What is the best way to achieve investment success?

What is the best way to achieve investment success is a question that haunts every investor. Though achieving investment success is not a hugely difficult task, the challenging part is to achieve it on a consistent basis and that too in line with one’s investment objectives. Many investors struggle mainly because they do not go through the process of analyzing their investment needs in a proper manner. There is a general tendency to follow a haphazard approach to investing.

Investing is a simple process that requires planning, perseverance and time. Therefore, one needs to begin with having an investment plan in place and a strategy to implement it. Before starting the process, it would help investors to know that risk is an inherent part of investing and that there is a direction co-relation between risk and reward. The right way to make an investment plan is by taking into account factors like current financial situation, investment objectives, attitude towards risk and the time horizon. The level and the type of risk would mainly depend on one’s time horizon i.e. the length of time one has to achieve an investment objective. For a short term investor, volatility is the main risk. Therefore, a short term investment strategy should focus on capital preservation. For a long term investor, however, important aspect is the annualized rate of return as volatility tends to work itself out over time. Moreover, compounding plays a major role in the wealth creation process of a long term investor.

As regards the risk, all of us have our own definition of risk. While investors recognize the risk of losing a part of the capital, inflation risk is ignored by them. For a long-term investor, it is crucial to earn positive real rate of returns i.e. returns minus inflation to take care of escalating costs. The real issue, therefore, is how can one find and maintain one’s balancing point that can ensure success at a risk level one is comfortable with. This is where an asset allocation strategy has a role to play. An asset allocation strategy helps in spreading investments across different asset classes such as equity, debt, real estate and commodities thereby reducing portfolio risk.

It is important to choose the right investment option while investing in different asset classes. It is equally important to remember that different asset classes perform differently in different market conditions. For example, stock market does well during an economic boom, and loses ground during recessionary times. Bond market, however, goes in the opposite direction. While the recessionary conditions are good for the bond markets, a booming economy is not so good for it. Therefore, one shouldn’t allow short term turmoil in the markets to block one’s vision for a better financial future. One needs to look for appropriate and tax efficient options rather than investing in a state of fear and miss out on opportunities to make the money grow at a healthy rate.

Thankfully, there are various investment options to suit the needs of investors with different risk appetite and temperament. For a long term investor, equities are potentially better than other options. At the same time, the probability of an investor facing higher volatility in the short to medium term goes up too. This risk, however, can be tackled by following a disciplined approach whereby money is invested on a regular basis. Remember, the level of exposure to equities vis-à-vis the overall portfolio size decides the likely impact on the overall returns and the level of risk. For investors who are not familiar with equity markets, mutual funds (MFs) can be a better option as they are not only diversified by nature but also offer many other benefits such as professional fund management, high level of liquidity through open-ended funds, transparency, flexibility, variety of options and tax efficiency. While investing in MFs, it is always advisable to focus on diversified equity funds. Though some of the aggressive funds like sector and thematic funds can be tempting, one should avoid investing in them at least in the initial phase of portfolio building.

For conservative investors, the traditional investment options like bank deposits, bonds, small savings schemes and debentures have been the mainstay of their portfolios for years. Though as a category, these instruments do address their concern for the safety of their hard-earned money; most of these do not have much of a role to play in the wealth creation process. That’s because they not only offer low returns but also are not tax efficient barring an exception like PPF. Besides, lack of liquidity in most of these instruments can be a major hindrance in the flexibility required to make changes in the portfolio from time to time. The time has come to look beyond these for at least a part of the portfolio and explore options like debt and debt related funds offered by MFs. These are not only tax efficient and flexible but also have the potential to provide better returns.

Gold continues to be one of the effective investment options. However, considering that ultimate role that gold plays in a portfolio is that of hedging against the inflation, one needs to restrict the exposure to gold to around 10-15% of the portfolio. Here too, MFs have a role to play. In today’s times, the better way to invest in gold is through Gold Exchange Traded funds (GETF) rather than buying physical gold which has many risks and logistic issues. GETFs can be bought on a stock exchange through a stock broker.

