Profit Booking in Mutual Funds

We have heard Financial Experts often reiterating the fact that Mutual Fund Investment Portfolio's need to be reviewed regularly. It is critical to regularly review the portfolio and shift from non performing schemes to performing ones.

At the same time it is also essential to book profits wherever possible. Profit booking I believe does not lead to speculation rather it is an essential element of making money through investments.
Agreed that every investment is goal oriented and has a timeline attached to it. Also for every investment to match its goal a certain rate of return is taken into consideration basis the past performance and current economic scenario.

In between the investment horizon during portfolio review in case the ongoing returns on the investments are exceeding the planned rate of returns I advise that a profit booking may be done and reinvested into a safer scheme.

E.g. 
1.) During sudden fall on interest rates returns through income funds jack up and provide a good opportunity for investors to book profits.
2.) For investors having investments in Equity Funds bull phases leading to so called peaks (although nobody can determine the real peaks and bottoms of markets) provide an ideal opportunity for profit booking.
Investors having SIP's during such scenarios may continue their SIP's after booking profits.

Only caution is that profit booking also involves some reinvestment risk :
E.g.
1.) If interest rates fall further after booking profits from Income Funds.
2.) If Market rises further after booking profits from Equity Funds.

However given the nature of Investment in MF's I believe this should not be considered as some volatility is bound to be present which nobody can predict accurately.

Please Note
1.) To avoid misinterpretation of my views let me tell you that Profit booking should not be a daily or monthly phenomenon.
2.) Also the idea of profit booking is not to temper with the goals. Money earned through profit booking may be reinvested for the same goal in an appropriate scheme.
3.) It may be considered during portfolio reviews once or twice a year or during specific market levels in the prevailing economic scenario. Savvy Investors might gauge it but for others Financial Advisors may do the needful on advisory and execution.

(Views are Personal)

NFO Investment!! How right is it??

I have heard and read  many times Investment experts advising clients to stay away from Mutual Fund NFO's (New Fund Offer). Mostly the reason given to stay away is "performance of a fund cannot be ascertained during NFO". Well I feel this doesn't do down well with me. My points of contention as stated below:

1.) Past performance is not an indicator of future performance. If this is the line we talk about it holds for all schemes of all Mutual Funds including the existing open ended ones. Then Why only NFO's. If nobody can guarantee the performance of existing open ended funds then why should NFO's face the question of performance. There are instances where performing Funds have faltered and mediocre funds or NFO's have excelled.

2.) Look at the attributes of the Fund, risk Profile and Fund Manager: If these points are to be considered and all of them fall in line with the requirements of clients then why should NFO's be avoided. If Fund Manager is the key then why target NFO's just because they are new. With the same Fund manager even performance of existing well performing schemes can't be guaranteed. So if the objective of NFO matches that of client requirements and the Fund manager is good I see no reason why to avoid the NFO's.

3.) Growth Hampered:  It is said that competition brings choice for customers and enhances the industry standards. Spreading negative words about NFO's just doesn't support the Industry Growth. NFO's are one major way especially for the new entrants to mobilize some good chunk of money and enhance their product portfolio. Moreover we should not forget that even the existing performing schemes of established AMC's were launched through NFO's way back. Success of NFO's add's up to industry AUM and who know's if there is a star performer fund coming in the form of another NFO.

Agreed at times Fund Objective / Fundamental attributes of an NFO might not prove a good bet with existing economic situations. But then all NFO's cannot be bad. And since performance cannot be predicted for any scheme NFO investments should not be discouraged altogether.

To conclude I would like to say that certainly Fund objectives should be analyzed within the existing scenario and if they fit well and the Fund matches the client requirement, risk profile and horizon NFO investment shouldn't be discouraged. This shall benefit the Fund houses (big / small) and the industry.

Concept of Right Coverage

Life Insurance Penetration in India is Hardly 3.4%. Firstly the Penetration figure is extremely low and to top it we may find a very small percentage of the Insured people having the right amount of cover.

