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)