Direct stocks or mutual funds?

The dice is heavily loaded in favour of mutual funds, unless you are a great stock picker.

At a time when both Indian and global equity markets are being plagued by bad news, retail investors aren’t sure of the strategy they need to adopt. Should they bet on the equity markets now or take the safe route of mutual funds?

This is a loaded question. This does not have a simple yes or no answer and depends on a person's risk taking ability, return expectations combined with the ability and inclination to manage a share portfolio, as opposed to simply investing in mutual fund schemes.

However, if the same question is posed in the context of the current downward slide in the markets, the answer could be far more definite.

Consider this… can a person used to swimming in a pool switch to swimming in an ocean or river at will? The answer seems self-evident as swimming in a pool is far easier as it is a controlled environment. Swimming in a river or ocean is far more difficult as one has to contend with the surging waters, currents and whirlpools.

There are of course other lurking dangers like alligators, sharks and so on, which can cause harm. So, even those who swim regularly in pools aren’t always willing to jump into a river or ocean. Apart from the perils involved, swimming in the open, also calls for higher level of skills. It even involves different, special skills, not required in a pool.

MUTUAL FUNDS 

That is precisely the difference between investing in mutual funds and equity. Mutual fund investments are far safer as there is a fund manager who takes care of the investments and whose only mandate is to monitor and manage the investments that his fund makes. Not much knowledge is required from the investors' side, except for the due diligence on selecting an appropriate fund to invest, in-line with their requirements.

Most investors, are not even aware of who the fund manger is, but a look at the kind of returns the fund manages over the years, and you can judge his work. Good managers will use extensive information from their research to pick the best stocks. Over time, the investor just needs to check if the fund manager is sticking to the mandate and is delivering a return superior to the corresponding index and the category, enough to justify the charges.

But not all investors want to depend on the fund manager’s discretion. Such an investor may want to invest in the broad economy instead. He could invest in index funds. This is even simpler, as the investor does not have to spend too much time studying what to invest in. All he needs to know is which index, he should like to invest in and what the charges are for managing it.

Savvy investors may also want to go through websites that rate mutual funds on various parameters.

EQUITY 

Equity, however, is a different ball game. Here, the investor needs to analyse and choose the equity shares to invest in. This is easier said than done. Choosing a good equity share requires broad understanding of the economy, sectors and the company itself. One has to go through the financials of the company like balance sheet, profit and loss account as well as all other parameters that indicate the health of the enterprise.

As individual investors, most people do not have the capability nor the inclination to do this. Unless, they have a good broker or advisor, they may end up taking or simply choose bluechips. you could end up a sucker , if you have been taking tips from the wrong person.

Again the latter may also not be the best investment decision since there are many good buys even among the smaller stocks. By avoiding them totally, you may miss the opportunity to buy potential multibaggers. You might as well have, invested in an index funds if you want to go for bluechips only.

STRATEGY 

Given these facts, investors want to know what changes they need to introduce in their strategy. The proximate cause is that an investor hears that some stock's prices have come to 50 per cent levels of what it was prevailing at, a year ago. Investors will also find bluechips among these. Most market experts have been asking investors to buy at such points, given that these stocks may not be available at such attractive valuations in a upward moving market. That gets investors salivating.

But if there are major drops, there would be reasons for it. Assuming that it has dropped due to market conditions would be wrong. GTL Infra and KS Oils are cases in the point. For KS Oils the 52 week High/low is 63.1 and 7.7 and that for GTL Infra is 48/ 10.5. The drops here may make one salivate and invest in them; but these companies prices have come down because the equity shares pledged have been sold to recover the money.

That hints at a cashflow problem for these companies and hence caution is advised. What this illustrates is that, just a price drop is not sufficient reason for picking up a stock. Unfortunately, in a falling market, investors who follow the herd mentality, may end up picking up stocks that should be best left untouched.

Investments are done with a purpose. Admittedly, there is more than one route to get to one's goal. Mutual funds allow investments through either lump sum payments or systematic investment plans. One could follow similar investment patterns for equity investing too. Either ways, staying invested for longer periods is the only way to make money from equities as well as mutual funds.

However, changing from equity to mutual funds or vice versa, may not be warranted just to take advantage of a falling market. Those investing in mutual funds should continue to stay invested there - for the fund manager would be able to take advantage of the situation, much better than any individual investor.

Those who have been investing in equities, however will have enough knowledge to pick and choose the right investments. For them, equity markets at this point provides great opportunities. Equity investors can consider mutual funds, to bring down their risk.In summary, one need not change the investment strategy due to market conditions. Rather, it is better to think it out before opting for a strategy. And once done, stick to one's strategy - be it equity or mutual fund investing.