Last but not the least; take help of a professional advisor to guide you through the maze of investment world. However, it is equally important to know that you, yourself, have an important role to play in the decision making process. No one will know about your objectives, needs and risk profile better than you. While an advisor can help you in terms of determining the course of action and selection of investment options, you have a big role to play in defining the parameters.

Source: http://www.moneycontrol.com/news/mf-news/what-isbest-way-to-achieve-investment-success_455033.html

Bond yields at 18-month high ahead of debt sale

Ten-year government bonds fell for a fourth day on speculation investors refrained from adding to their holdings before debt sales on Friday.

The yield on the 6.35% note due January 2020 rose 1 basis point to 8.10% at the close of trade on Thursday. The price fell 0.02, or 2 paise per Rs 100 face amount, to 88.43.

Yields climbed to their highest closing level in 18 months as the finance ministry plans to sell Rs 12,000 crore ($2.7 billion) of bonds maturing in 2015, 2020 and 2032. The government plans to raise 63% of its full-year borrowing target of Rs 4.57 lakh crore in the first half of the year that started April 1.

“Supply pressure is persistent and has made portfolio management a lot more difficult and sensitive,” said S Srikumar, a fixed-income trader at Corporation Bank in Mumbai. “The trend in yields will be determined by the outcome of debt sales and economic data.”

The cost of five-year interest-rate swaps, or derivative contracts used to guard against fluctuations in borrowing costs, increased. The rate, a fixed payment made to receive floating rates, rose to 6.86% from 6.84% on Thursday.

Source: http://economictimes.indiatimes.com/markets/bonds/Bond-yields-at-18-month-high-ahead-of-debt-sale/articleshow/5874716.cms

Mutual funds see no gain from IRDA move on agent fee disclosure

Even as the Insurance Regulatory and Development Authority (IRDA) asks insurance companies to disclose commissions paid to agents, mutual fund experts say the step is not enough to create a level playing field for mutual funds vis-à-vis ULIPs. It will take some time for the mutual fund industry to recover from the dip in distributor revenue due to the entry load ban, the experts observe.

The ban on entry load for mutual fund products last year had sparked off the confrontation between the insurance and mutual fund industries on the non-uniformity of the commission structure. According to industry insiders, nearly half of the country's independent financial advisors selling mutual funds have quit due to the ban on entry load. They say that many distributors have also chosen to sell ULIPs rather than mutual funds as the former offered more lucrative commissions.

ULIP Vs. mutual fund

Some observers also see the recent spat between the Securities and Exchange Board of India (SEBI) and IRDA on the jurisdiction of ULIP as a fallout of this clash of interests.

“The basic idea behind SEBI's move to claim jurisdiction of ULIP is to bring parity in commissions,” says the head of a mutual fund company on condition of anonymity.

Since the ban on entry load, upfront commission for mutual fund distributors has been slashed from about 2.5 per cent to 0.5 per cent. In contrast, the upfront commission for ULIPs remains 20-40 per cent even after the recent cap on charges.

Phased changeover

“Any move by the insurance regulator which infuses transparency in the system is welcome; but such changes should be phased and not rushed into. It will take at least a year for the mutual fund industry to regain the business of pre-entry load barrier days,” Mr Rajiv Deep Bajaj, Vice-Chairman and Managing Director, Bajaj Capital said. The revenues from Bajaj Capital's mutual fund business dropped 40 per cent in the last 6-8 months, and this was more or less compensated by the rise in revenues from ULIPs and fixed income instruments, he added.

While distributors are gearing up to charge commissions directly from investors for advisory services, only about 30 per cent of customers are willing to pay the additional fee, Mr Bajaj said. “The strategy for the remaining 70 per cent would be to reduce operating cost by using online medium and impart more efficiency in the distribution system,” he said. Investors generally would prefer to pay commission for financial instruments if it was embedded in the product pricing and not on a voluntary basis, he pointed out.

Mr Atul Suchak, an independent financial adviser said, “We are trying to mitigate the fall in charges by acquiring more customers by offering innovative and interpersonal advisory services.”