Yes it is true. I ask a lot of people if they are Insured and the coverage amount. In rare cases I find people having the right coverage. Imagine somebody earning 75000 per month and having a Life cover of Rs. 10 lacs or anybody earning 40-50000 a month having a 5 lacs cover. God Forbids if he dies is the cover sufficient to cover his family needs. Answer is no. The money finishes in some months  / years. So while taking Insurance along with Premium it is the cover that really matters. Else I would say that the person is not covered.

Insurers widely advocate the concept of Human Life Value. Almost all Insurer website will have a Human Life Value (HLV) calculator. This is even a part of Insurance Tutorials. However while advising a client it is seldom used.

A lot of advisers & distributors (to be read as advisors henceforth) combine Insurance and Investment for the sake of revenue associated. Of course some products have whopping high revenues. I personally feel it is not justified in the interest of client. Insurance by concept has been a risk cover and not investment. However Insurance products of late are structured with an Investment component. Well nothing wrong technically but this takes away a major chunk of coverage from the Product. At the same time it also incurs heavy charges thus leaving very little benefit for investors. Of course a major portion of this charge also goes to the advisor in the form of commission. But then that is the way the industry works!!!

Life Insurance is a complex product and not everybody understands it. At the same time it is also the bread and butter for many Agents especially LIC which has a very deep presence in Rural areas. Still I feel there are very few Life Insurance  products which are of immense benefit to the consumers. If I have to rate anything I feel Online Term Insurance the recent offering by most insurers is the best. Low cost and High coverage. Very few understand the calculations of benefits associated with Online term cover and at the same time being restricted to online its reach remains limited even in big cities.

Insurance has been a distribution oriented Industry and is the bread and butter for a lot of Agents. It is also a source of good revenue for Banks and other Distribution channels.  Online products cannot replace Agents and other Distribution channels. Insurance is a must have product for anybody and everybody and an integral part of Financial Planning. I believe there is a need for structuring products which are heavy on coverage for the consumers. How it happens is yet to be seen and involves considerable brainstorming. Structuring of Life Insurance Products heavy on coverage might have a dent on the advisor commissions but in the longer run will be beneficial for consumers and in turn for the advisors. With client Insured adequately the Advisors will have a free hand in Planning the investments. But if I have to talk about the consumer interest I feel a lot of existing products do not justify the concept of right coverage. Supporters of these products on the other side will have multiple reasons to prove me wrong. But if we look at the broader picture they hardly satisfy the consumer interest of being "Insured".  Waiting to watch the change happen.... To close it on a positive node I believe it may take some time but it surely will happen.

                                                                                 (Views are personal)

Quick Investment Tips...Current Economic Scenario

1.) Take Exposure into Income Funds: The Current scenario makes it a good time to take some exposure into Income Funds. With G-Secs hovering above 9% mark allocation into Income Funds might prove a decent bet for a horizon of 18 to 24 months.

Rationale:
RBI has been determined to fight inflation and the huge volatility in the currency. First it squeezed the liquidity by raising the MSF. Then it has been on a rate hike spree from the last two times. Even though the differential between the MSF and Repo was brought down to 100 basis points liquidity in the market has been an issue. Inflation has been moving northwards, Oct CPI was above 10% mark and WPI above 7% making it difficult for RBI to bring down the rates.  Moreover FII's have been net sellers of Indian Government Securities. This has led to a steep rise in Bond Yields since June 2013 with yields crossing the 9% mark.  It needs to be seen on how RBI comes out with its policy in Dec 2013.

Over the next 12 - 18 months I see the rates coming down as slow growth of Indian Economy is a key concern. High Interest scenario shall not be favourable to push the growth and sooner of later RBI will have to bring down the rates to regain the growth momentum.
This downward scenario of rates shall be extremely favourable for investors with exposure to Bonds / Income funds as they stand to benefit the most. (Remember Bond Prices are inversely proportional to Interest rates.)  Hence with G-Secs hovering above 9%+ mark  it becomes a lucrative option to take some exposure in Income Funds.