Source: http://www.business-standard.com/india/news/direct-stocks-or-mutual-funds/447968/

Fund houses merging schemes is a ploy to hide black sheep

Mutual fund schemes are vanishing. Nothing sinister - it's just that fund companies are merging some schemes into others at a far higher pace than they used to. In the first seven months of 2011, as many as 41 funds have been merged into another one. During the previous three years, this number was just 37.

In fact, in the five years from 2006 to 2010, there were a total of 58 fund mergers. Looking at the current trend, 2011 could comfortably exceed this number.

On the face of it, there's nothing wrong with this. These fund mergers are obviously done with regulator Sebi's permission and follow all the rules that have been put in place for investors' protection. However, fund mergers are an unfamiliar subject for most investors, and it's useful to understand exactly what is going on.

The first question to ask is about the need for all this. Why do companies merge funds in the first place? The answer is simple (if uncomfortable for the fund companies' management), they do it to bury poor performance. In the roster of practically every Indian fund company - even the ones with the best investment management - there are some black sheep.

These are the funds that have lost a lot of investors' money. In my view, these tend to be flavour-of-the-month funds that were launched during some period that was hot for a particular theme. By the time the fund got going, the theme became yesterday's idea and the fund never did well.

Eventually, whenever investors look at the list of funds that the company has, it just becomes an embarrassment for everyone. A distributor goes and pitches for a good, high-performing fund from a fund company, the customer looks up the list of funds, perhaps on a website. However, when the prospective investor asks questions about the duds that are there on everyone's list, the distributor or the fund company has no answer.

Therefore, the best course for them is to merge the fund into another one that has been showing good performance. All the investors of the bad-performing fund are informed that the fund will be merged into another one. They have to be given a choice of redeeming their money, or having it transferred to the new merged fund. Either way, they are effectively redeeming their investment from the original one.

In theory, this would lay them liable to capital gains tax on any gains that they have made. In practice, this never proves to be a problem. The kind of fund that is merged tend not to have ever made any profits for their investors. And if there are no gains, then where is the question of paying any capital gains tax?

Apart from capital gains tax, there's also the issue of paying securities transaction tax (STT) on the transaction. However, fund companies generally pick up the tab for STT. Or at least, they all seem to be doing so in recent times.

Since the transaction is basically one of selling a fund and buying into another one, the arithmetic is somewhat like that in the case of a corporate merger. The value of your investment stays the same, but the NAV and the number of units change. For example, let us say that pre-merger you hold Rs 10,000 in a fund with 2 of NAV and you have 500 units. If the fund being merged into has an NAV of Rs 50, then post-transaction you'll have 200 units totaling Rs 10,000 in value.

At the end of the day, if one of the funds you hold is getting merged, then what it means is that you have been careless. If the fund was such a dud that it's being merged, then you should have sold it long ago.

Source: http://articles.economictimes.indiatimes.com/2011-09-05/news/30115929_1_fund-companies-indian-fund-value-research/2

Domestic mutual funds turn big buyers in Aug

According to a report by Morningstar, domestic mutual funds made a net investment of Rs 2,524 crore in equities in August 2011, the highest in over three years.

However, domestic equity funds saw the worst monthly return performance since January 2011. Among sector funds, banking and technology funds were the worst performers with these categories falling more than 12 per cent during the month.

Of the mid- and small-cap equity funds, about a quarter of them underperformed the category benchmark index. These funds, which are benchmarked to the CNX Midcap index, saw a sharp decline in August.

With gold prices touching an all-time high in August, gold ETFs registered the highest ever monthly return of 15.2 per cent on an average. With the softening of bond yields, gilt funds and longer tenure bond funds outperformed in August.

Source: http://www.thehindubusinessline.com/markets/stock-markets/article2426600.ece

Use SIPs to fight market volatility

Have you been caught off guard by markets that collapse like a house of cards one day and shine brightly in the next session? If you are sitting on the sidelines, wondering about the right time to jump in, fund houses offer options that take the guesswork out of equity investing. The SIP is the oldest and most widely used weapon against market volatility in the small investor's armoury. "By investing in random time slots, the investor is able to get a good average price," says Srikanth Meenakshi, director at Fundsindia.com.

In the past few years, fund houses have fine-tuned the SIP mode of investment and made it more sophisticated. You can now invest in weekly, even daily, SIPs. You can tweak the investment amount or even choose the index level at which you want to invest. Let us look at the various innovations in the SIP and how you can use them to your advantage in today's volatile markets.