Source: http://www.thehindubusinessline.com/2010/04/30/stories/2010043050671200.htm

'Equity funds have lowest rate of survivorship'

Equity funds have the lowest rate of survivorship over a five-year period when compared to other fund categories, said a Standard & Poor's-Crisil survey report.

S&P Crisil has introduced a new performance scorecard for mutual fund schemes taking into account some unique attributes.

The report covers equity, hybrid and fixed income categories of funds.

S&P Crisil Spiva scorecard removes survivorship bias, also compares a fund's return against the returns of a benchmark for that particular style and size category, said a release issued by S&P Crisil.

Also the scorecard shows both equal and asset weighted averages unlike the usual practice of calculating average returns using only equal weighting.

“S&P Crisil Spiva” performance scorecard presents the performances of actively managed mutual funds in India as compared to benchmark indices (S&P CNX Nifty and S&P CNX 500).

According to the report, “Benchmark indices have outperformed a majority of funds in most categories across one-year, three-year and five-year time periods.”

The S&P CNX Nifty index has outperformed at least 55 per cent of active large cap equity funds across all observed time periods and 70 per cent of large cap funds under performed the S&P CNX Nifty Index over a 5-year period.

Large cap and diversified equity funds only have a 74 per cent and 85 per cent rate of survival over 5-year periods respectively.

On the other hand, ELSS funds enjoyed a 100 per cent survivorship rate across all time horizons due to mandatory 3-year commitment for investors to invest in ELSS funds for availing tax benefits.

Source: http://www.thehindubusinessline.com/2010/04/30/stories/2010043052161300.htm

Sanjay Sinha, CEO, L&T Mutual Fund

Sanjay Sinha, CEO, L&T Mutual Fund, which was known as DBS Chola Mutual Fund before it was acquired by L&T Finance in January 2010. Before joining DBS Cholamandalam Asset Management in September 2008, Mr. Sinha was the Chief Investment Officer at SBI Mutual Fund. He started his career with UTI AMC Pvt. Ltd. and was with them for over 16 years. He joined SBI Funds Management in 2005. Mr. Sinha is an Honours Graduate in Economics from University of Delhi and a Post Graduate from IIM Kolkatta.

L&T Mutual Fund is one of the premier mutual funds in the country that serves the investment needs of investors through a suite of acclaimed mutual fund schemes. With a well laid out investment management process and an equally proficient fund management team, L&T Mutual Fund helps its investors reach their financial goals. L&T Mutual Fund is present across 37 cities through its network of dedicated branches and is continuously increasing its footprints across the country. L&T Mutual is backed by one of the most trusted and valued brands, L&T Finance as the sponsor. L&T Finance and L&T Mutual Fund are part of the L&T Group, one of the largest and most respected groups.

In an exclusive interaction with Hemant P. Maradia and Fahima Shaikh of IIFL, Mr. Sinha says, "India stands out due to strong pace of GDP growth, which should be sustained over the next few years."

What is your reaction to the Goldman Sachs fraud case?

There is a point of view that the some of the activities of the big US banks are not transparent and beyond the jurisdiction of many regulatory authorities. These issues have been cropping up every now and again. What we right now have is mounting of an investigation by the SEC into alleged irregularities of Goldman Sachs in relation to a particular product. We don’t know what will be the conclusion of these findings. So, on that one would be a little guarded in responding. However, a couple of issues are still worrisome. One is the opacity with which some of the Wall Street banks operate. Another is the infallibility of the so-called big banks. It will be difficult to predict the enormity of the issue.

Some time back there were talks in the US on new set of regulations to be introduced for the financial firms. With the Goldman fraud case, the case for the new legislation will be strengthened further.

What is your outlook on interest rates?

We expect the RBI to go for calibrated hike in interest rates. Rate tightening cycle may be more front-ended. Most of the rate increases may get over in the first half.

Some of the pressure on the RBI to raise rates may subside in the second half. Inflation should start to moderate from the second quarter of FY11. If we have a reasonably good monsoon then food price inflation should also come down.

Also, there will be a need to get the capex cycle moving in a far more accelerated pace. A softer interest rate environment will be conducive for corporate investments.

