Posted tagged ‘Mutual funds’

Winner takes all? Mutual funds

August 15, 2008

If you read magazines, newspapers, etc. or watch the business channels you would have been convinced that people chase performance. However when I recently ran a screen on the best mutual funds over the past 3 years, I found something interesting. The fund returns (on an annualised basis) was 33.07%, 31.30%, 30.79%, 30.42%, and 29.66%.

Frankly what I am trying to say is you should not believe that old adage “Winner takes all”. Actually winner does not take all. In the long run whether you were in the fund which gave 33.07% or 31.30% for a period of 3 years, the overall money that you made would not have changed much. Also next quarter if both these funds gave (say) a return of 3% and 6% respectively the over all return figure may still be favoring the fund which got 33.07% over a longer period (!).

Thus those of you (or us) who keep shuffling funds or schemes should realize that sitting tight without worrying about returns over 1-3 quarters might be far, far better off than those who keep churning. Elsewhere I have called it a “rating trap” – which is helping on the rating company!!


Retirement planning: a reminder

June 17, 2008

Are you in Denial mode regarding your retirement financial needs?

I cannot comment for every one, but too many people are in denial about their financial needs for retirement. Most of us do not want to accept that we will buy 3-4 washing machines, air conditioners, refrigerators, maybe about 2-5 cars, at least one or two houses during our retired life!

And all this buying will happen with our own money – i.e. by selling our mutual funds, unit linked plans, shares, etc. and from our pensions!

Strong financial planning is the key to a comfortable retirement
If you’re planning to spend your retirement in comfort, you’ll need to rely on some pretty strong financial planning. You’ll want to take into account your current financial position and your anticipated retirement income, preparing for contingencies and unexpected expenses along the way. Then you’ll need to develop a strategy for setting aside money on a regular basis to fund your retirement financial planning and choose wise investments so your money will build as much as you need. It’s kind of a daunting task, and it’s no wonder that so many people planning their retirement are worried about the quality of financial planning available in the country.

Benefits of the top financial products for retirement planning – Critical need for Long Term Care Insurance
There is a critical financial aspect of retirement planning today. If you lose the capacity to take care of yourself and require either in-home assistance or be transferred to a nursing home, all the financial resources you set aside when planning your retirement may be spent in just a few years on the cost of health care. Long term care insurance will cover the cost of your medical needs without jeopardizing the wealth you’ve accumulated for retirement or want to pass on to your heirs. Unfortunately no such insurance is available in India as of now.

Choosing the right type of life insurance is also part of planning for the financial circumstances of retirement. If something were to happen to you before you retire, you likely would want your spouse to still have the lifestyle and financial security in retirement you envisioned in your planning, and the right life insurance policy can ensure that.

Keep reading……


Market view: S Nagnath DSP Merill Lynch

June 11, 2008

Why should you know Nagnath’s view on the market? When the whole world was pessimistic about India he predicted huge cash inflows. I may not be too wrong if I say that he predicted the bull run in 2002, not in 2008! He always has a balanced view and gives excellent quotes and views to the media.

This is what he had to say at the India equity show – a show organised by at Worli, Mumbai.

When quizzed about the Golden rule of investing, Nagnath quoted somebody (Anon) and said “The man who has the Gold makes the rules”. Apart from sounding good I guess what it means is the importance of cash flows. If the valuations are good, the market is attractive. However for the market to go up, there has to be somebody who puts in the cash. My personal view is that the money can come in from Unit linked Insurance and mutual fund sales – to compensate and more than compensate the FIIs taking money out of the country.

One thing apart from liquidity predictions and analysis is that many people who predict things may get it wrong. When the US $ started getting weak and there was a need for many Americans to go away from the US $, the cash flow caused the Emerging Markets and commodities to boom. Now if there is a reversal, we need to be ready for the same.

When markets go up, we rationalise. When markets go down, we rationalise.

Then he spoke about “regression to the mean” – if you are expecting say 15% p.a return over a 15 year period and you have had a bull run for 4 years where you got say 100% return, maybe you take some profits and keep it away. Similarly if you have got a -13% p.a. for say 4 years maybe you pump more money into the market. My take is “continue your SIPs, stay away from Unit Linked plans” theory will work well.

What causes this tendency of the market to run far ahead of earnings or lag the market for long periods of time? It is cashflow – created by euphoria or by excessive pessimism.

Nagnath also said it is difficult to take a long term view because of the crisis in the US and European markets. He called it an unprecedented short term market crisis – and similar crisis seems to have hit the western world only in the 1930s.

He took a nice dig at Bank balance sheets – and said that after the sub prime crisis, in a bank balance sheet if you saw on the “left side” there was nothing right and therefore quite obviously when you saw on the “right side” there was nothing left. He said that banks have very poor quality of assets funded by high leverage. We saw this in case of Bear Sterns, and now Lehman brothers is raising money for meeting its capital adequacy needs.

About the future Nagnath felt that the markets in the next 12 months are likely to be tough. He had no clue on whether we are finished with the sub prime crisis, are at the half way mark or in which leg of the journey we are. He felt the markets will be worse before it got better. He also predicted a market rally as and when the oil prices hit US $ 100 on the way down.

an invite for an Investment event –

May 14, 2008

I had put this invite in the month of April /May of 2008. This event will be repeated in May / JUne of 2009 also – hopefully year on year every year….read on….