Systematic transfer plan

If you have a lump-sum amount to invest, experts advise that you put it in a debt fund and then start a systematic transfer plan (STP) into an equity fund. STPs can be of different intervals-weekly, monthly or quarterly. "The STP is a richer version of the SIP and follows the same concept of value averaging. Markets will always be volatile. The only way to manage it is through time diversification and asset allocation," says Kalpen Parekh, deputy CEO, IDFC Mutual Fund.

To start an STP, the investor must have a certain minimum amount in the debt fund. HDFC Mutual Fund, for instance, requires that the source scheme should have at least Rs 12,000. Also, the transfers are done on designated days of a month. This option suits investors who have lump-sum money, such as bonuses or sale proceeds from assets.

Flexible SIPs

One of the biggest innovations in the SIP, this allows the investor to change the SIP amount depending on the market level. ICICI Prudential's Flex STP plan, for instance, transfers a higher amount when the markets are down and reverts to the pre-set STP amount when they rise again. So, the investor is putting in more money when stock prices are low and holding back when the index is up. This adds that extra zing to his efforts at rupee cost averaging.

However, only a few mutual fund houses, such as Reliance Mutual Fund, HDFC Mutual Fund and ICICI Prudential, offer the option of flexible SIPs and STPs. But there are intermediaries who can help investors in other mutual funds. One can invest through Fundsindia.com and can call the distributor or send an e-mail for raising the investment amount. "Under the Flexi SIP Investment, the investor can increase the amount with the click of a mouse or a simple phone call, or let our system work through pre-set parameters. Instead of investing, say, Rs 5,000 a month, he can go with Rs 7,000 or Rs 10,000 if the markets are down. In this manner, he will get a much lower cost of entry," says Meenakshi.

Trigger option

Mutual funds also have trigger options to help you invest or book profits at certain index levels. When the index drops to a level predetermined by the investor, the fund transfers money from the debt scheme to the equity plan. Under the HDFC Flexi Index plan, the investor can choose 3-5 index levels and specify how much amount in the debt plan should be transferred to the equity scheme at each level. "For instance, he can choose 15% to be invested when the markets drop to 16,000, the next 15% to be invested when it drops further, and likewise at varied index levels," says Surajit Misra, executive vice-president and national head, Bajaj Capital.

Similarly, when the markets rise beyond a level specified by the investor, the equity units can be sold and money transferred to the debt scheme. More than six fund houses offer these facilities mostly for their large-cap and mid-cap funds. Here, you can invest a smaller quantum of money at select market levels or NAV levels.

Weekly & daily SIPs

The SIP investor should not pay heed to the daily ups and downs in the market. Yet, if you are worried that the markets will rise when your SIP is due and decline subsequently, you could consider spreading your investments across the month. "If the investor wants to put in Rs 20,000 every month, he can split it into four different SIPs on different days of the month," says Paul D'Souza, proprietor of Cuzinns Investment Services.

Some funds also give the option of weekly and daily SIPs and STPs. However, experts believe the daily mode is not a good option because it serves no meaningful purpose. Even fund houses are having second thoughts about this facility, which increases their back-office work by over 20 times compared with that in the monthly SIP. "Under daily SIP, the cost of operation will be high for the mutual fund house. It is operationally inconvenient," says Misra.

Even financial planners have seen their clients bearing the brunt of daily investments from their chartered accountants. "In case of daily SIPs, the chartered accountant faces a problem as he will have to feed in 300-500 transactions while calculating capital gains at the time of filing your returns when you book profits," says D'Souza.

Instead, a weekly STP works better because the volatility is getting trapped and calculations are not much of a bother, say experts. "Whether you invest every month or over 365 days, the outcome is not too different. However, there is huge paperwork involved," says Parekh.

Considering this, the handful of fund houses that have been offering the daily SIP option are mulling over discontinuing these. "We have asked our sales team to take a re-look as there are no takers for them. Besides, operationally, these are inconvenient both for the AMC and the investors," says a mutual fund spokesperson.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/analysis/use-sips-to-fight-market-volatility/articleshow/9846135.cms?curpg=2

Use SIPs to fight market volatility

A value investment plan (VIP) is a new investment option launched by a few mutual funds. This concept may gain popularity in the times to come. A VIP is supposed to be a better form of the SIP (systematic investment plan).

A VIP too follows the averaging concept. This investments strategy also works on monthly contributions. The differentiating point is the approach to the amount of each monthly contribution as compared to a SIP.

In case of a VIP, you have to set a target growth rate or amount for each month, and then adjust the next month's contribution according to the relative gain or shortfall made on the original portfolio. In this case, you have to invest more when the market prices fall. On the contrary, you have to invest less when the stock prices rise.