How do you see benchmark yields?

The bond market seems to have received the borrowing programme positively; because it is staggered. Given the fact that there will be some more monetary tightening, there will be an upward pressure on benchmark 10-year yield. At the same time, the tightening cycles will not be too prolonged. In that case, the 10-year yield may not rise too much beyond 8.5-8.7%.

Indian shares recently touched 2-year highs? What in your view could be the challenges or concerns immediate or medium to long term?

In the near-term, the market will tend to react to every upward movement in interest rates. Historically, whenever there are rate hikes, the market has reacted negatively. A fairly large chunk of the market is in the interest rate sensitive sectors. Also, some of these rate sensitive sectors are fairly high beta in nature. So, whenever there is a rate hike, these sectors tend to take a hit, which in turn affects the overall market.

But I feel that if the stocks in these rate sensitive sectors do fall in reaction to RBI action, it will be a good long-term opportunity. Banks have largely benefited whenever the interest rate cycle has turned up. Loans will be re-priced faster and the deposits are anyways coming in for re-pricing. Therefore, their net interest margins would tend to expand. While there will be treasury losses they will be notional in nature.

Has the risk-reward ratio for equities narrowed? Where do you see opportunities now?

Corporate investments may start to pick up from now onwards. Out of the Rs20 trillion that was earmarked for spending on infrastructure in the 11th Five-Year Plan, only about Rs8 trillion has been spent so far. So, in the last two years of the Plan, there will be accelerated spending on infrastructure. In addition, there is a proposal to hike the infrastructure spending in the 12th Plan to US$1 trillion (Rs45 trillion). What this means is that the investments will have a major part to play in boosting India’s GDP going ahead.

There will be huge opportunities that will emerge from accelerated investments and the same will not be confined to sectors directly linked to infrastructure. This in turn makes the overall outlook for the market positive.

Another factor that influences the market is liquidity. With the global economy recovering funds will move from less risky asset classes to riskier asset classes. While there will be large allocations toward developed markets, there will also be proportional allocation to the emerging markets, where India will be hard to ignore. So, I expect the momentum in FII inflows to continue going forward also.

RBI’s role in maintaining the financial stability has been remarkable. This has happened because it has a fairly measured approach toward opening the various parts of the financial sector. It has now a good number of time-tested tools to formulate its monetary policy in response to the changing economic situation.

Do you feel the premium that Indian market commands vis-a-via other comparable emerging markets is justified?

India stands out due to strong pace of GDP growth, which should be sustained over the next few years. The capital market structure that is present in the country today also makes it attractive to overseas investors. So, there is a case for one to be overweight on India. The only reason for one to be a little apprehensive about India is on relative valuations vis-à-vis other emerging markets. But, valuation has to be seen with growth prospects and not in isolation.

What would be your advise to those who may have missed the rally and now want to enter the market? Is fresh buying advisable at this juncture or should one wait for a correction?

Markets are fairly valued at this juncture if you consider current earnings. But, from the third quarter of FY10, the earnings momentum has gathered pace. If earnings growth picks up further then the valuations may start appearing attractive.

If you commit a large chunk of your investment money toward equity, and for some reason there is short-term pain, then the initial reaction is one of disenchantment. Retail investors should come into the market in a staggered manner. Trying to time the market on the way up or down hasn’t worked for them in the past. One needs to be clear about the investment horizon and the risk appetite.

Do you fear any asset bubbles building in any part of the Indian economy e.g. real estate prices?

Two divergent trends are emerging in real estate. In commercial space, there is excess capacity and rates haven’t come down. So, the offtake is slow on the commercial side. The residential side is doing reasonably well. In the last quarter of 2009 when developers dropped the prices there was significant offtake. But now rates have started rising again. Despite that, there is demand for fairly priced residential properties. Wherever, the prices are moderate, the inventory is being reduced.

Are you satisfied with the Government’s policies?

This Government has decided to go for incremental reforms rather than blockbuster measures. So, the policy announcements are not creating too much of a sensation. But, the policies have been positive for sectors at which they are aimed at.