2.) Equity Exposure SIP and Lumpsum: For Risk averse Investors SIP remains the best mode irrespective of time. For those who are willing to take risk upto a certain level Lumpsum investments can be done in Small and Mid Cap Funds.

Rationale: 
SIP investments can be done anytime as they average out your costs. But for Lumpsum Investments are Markets at 21000 a good investment bet. Well equity has been a favourite for Investors in India during rising markets. Many would happily invest assuming that Markets will go up further.
At 21000 the belief is widespread that there is a lot of value in Indian Markets. The sudden upwards movement of Indian Equity market is primarily driven by handful of Bluechips which have witnesses significant buying from FII's. At these high's still 90% of stocks are trading far below their book values (Especially Small and Mid Caps) suggesting a strong underlying value in Markets.  Hence some Lumpsum Investment into Small and Mid Cap Funds can prove to be a good bet. Suggested Horizon: Min 5 years. Warning: Be prepared to withstand the volatility and donot panic as the NAV might fluctuate significantly during bearish phases.

Investment Advise in the current Indian Economic Scenario:

The current economic scenario is gloomy and full of ups and downs:

- Equity Markets are highly volatile with last 5 year returns almost negligible.
- Bond yields have moved up drastically by almost 100 basis points compared to what they were 1 to 1.5 month back leading to Mark to Market losses on Mutual Funds and direct security holdings:
 - High level of political instability.
- Policy paralysis and inaction by Government.
- Rupee depreciation to all time high of 61.43 vis a vis, the dollar.

The list can continue but some of the points mentioned above are sufficient to justify that we are economically going through a difficult phase. Of course measures are on by the Government and RBI to control the same, however this may take its own course and time to get things in order.

So what should a retail investor do to make money out of his Mutual Fund investments in the current scenario.

Simple Rules: 1.) Be disciplined
                        2.) Maintain horizons
                        3.) Do not Panic

Equity Exposure: Ideal for a minimum horizon of 7 to 10 years with Systematic Investment Plans being the ideal route. Diversify through Small and Mid Cap Funds and Large & Multi Cap Funds.

Debt: With 10 year G Secs hovering between 8.4 to 8.5% levels it is an excellent time to invest in Income funds with a Horizon of 1.5 to 2 years. Staggered approach is best. Buy in small amounts on every rise in G Sec Yields. Given the high yield scenario in Debt Market Investment in Income Funds make a strong sense at this point in time. Lumpsum investment strongly advised. 

Hybrid Funds and ETF's: In case you have Liquidity in hand I will advise to take small exposure with a horizon of 3 to 5 years.

Liquid and Ultra Short Term Funds: Keep investing in case you have liquidity for short tenures.  Best bets for short tenures. Horizon 1 day to 12 months

In case you have invested before this Liquidity Tightening carnage by RBI and the market fallback, I suggest you should hold on to these  & Stay invested patiently till the time things get in line and your investment starts making money.

Remember horizon and discipline are the key.  

Mutual Funds: Fundamentally superb but Fundamentals misunderstood

Mutual Funds are fundamentally a superb product but unfortunately the fundamentals of this product have not been understood or I should say misunderstood by a majority of investors.

Time and again AMFI, SEBI, AMC’s have been coming out with investor awareness and education campaigns for promoting investment culture in Mutual Funds.  Huge budgets are allocated to the campaigns and every campaign reads out loud about benefits of Investing in Mutual Funds.  

SEBI off late has been hard on AMC’s and has come out with regulations giving huge benefits to investors.

Even if we look at Fund performances at large with respect to horizons the respective fund categories have performed up to the mark (barring certain bad patches) and made money for investors.

The benefits are many if I have to list them down one by one.

Still the retail inflows into MF’s are limited. Why?