Your investment pattern follows the market. You buy more when the prices are low and invest less when the markets are rising - the ideal thing an investor should do. The investment pattern mirrors the market trend. For example, assume you want to add Rs 5,000 per month to your mutual fund portfolio, and on the first of the month you invest Rs 5,000. Next month say the value of your investment is Rs 5,200. So, you will invest Rs 4,800 only next month rather than Rs 5,000. The balance is contributed by selling securities of an equivalent value (Rs 200 in this case).

In the third month, let's say the value of your investment falls to Rs 8,000. You will have to contribute Rs 7,000, so as to make the target amount of Rs 15,000 (Rs 5,000 for three months). This roll-over goes on during the specified period .

With this plans, you invest a higher amount when the markets are going down. Similarly, you invest a lesser amount when the markets are going up. This is precisely what investors should do. An investor cannot predict the direction of the markets. The VIP mode of investing helps synchronise the investment amount with the market movements . In contrast, a SIP mode of investing is based on the principle of rupee cost averaging. The cost of acquisition in VIP is usually lower vis-a-vis a SIP.

Another difference from a SIP is that each month the amount to be invested will vary. In case of a SIP, a fixed amount is invested each month. In case of a VIP, the difference between the target value and the portfolio's actual market value is to be invested.

So, you cannot really plan out the cash flows with precision, because the amount to be invested is based on the market values, which itself is volatile. In case there are prolonged bear market phases, the amount required to be invested will be much higher. The point to be kept in mind is that if a bear phase continues, let's say for 3-4 years, it can be value eroding for an investor. He will continue investing in a falling market.

In case of bull phases, the incremental investments to be made will be smaller. So, in case one expects a cash crunch, it is advisable to fix a lower target rather than go aggressive and fix a higher target. Usually, in the long term, a VIP is expected to give better returns than a SIP. This is mainly because investments are automatically triggered as the markets fall. The basic premise is that money is invested in periodic intervals in a portfolio in such a manner that the portfolio tries to approach a target rate of return.

Source: http://articles.economictimes.indiatimes.com/2011-09-04/news/30112692_1_investment-plan-new-investment-option-investment-pattern

All that you want to know about - Alpha & Beta

Alpha and Beta are terms that come up often in discussions on investments. Yogita Loke explains you the significance of two vital terms

What is Alpha & Beta?
Alpha indicates the excess return of the fund above risk adjusted market return, given its level of risk as measured by Beta. The excess return of the fund over its benchmark index is a fund’s Alpha.

Beta is the measure of the volatility of a security or a portfolio as compared to the market as a whole. It is also known as beta coefficient.

What do both signify to the investors?
An investment with a positive Alpha indicates that the fund has performed better than its benchmark and a negative Alpha indicates that the fund has underperformed its benchmark.
A Beta of one indicates that the volatility of the portfolio will reflect the market volatility exactly. A Beta of less than one indicates that the volatility of portfolio is less than the market volatility while a Beta of more than one signifies that the volatility of portfolio is greater than the market.

For example, if a stock's Beta is 1.2, theoretically it means that the stock is 20 per cent more volatile than the market.

Why these ratios are considered important?

Alpha value is important to your investor because it measures the excess returns a fund has generated in relation to the returns generated by its benchmark. Alpha is used to determine whether the fund manager through his stock selection ability has been able to beat the market.

Beta value gives you an idea of how a fund will move in relation to the market volatility. In simple words, it is a statistical measure that shows how sensitive a fund is to the market movements. If the Sensex moves up by 10 per cent, a fund's Beta number will help your investor to gauge the fund's movement in relation to the sensex.

Source: http://cafemutual.com/News/InnerKnowledge.aspx?srno=57&MainType=Tutorials&id=5

MFs step up buying

Mutual funds (MFs) bought shares worth a net Rs 266.20 crore on Tuesday, 30 August 2011, compared with an inflow of Rs 49 crore on Monday, 29 August 2011.

The net inflow of Rs 266.20 crore on 30 August 2011 was a result of gross purchases Rs 752.50 crore and gross sales Rs 486.30 crore. The BSE Sensex had jumped 260.42 points or 1.59% to settle at 16,676.75 on that day, its highest closing level since 17 August 2011.

Mutual funds have bought shares worth a net Rs 2523.90 crore in August 2011. They had bought stocks worth a net Rs 652.20 crore last month.

Source: http://www.adityabirlamoney.com/news/504037/10/22,24/Mutual-Funds-Reports/MFs-step-up-buying