June 7 and 8 (2008) Nehru Centre, Worli, Mumbai, India will see an unique event for the retail investor. Many fund managers – (Nilesh Shah (icici prudential mutual fund), S Nagnath(dsp mutual fund), Madhu Kela (reliance mutual fund), Prashant Jain (hdfc mutual fund), Rakesh Jhunjhunwala (Rare enterprises) – an investor, Sanjoy Bhattacharyya, are all people who have spoken in the past), along with many company managements will come under one roof and give gyan on what to buy, when to buy, should you sell, etc.

It is a fantastic intellectual event happening for the 4th time, and the best part is it is free to the retail investor.

The title sponsor is Icici Direct and the silver sponsor for mutual funds is Mirae.

for registration

Mis-selling or Mis-buying?

May 13, 2008

When the guy/ girl selling “financial planning solutions” comes to your house and you happily part with the cheque is it her fault for asking or your fault for giving?

This is a question I would like to ask all people who complain “I have been mis-sold to”. It is ridiculous that suddenly a retired petroleum engineer and his spouse (a home maker) have suddenly understood endowment, unit linked plans, mutual funds, real estate PMS, equity PMS, hidden charges, surrender charges, upfront load, bid-ask spread, and have then bought the product. Most of the people who sell do not know some of these terms, so the buyer knowing these terms is surely out of question.

So why do people buy?

Ego. Their ego does not allow them to admit that they do not understand the product, the suitability of the products, the structuring, etc. Also they convince themselves if a nice big organisation is selling it and the product is “approved” by SEBI/ IRDA (btw sebi does not approve any product) it must be a good product.

The other reason is “If I can decide to buy a Rs. 1 crore house, a Rs. 20 Lakh car etc. WITHOUT any advisor, why should I need an advisor for Rs. 50k a month SIP in a unit linked plan?” kind of attitude.

The third reason is they do not know whom to ask.

So God bless the uneducated (hurts?) buyer. Let him not crib about mis-selling. It is all about mis-buying.

Mis-selling in mutual funds?

April 11, 2008

The best thing that life insurance business has done in India is it has eliminated mis-selling in mutual funds! How is this possible?

Simple the rewards for mis-selling in life insurance plans is far, far greater than mis-selling in mutual funds, so many of the players have shifted games. That brings us to the question of commissions in selling life insurance plans…well that is a separate post is it not?

Financial planning for the young

February 25, 2008

You have just crossed your 23rd birthday, when you’ve gained the education and/or skills you need for the career you’ve chosen, and you’re earning money and learning how to handle it. Ok, ok you are not in your twenties but are in your thirties and have started looking at financial planning. Fine, this article will be just as applicable to you – only that the time advantage of a 20 year old is not available to you.


 Remember the importance of an early start in a One-day International cricket match? Remember the heroes? An early start ensures that the middle order batsmen can play with lesser stress and strain. Similarly there’s no time like your twenties to start putting your money to work for you so that you can achieve your financial goals throughout your life. Developing good spending, saving and investing habits, and learning to budget and invest during your twenties, can help.

You prevent needless debt, put away money for the things that are important to you, and take advantage of the power of compounding. In fact, compounding of earnings is so powerful that those who start saving for retirement in their twenties can amass large nest eggs with relatively little effort, as long as they invest regularly. Also remember retirement is not an age, it is a state of mind and a particular level of asset accumulation. If retiring means doing what you can rather than what you must, maybe you may want to retire at 37 instead of 55.

For an example of the power of compounding, take a 23-year-old who invests a paltry Rs.10,000 a month – he will accumulate about Rs. 15 crores for his retirement. Contrast this with a difficult Rs. 51,000 for a 35 year old. Not bad for an early start right?

GOALS! The first step in planning is to identify your goals. In most financial planning exercises, this is the most difficult task to achieve for most of the people that I meet. Your short-term goals (five years or less) might include a wedding, buying furniture, a new car or a career changing higher education, doing your own business, or more lofty ones like dedicating your life to social services.

Next, think about medium-term goals, such as owning your own home and financing your kids’ college educations.

Finally, list your long-term goals, such as retirement and travel.

Remember all these goals have a financial implication. All of these goals will mean some sacrifice of present consumption for a benefit in the future. You need to feel very strongly about these goals. To use a typical MBA term, you need a personal buy-in.

This article can at best motivate you into some action- but you need to be motivated enough to pick up the phone and make that call or send an email! Estimate how much money you’ll need to meet each of your goals, and determine how much you need to invest each month to reach that goal within your timeframe. Planning is a word document, budgeting is putting the plan in excel. When budgeting, set aside money to go towards your short-term, medium-term, and long-term goals. Try not to sacrifice one for the other. And try to prioritize them. Understand that since we all have limited means of income and too many goals to achieve, there will be conflicts. You need to resolve them. Too many of my clients ask me to prioritize their goals. Sorry this is your job as a client.

Is your daughter’s wedding more important than your retirement goal? I do not think so. However if you do think so, so be it.

 Just do it! It may be wise to invest in Savings Bank accounts, Mutual funds, etc. for your short-term goals, and unit linked policies for your medium and long-term goals. Historically, the stock market has outperformed any other type of investment over time, but it’s not for the faint of heart. Its volatility makes it a less than ideal investment for short-term funds, unless you have a very high tolerance to volatility. Remember equity or debt is never the question – it is only how much of each. You can enter the equity market or the debt market through vehicles like Mutual funds or unit linked policies. As an ad for a shoe company says, “Just do it”.

It is better to implement a plan while waiting for the “best plan for the year” . With the wealth of information available on the internet, it’s never been easier to learn how to be a smart investor. You just need to know how to separate the information from the noise.