benchmark is not available, you can create your own benchmark. For example, for a fund investing in Chinese and Indian stock markets, you can take representative indices (a Chinese equity index and an Indian equity index) and combine them by taking proportionate investment weightage. Similarly, you can create other benchmarks based on the asset class you are investing in and your overall portfolio allocation.

Whichever way you do it, it is essentially to compare returns from an asset or a product with peers to understand whether it is under performing or outperforming.

Source: http://www.livemint.com/2011/11/28213737/Did-You-Know--Returns-must-be.html?h=B

Equities may see more selling pressure

Equities are likely to suffer further this week due to lack of confidence from market participants, particularly from mutual funds, and weak rupee.

According to Street experts, mutual funds are not willing to commit themselves now despite several stocks ruling at multi-year lows, as the funds fear a further fall.

The market is now completely dominated by foreign institutional investors. They will persist with selling on the back of weakening rupee.

Foreign funds pulled out about Rs 7,300 crore in nine straight trading days since November 15, according to exchange data. On the other hand, domestic institutions' net buying stood at about Rs 5,900 crore.

“We have taken a cautious stance on the Indian rupee in recent months and while the currency has weakened sharply, we do not yet see light at the end of the tunnel,” said a note from HSBC. “In an environment of moderating global growth expectations and broad de-risking, current account deficit currencies such as the Indian rupee will struggle. In our view, the INR has room to fall further if global growth expectations continue to decline and the US dollar liquidity pressures are intensifying.”

Domestic cues continued to be negative — be it policy gridlock; or elevated levels of inflation; or the likelihood of fiscal slippage. The global situation is also adding to the pressure as there are no signs of a resolution to the debt crisis in the Euro-zone.

Investors will continue to watch the developments in Europe, and overseas equities will determine the direction domestic indices will take early during Monday's session.

The cautious stance of market participants was well captured by the movement of the derivative market.

Nifty futures witnessed a rollover of 64 per cent (to December series from November), which is much lower than the three month-average of about 71 per cent. This indicates that traders who went long preferred to book losses as they fear further value erosion in the coming month.

Bank Nifty saw high rollovers but on the short side, indicating that traders expect further fall.

On the options front, 4500 and 4700 December puts have seen significant rise in open interest pointing that Nifty is likely to move in the range during the short term. Trading in Call options points a limited upside due to the strong emergence of call writers at 4800, 4900 and 5000 level.

Despite the market being oversold, there are little triggers to turnaround the Street mood. Even the clearance of foreign direct investment by Union Cabinet on in multi-brand retail failed to cheer market participants, as they expect several roadblocks, given the reservation within the Government and the Opposition.

Under such a situation, selling pressure on equities is likely to continue.

Source: http://www.thehindubusinessline.com/markets/article2665789.ece

About 75% of equity funds beat benchmarks

Despite equity markets remaining volatile for the year till date, over 75% of the equity schemes have managed to outperform their respective benchmark indices by huge margins. According to data provided by Value Research, out of over 340 equity schemes in the country, around 246 schemes managed to outperform the benchmark indices.

Interestingly, many mid and smallcap equity funds have managed to give better return then large-cap and thematic schemes. Some of the mid-small cap fund like Magnum Emerging Business, Mirae Emerging Bluechip, HDFC Mid-cap opportunities, Reliance Small Cap and DSP BlackRock Micro Cap have given negative returns in the range of 5-15% till year to date. During the same period their benchmark indices have fallen by about 25-35% while largecap index Sensex was down by 22%. According to fund managers, conservative investing coupled with aggressive cash calls taken during the market fall helped give better returns than that of their respective benchmarks.

Neelesh Surana, head of equity, at Mirae MF, says, “Last one year overall environment was very challenging following high inflation and surging interest rate scenario. In such a situation, we had stayed away from sectors such as real estate, infrastructure and construction, which helped us.”

Soumendra Nath Lahiri, head equities, at Canara Robeco MF, says, “The construction of our portfolio was defensive as equity markets were volatile. In the past few months we had remained underweight on interest rates sensitive sectors, while hiking exposure to consumption and cement sector which helped us to generate better returns.” “It was not only stocks picking that helped get better returns, but investing in companies which have low gearing and good cash flows” added Surana.

Also many equity funds were seen investment in non cyclical sectors such as pharma and consumer goods which helped arrest the fall in NAV values in the downturn. According to market participants, some schemes were seen sitting on cash of over 15-20% at one point in time which was gradually reduced at lower market values.

Some fund managers changed asset allocation in favour of high interest yield debt which helped generate better returns. However some of the funds like JM Core 11 (-33.99%), JM Basic (-36.25%), Reliance Infrastructure Retail (-40.80) and HSBC Mid-cap Equity (-37.52%) saw major erosion of their NAVs in the current calendar year.

Source: http://www.financialexpress.com/news/about-75-of-equity-funds-beat-benchmarks/879657/0

Focus on providing pension to the poor

Gautam Bhardwaj, Director, Invest India Micro Pension Services

Retirement benefits in a defined contribution system with individual accounts such as National Pension System (NPS) will depend principally on contributions and the accumulated investment earnings on them. Efficient management of NPS assets can generate larger benefits for subscribers.