What is your reaction to FPOs not doing well?

It is good for the Government to offload shares in public enterprises to a larger pool of shareholders. A few significantly large PSUs are being brought to the market. The flip side is because the Centre is aiming to raise such a large amount of money through disinvestment in a short period of time, there may be pressure on the markets due to the liquidity that it will suck out from the system. Also, in few cases, the pricing has been aggressive, which has left retail investors disappointed. This will be another negative going forward.

How do you see the sovereign debt problems in certain parts of Europe?

There will be among the trouble spots in 2010 for the global markets. Issues connected with Greece have also not been resolved totally. The eurozone will be a cause for concern in 2010.

What about China?

They have executed some tightening for the real estate sector recently. There also seems to be some willingness to allow the yuan to appreciate much more rapidly. These two developments suggest the China is ready to move towards a market-driven economy. Rate tightening will slow the Chinese economy and yuan appreciation will make other nations more competitive. As long as the re-balancing in China is a gradual it won’t impact the world markets that much.

Which are the themes you are betting on for this year and the next fiscal?

Engineering and Capital Goods looks like an enduring theme. Pharma sector should also do well. What doesn’t look attractive in the short term actually is good in the long term. Therefore, Banking & Financials, Autos, etc. would be good to accumulate at lower levels.

We have a contrarian call on IT. If these companies have been able to sustain business in the downturn, they should be able to expand volume in the upturn. Right now, the stocks are reacting to Rupee appreciation. But, the Dollar could start rising in the latter half of the fiscal year, which will be good for IT companies.

What about telecom, fertilizer and FMCG?

Telecom we are not positive because of the competitive pressure and aggressive bidding for 3G spectrum. We are underweight on Telecom as of now. Deregulation in fertilizer is happening in calibrated manner. It is not getting deregulated completely. Some of the actual benefits for the sector will come a little back-ended. Most of the good news is already reflected in the stock prices. For some time, the sector may be a market performer.

FMCG is attractive but it is a fairly well-penetrated sector now. It is also prone to a lot of competitive pressure. But, the economic growth is more effectively getting passed onto the grass root levels. That will lead to greater purchasing power in the rural areas. How big an impact this will have on the sector would be visible in the quarter-on-quarter growth of FMCG companies. As of now, one is a little guarded about the sector.

What is your view on small-cap and mid-cap stocks?

The mid-cap segment may outperform the large-cap stocks in FY11. If the economy as a whole is doing well then it presents a whole host of opportunities to companies of small-and mid sizes.

Could you give your take on the SEBI-IRDA spat over ULIPs?

The move by SEBI is aimed at making a level playing field for all types of similar financial products. As of now the field is uneven with different guidelines for products with similar attributes. If the field is leveled then the ability of mutual fund industry to tackle competition from other similar products will increase. Mutual Funds are one of the most cost-effective investment products. It also has a fairly good track record in terms of returns delivered net of expenses.

How do you feel commodity prices will behave in the next few months?

If you look at the way commodity prices have moved in the past few months, they seem to have factored in a global economic recovery much ahead. But, there is still scope for commodity prices to rise from here onwards though they may not gain as rapidly as they have done in the past 12 months. If commodity prices do shoot up sharply it could derail the entire growth process.

There will be an aggregate demand for commodity as the global growth picks up pace. Also, two of the world’s most populated nations – India and China - are witnessing accelerated growth. Because of the scarcity of resources there will be an upward pressure on commodity prices. In the short term one will see volatility in commodity prices and stocks related to commodities.

Source: http://www.indiainfoline.com/Research/LeaderSpeak/Sanjay-Sinha-CEO-LandT-Mutual-Fund/10498950

DWS Fixed Term Fund - Series 70 Floats On

Deutsche Mutual Fund has launched a new fund named as DWS Fixed Term Fund - Series 70, a 370 day close ended debt fund. The New Fund Offer (NFO) price for the scheme is Rs. 10 per unit. The new issue is open for subscription from 28 April and closes on 4 May 2010.