According to me the Problem may be divided into two broad areas:

1    1.)    Distribution Front

2    2.)    Education & Awareness Front

1.)    Distribution Front

·         -  Low Revenues and Inactive distributors: Distribution has been the key to growth for any industry and Mutual Funds are no different. It was one of the preferred financial products till Aug 2009 when SEBI abolished the entry load in Mutual Funds. After entry loads were abolished revenues for MF’s have been extremely low. AMC’s have been running on tight pockets as they need to manage everything out of the expenses charged to the fund. Distributor commissions were reduced across the industry and it led to MF’s taking a backseat in the selling priority of distributors. The distributors sell MF’s on a pick and choose basis wrt the commission offered by the AMC’s. As such awareness about MF’s is low and inactivity of distributors adds to the woes.

·        -  Improper Advisory and Misseslling:  Mutual Funds have traditionally been push products and also carry some degree of risk and volatility. Hence they need a proper advisory when it comes to investment. However MF sales have been low on advisory many a times and mis selling has been rampant in the past with many issues coming to the highlight. Investors were sold Equity products (ULIP’s, Equity Funds etc) without explaining them the horizons and the embedded volatility.  Improper horizons led to untimely redemptions and ultimately a negative perception of MF’s among the investors.  Right advisory has a long term impact. Mutual Funds are fundamentally right products and if sold with right advise even with low revenues they shall create a better value and revenue proposition for advisor and the client.

2.)    Education and Awareness Front

·         -  Mutual Funds always invest in Equity Markets: An extension to the above point on advisory. Because of improper advisory a lot of investors still have the perception that MF’s invest only in Equity Markets. They are not aware about Debt funds and its various categories. Moreover compared to the good times of a bull run bearish phases in markets are publicised in media more with a panic leading to negative perceptions. Financial awareness campaigns have to speak out these clarifications loudly so as to clear these negative perceptions. Also Education distribution on this front has to be strong so as to make the awareness stronger and inroads.

·         -  Advisory Fees, Financial Planning and Wealth Management: The concept of advisory Fees and Financial Planning is in initial stages and yet to take off in a big way. It will take some time before investors realize the value of paid advisory. This should felicitate the investor awareness and weed away the negative perception about Mutual Funds.    

·        - Penchant for Fixed Returns: Fixed return syndrome has been widespread among most of Indian investors. FD’s, PPF’s have always been hot favourites of Investors as they can regularly see their money growing. Well I won’t get too much into the arithmetic but calculations have proved that FD’s, PPF’s or for that matter any traditional fixed return product are not always the best source of investment. MF’s do not offer fixed returns but always find a place when it comes to a certain investment horizon along with certain tax benefits. However a very small percentage of investors are able to come out of their shell of Fixed return syndrome.  

Conclusion: I believe Mutual Funds are a poor victim of Negative perception and half knowledge of investors coupled with the inactivity of distributors. Both the sides i.e. Investors are distributors are negative about Mutual Funds with their own reasons. Recession, Global environment, etc are smaller factors. Any MF Sales person has more to fight with the Negativity than anything else in selling Mutual Funds. The strategy requires some brainstorming to get things back in order. Initiatives are on at many levels but implementation strategy shall be the key for things to take off in Mutual Fund Industry.

Being an optimist and a well wisher of Mutual Fund Industry I look forward to see good times for the industry in near future.

Call from Bank for Insurance.....................

You maintain a decent Bank Balance! Great.......

Very soon you will get a call from your Bank pitching you an Insurance product or you may be pitched an Insurance product the moment you enter your Bank for some work.

This is also Great! You get the benefit of buying all kinds of Financial Products under one roof. That's what the Bank's are aiming at. Becoming a Financial Powerhouse.

Insurance is never bad. Personally I feel Insurance is a great product and covers your Liabilities. The concept dates hundreds of years back and started as a cover for Merchants sending their goods via Ships. Now Insurance is a vast field and covers are available for a lot of activities and products in our life. Whenever I am advising somebody I always tell him to get Insured first to cover his Liabilities and then look for other investments.

Hence whenever you are pitched by your Banker for Insurance donot run away or buy without understanding. I never advise anybody to avoid understanding the Product in Bank as you never know when you come across something good.