This, in turn, could be a powerful tool to motivate potential subscribers to open NPS accounts and for existing customers to continue their contributions. High real returns on NPS savings are critical for India as this could play a key role in converting the tiny savings values of millions of low-income workers into an above-poverty annuity.

In this context, FDI in pension funds is really a non-issue. Instead, a primary concern for both policymakers and the PFRDA should be to engage the best pension fund managers available, regardless of their shareholding. This has already served us well in the context of mutual funds.

Between 26% and 100% of several AMCs is owned by overseas institutions. Sebi provides strong regulatory oversight and clear investment regulations to ensure that savings of millions of Indians in mutual funds are protected. So, FDI was not a consideration when Sebi-regulated AMCs were hired by the EPFO to manage the PF assets of over 50 lakh formal sector workers.

Customer protection can be achieved through institutional architecture design, like in mutual funds and the NPS. Both are based on a time-tested 'trust' model where the underlying assets do not sit on the books of the fund manager and individual subscribers remain beneficial owners of the trust assets.

Instead of looking at FDI implementation issues, Parliament could debate strategies to overcome the more fundamental and urgent challenge of bridging India's huge pension coverage gap. And of creating parity and portability across pension verticals through a national pension policy that assures every Indian the right to a dignified old age.

Setting FDI limits could distract future policymakers from more pressing concerns. We could do well to buck the trend with FDI in pensions and leave future decisions in this regard to the executive. And, perhaps, set an important precedent.

Source: http://economictimes.indiatimes.com/opinion/et-debate/focus-on-providing-pension-to-the-poor/articleshow/10837036.cms

India faces fears for retirement

With shrinking families, little state support and inadequate retirement planning, many in Asia's urban middle classes are scared of being broke and alone in their old age. India is no exception.

"We have to look after each other," says Sulbha Jagtap, turning to smile at her husband Nitin. The Mumbai couple, both officer workers, are only in their early 40s but they are already nervous about their retirement.

They have teamed up with siblings to help support their own parents. But they realise changing times mean their only son Soham, now 14, may not be able to support them in the same traditional way. "He will have to go away from us," Sulbha says.

Once upon a time in most parts of Asia "retirement planning" simply meant having large families - ideally several sons to look after you in your dotage. But Sulbha's generation see retirement differently. Because their children may leave home and because they face high projected health costs, their biggest fear is how expensive it will be.

"Like most Indians in my age group, retirement is my big priority," says Hemant Kulkarni, a 37-year-old IT worker and father of two young children. He left a small town to study for his degree and now lives in a fashionable apartment block in Hyderabad, central India's exploding tech hub.

In many ways he is living the new middle class dream in the hi-tech city dubbed Cyberabad, emblematic of a rising Asia. But unlike his more rustic parents, who had state pensions, ancestral land and a large number of children, for him retirement is already a looming fear.

"My parents worked in government organisations and they provided pensions," he says. But despite the glamour of working in a shiny new IT park, his multinational company has no group pension plan - and he is already planning ahead.

In fact only a minority of Indians have formal pensions of any type - a situation replicated across Asia. There is very little public welfare for the elderly.

Employers often pay into payroll-based schemes like Provident Funds, in which employers match their payments. But so many Indians work in the informal sector that this kind of saving only helps a minority of the population.

That leaves the majority to fend for themselves when it comes to planning for retirement - but there are ways to make it easier, according to financial planners.

"Many options are available," says Surya Bhatia, an independent financial adviser in New Delhi. "A lot of insurance companies have now opened shops over here."

Banks and insurers offer a variety of savings options, from annuities to mutual funds, which help build up a pot of savings, or "corpus", for retirement.

"Typically about 10% of my savings goes towards creating a corpus for my retirement," says IT worker Hemant Kulkarni.

There is also a growing list of retirement-specific options, including the Indian government's "New Pension Scheme", which is managed by a range of fund management companies.

It pays out based on contributions and although only government employees get their own contribution "matched" it has also been open to non-state workers since 2009.

The bewildering new range of products and plans has brought with it another fear: how can you be sure what fund managers are doing with your money?

Rising health costs

"Transparency is still one thing which I think needs to come up over here," cautions financial adviser Surya Bhatia. "As an investor, be slightly wary about that, and choose the right thing for you."

But there is one financial product that he says everyone should get long before they retire. "Everyone needs to get health insurance done," he says.

He cautions that health policies often come with fine print - which needs to be checked. But he says that should not put people off getting insurance.

Health insurance is a relatively cheap way to solve one of the most frightening aspects of retirement - the high costs of deteriorating health, in a country where state-funded healthcare provision is thin.

Insurance is a much better and less stressful way to save for health costs than, say, extra money spent on property or shares because it will cover unexpectedly high costs or emergencies too.

The experts say that every Indian should buy a policy even if they get insurance from work. If you lose a job or retire, you may lose health cover - but it will be more expensive to get covered from scratch at a later stage in life.

Sulbha Jagtap and her husband have dealt with their fears. They have an insurance policy and they are already investing for their old age through mutual funds.

"Whatever is planned, we don't know if it will go through in that way or not," says Sulbha philosophically, while her nephew plays beside her, blissfully unaware of the plans being made by the generation above him.

"Until then, with whatever possible, we try and secure our future."

Source: http://www.bbc.co.uk/news/business-15640444