Source: www.karvymfs.com

Fund managers gung-ho about realty debt papers

The outlook on real estate sector may not be too bright at the moment, but that is not deterring mutual funds from investing in paper issued by property developers.

In addition to the old restructured papers of Gurgaon-based builder Unitech, debt schemes of fund houses like SBI, ICICI and UTI have invested in papers of companies like K Raheja, Emmar MGF Land and Shapoorji Pallonji.

As per mutual fund tracker Value Research, UTI Bond (medium term) fund has invested Rs 14.7 crore in ‘BBB’-rated floating rate bonds of Emmar MGF Land. ICICI Prudential Liquid Fund has invested over Rs 421 crore in secured debentures of K Raheja Corporation. LIC Income Plus and SBI Short Horizon Debt Fund have invested Rs 1.8 crore and Rs 1.6 crore respectively, in the ‘A1’-rated commercial papers of Shapoorji Pallonji.

However, raters tracking debt are comfortable with the debt-equity mix of most real estate companies and are positive on the sector. “The fundamentals of India’s real estate sector are improving, as seen by better liquidity and improved demand in the residential segment,” said Rakesh Valecha, senior director, Fitch Ratings.

Enhanced affordability, lower mortgage rates and better job security have helped revive demand for homes, according to Mr Valecha. “Demand in the commercial segment remains weak, primarily due to over-supply and the scale-back of expansion plans by corporate India. But then, we expect demand for commercial spaces to improve in the second half of 2010,” he added.

According to analysts, in sharp contrast to 2007 and early 2008, real estate companies are not investing money to acquire mass land bank or other fixed assets. Post the turmoil in end-2008, real estate companies have realised the need for a stronger balance sheet. Many over-leveraged real estate firms have used their cash in books to de-leverage themselves.

Equity analysts tracking the sector are currently maintaining a neutral to near-positive outlook on the real estate sector. They expect prices to be stable in the medium term due to good demand. Property prices may only rise 3-5% over the next few months, say analysts.

Such a price trend could sustain the demand for real estate for a longer term. Moderate demand will enable real estate companies to complete existing projects and take up new ones. Pressure on profit margins, however, cannot be ruled out, analysts opine.

Overall, credit metrics are expected to recover in 2010 and 2011, as developers are expected to improve their capital structure, operating margins, and liquidity. According to sources, the restructured loans of Unitech are expected to come up for repayment (or reaching maturity) in about 6-8 months’ time. Unlike in 2008, fund managers and paper valuers are not expecting the company to have too many problems in repaying the debt.

Debt schemes like HSBC Cash and HSBC Ultra Short Term Bond, Kotak Flexi Debt, Reliance Money Manager and Sundaram BNP Paribas Ultra Short Term fund still have investments in papers of Unitech. The Gurgaon-based company had restructured and rolled over the debt due to mutual funds in early-2009, as it was not in a position to repay because of low demand for real estate and beaten-down prices.

“We’ve not made any fresh investments in real estate companies since 2008. Our current investment in Unitech was done some time ago. In fact, our current investment is just 10% of what it was two years ago,” said K Ramkumar, head-fixed income, Sundaram BNP Paribas Mutual Fund.

“Unitech has paid back almost 90% of the debt in time. It is paying us a bulky monthly coupon as per a pre-set arrangement. Our investments are perfectly in order,” Mr Ramkumar added.

Source: http://economictimes.indiatimes.com/markets/real-estate/realty-trends/Fund-managers-gung-ho-about-realty-debt-papers/articleshow/5865613.cms

DSP Black Rock to mobilise Rs 2,000 crore from its NFO

DSP Black Rock mutual fund on Tuesday said it plans to mobilise around Rs 2,000 crore from the new fund offer, an open ended equity growth scheme focusing on investment in 25 stocks of top 200 companies by market capitalisation. "We expect to mobilise around Rs 2,000 crore from our open ended equity growth scheme DSP Black Rock Focus 25 fund, of which Rs 175 crore is the expected investment from Gujarat," Fund Manager DSP Black Rock Focus 25 Fund Apoorva Shah said.

Source: www.karvymfs.com