Ask for the following Insurance products from your Banker to make it a part of your Portfiolio and help you cover your Liabilities.

Term Insurance: Whenever you are pitched for an Insurance by your Banker ask for a Term Insurance. The Banker may approach you for a Traditional Plan or and Endowment. But Term Insurance is far better than both. It is a Pure risk cover and not an Investment option hence at low cost you get a fairly high coverage securing your liability in case of an unfortunate event. Child Plans, Retirement Plans or any other similar plan may not be beneficial as they can be structured through a combination of Term Insurance, Mutual Funds, FD's etc.

Health Insurance: As Life expectancy has gone up so has the cost of medical facilities. A Health Insurance is a perfect Tool to secure your medical liabilities. Healthy people usually avoid this saying that we have never taken a claim so why should we pay for Health Insurance. Insurance company is just making money out of it. My take: Do it like a charity for yourself. Illness never informs before happening. You may want to set aside some corpus for Health and do away with Health Insurance. Well not a bad idea till you have a heavy corpus dedicated to your medical expenses. This is possible iis you are extremely rich or in later part of life when you have accumulated sufficient corpus for the same and Health Insurance coverage is insignificant compared to that corpus. Till that time always keep a Health Insurance and buy it early right from the time you start working.

Criticall Illness: Important coverage to cover some extremely critical illnesses. It covers 8 to 10 illnesses depending on the company and pays the insured on detection of any of these problems subject to certain conditions.

 Home Insurance: It covers your home and items in your house against burglary, fire and act of god perils. Most people ignore this but I suggest we take one to cover against  a negligible probability of mishap.

Vehicle Insurance: If your Cars or Two wheeler are not insured. No need to explain why we need them. Mandatory insurance for every vehicle owner.

So next time you are being pitched for Insurance from your Banker donot run away or donot buy the product blindly. Ask for the products mentioned above as per your requirements and cover your liabilities. Never buy Insurance for Investment purposes. This will curtail your coverage and will let you fall into a false sense of satisfaction that you are Insured which probably wont suffice at the time of actual need. There are Mutual Funds, FD's  and other investment products to suit your Investment requirements. Insurance is just a risk coverage and should be taken for that purpose only. 

Very Basics of Financial Planning

Many people ignore Financial Planning and start thinking very late about the same. Many a times despite of thinking about planning our finances we are not able to get the time to structure them. Or at times we take it lightly and ignore the same. Here are some basics which one should do if somebody is not able to structure a financial plan for himself.

Start investing early and Invest only after you are through with your monthly expenses and have an investible surplus.

Always start with Insurance so that you cover your Liabilities. Get a Health Insurance and Take a Life Insurance Cover once you are married. For enhanced Liability coverage depending on your investment limits you may take Critical Illness and Personal Accident coverage. These covers are also available as riders along with your Life Insurance. For Life cover just take a Term Insurance to get a maximum coverage. Online Term Insurance are available with high coverage and at low cost and should be considered. However just make sure that you get the medical tests done and do all require disclosures. This ensures smooth claim settlements to your family in the event of any mishaps.  Don’t go for any ULIP / Endowment / Traditional Plans. They are not an effective combination (However they are sold the maximum by distributors due to high commissions).

Take Health Insurance:  Take a Health Insurance to cover your unforeseen medical exigencies. Taking Health Insurance in early age is beneficial as it is highly cost efficient.

Now Plan your Investments: Decide your goals / the timeframe / your budget and investible surplus and then your Asset Allocation. Simple rule: Diversify between Equity and Debt depending on your time frame and age. 

 Suggested Investments according to horizons:

1.)    1 to 30 days – Liquid Funds

2.)    30 to 365 Days – Ultra Short Term Debt Funds and Short Term Debt Funds

3.)    366 days to 5 years – FMP’s, Dynamic Bond Funds, Income Funds, MIP’s, FD’s. Decision should be made depending on the interest rate scenario. Just keep in mind that FMP’s and   Debt Mutual Funds are tax efficient is investment is held for more than 1 year (10% without Indexation and 20% with Indexation whichever is less). However this is best only if an investor falls within 30% Tax slab as he gets a min 20% arbitrage over FD’s. For anybody falling in 10% slab FD’s. Anybody in 20% Tax slab can divide his investments between Debt Funds and FD’s. This is because an investor falling in 20% tax slab might enjoy a tax arbitrage if Indexation is taken into consideration (Effective taxation rate after applying indexation might go down below 10% considering the current indexation rates.).

4.)    Above 5 years : Equity is the best as long term returns out of Equity are the best. In case you are not able to invest a Lumpsum amount invest through SIP (Systematic Investment Plans) with as low as Rs. 1000 per month. SIP’s are the best investment options for a Salaried investor to generate good returns over a long term. Remember Investment is Equity Mutual Fund is highly tax efficient as investor doesn’t incur any Tax if investment is held for more than 1 year from the date of Investment (Long Term Capital Gain is Tax Free). Never fear Volatility of Equity. Ups and downs in Equity are common but if a discipline and patience is maintained for the requisite horizon one does get a decent return beating inflation and fulfilling the required goals.

5.)    Allocation to PPF: Always allocate some amount to PPF as it is an old and well proven investment option from the last many years offering a consistent return of 8%. Only restriction: It has a minimum lock in of 15 years. But withdrawal after 15 years is Tax Free.

This article just emphasizes on basics. I have not included the nitty gritties of Financial Planning and Products in this article.  

Financial Planning a Two Way Process

I keep on meeting many people who often quote me “I know a lot or everything about Mutual Funds and markets. I have been doing this for so many years. In the end it’s a loss making investment and I have lost a lot of money in this”. Then I get to know a lot of explanations about why they only want to stick to the traditional FD’s, PPF and NSC’s.  At the end of this conversation I always wonder that if somebody knows so much about Investment Products / Markets then how come did he lose money.  The chances of a learned or properly guided investor to lose money in a long run are negligible. As a person who has planned his investments will have his goals and time frame in mind and shall select the product accordingly. 

I am not against any product whether it is traditional, market linked or exotic structured product. Traditional investment products like PPF, NSC’s, PF etc are designed keeping all sections of the society in mind and are still a favourite choice of investment. Whether downturn or boom they have consistently given decent returns.  However they may not serve all investor goals depending on their inherent structure. On the other hand Property Investment requires liquidity in Hand, Equity Investment requires a long horizon, Gold (Favourite Investment for Indian’s) is more of a hedge etc etc.... Investment in every asset calls requires a reason. Hence Financial Planning is required with a proper asset allocation depending upon the timeframe or investor goals.

Financial Planning is a two way exercise. Banks/Asset Management Companies/Insurance companies are doing a lot to educate the investors. Awareness Programmes are organized by various organizations. Lot of information is published in newspapers by organizations. Educational Mails are a regular phenomenon. Steps are also taken by regulators to educate the customers. Various campaigns are being rolled out via print and electronic media. In short there is no dearth of information on Investment products.

Now it is the advisors job and responsibility to guide the investor!! Agreed and also this advisory has to be done from a long term view and not from a short term revenue perspective. Right advisory without miss selling means a happy investor. This might lead to lower revenues in short term but over a long term it helps in building a trust, reputation, more no of customers and eventually shall translate into higher revenues for the advisor.

With all this in place it is also the investor’s responsibility to become proactive in planning his investments. Most of the time we go by word of mouth in deciding our investments without even evaluating the options.  We avoid investing in products which could be the best investment options without any valid reason. This is where we tend to miss the bus.  Many investors do not understand the nitty gritty of the products because of which they form their opinions (mostly negative especially about Equity and Equity MF’s) and further spread the same via word of mouth. Hence choosing a right advisor becomes very important. At the same time it is also the investor’s responsibility to at least have a look at where he is investing and clarify all doubts.  

Financial Planning being a two way exercise hence Trust and Information Exchange has to be done from both the ends.