Wednesday, December 2, 2009

When Should You Sell Your Fund??

The dilemma faced by some mutual fund investors on when to sell off an investment made in a fund often seems greater than the one they face while choosing a fund to invest in. The problem is that most — if not all — of us, who are active and involved investors, have a bias for action. We equate being good investors with doing something, often anything.

Unfortunately, this translates in practice to not just buying more funds than we need, but also to be ever ready to sell.

I frequently get questions from trigger-happy investors who are raring to sell a fund. There are generally three types of reasons they give for wanting to do so. One, they’ve made profits; two, they’ve made losses; and three; they’ve made neither profits nor losses.

That’s not a joke. At least, it’s not intended to be. Typical statements go something like this: “Now that my investments have gone up, shouldn’t I book profits?”; “This fund has lost a bit of money recently, shouldn’t I get out of it?”; “The fund has neither gained nor lost. Shouldn’t I sell?”

Basically, investors who have a bias for continuous action can create logic for taking action out of any kind of situation.The worst cases are those where investors want to sell a fund because it has done well, but not as well as its own past or its peers. Investors are willing to bail out of a fund that has done well for years on the basis of slight underperformance for a few months. The other day, I had a question from an investor who wanted to redeem a fund which, after six years of outstanding performance had given a ‘mere’ 60 per cent gains over a period when the top performing peers had done 70-90 per cent.

The problem is that investors’ actions while choosing a fund often mirror those while selling it. If you’ve chosen a fund because it was doing well for six months, then you’ll probably feel like selling it if it underperforms for three months and move on to another one, which has done well for six months. This doesn’t work. Investors in equity funds should choose one fund for sustained good performance over several years. As for selling them, the most logical reason for doing so would have more to do with your own finances.

Are the financial goals, for which you were saving, fulfilled? Then, by all means, you should sell off and redeem whatever money you need.

You should be a lot more circumspect, as far as getting rid of a fund and switching to another because it has started doing badly. The reason is that unless their management changes, funds that have a long history of good performance don’t suddenly become bad. It takes certain qualities for a fund manager to do well over years and those qualities do not vanish overnight. Everyone can have ups and downs and have bad phases, generally because one or two calls went wrong. In my years of analysing funds, I cannot recall a case in which someone was a good fund manager for years and then permanently became a bad one. And vice versa.

What this means is that, as long as the fund management remains the same, and as long as the fund is a diversified one (not a thematic one whose theme has gone wrong), it is better to be patient than to be trigger-happy.

Tuesday, November 3, 2009

Life after 01/08/2009 for MF Investor

It has now been a month since the Securities and Exchange Board of India’s (SEBI) new rule on the abolition of entry loads on mutual funds sales came into effect. As most investors should know by now, mutual funds no longer deduct an entry load from the amount invested. Earlier, this amount was used to pay most of the commission that funds disburse to the distributor who sold you the fund. From August 1 onwards, the entire amount that you write on the cheque is invested in your name - none of it is deducted for any purpose.

Of course, it's too early to see how the larger picture has worked out. There have been plenty of pessimistic projections about how distributors would stop selling funds and investors would stop investing in them. However, one month's time is not enough to make sense of any macro numbers about total investment inflows from different investors and different channels.

During this month, different distributors - and different types of distributors – have implemented different models for getting paid for the services they offer to investors.

Investors need to be aware of the various alternatives and the pros and cons of each.

Firstly, investors need to appreciate the fact that no entry load does not mean no commission. All that the SEBI’s new rule says is that fund companies must not deduct an entry load. Distributors can charge investors directly for their services.

Essentially, there are three models by which distributors can charge investors. They can charge a flat amount per investment. Or they can charge a percentage of the invested amount. Or they can charge nothing. All three are being tried, with some variations. The nothing option works only because fund companies are still paying commission to distributors - they are paying some amount of upfront commissions. Along with that, they will continue to pay the so-called trail commission which is mostly around 0.75 per cent per annum of the value of the funds.

Many distributors, including some very large ones appear to have reconciled themselves to this ground zero reality. My guess is that the free mode will come with some strings attached. The service and advice level is likely to be minimal. Also, the distributor could well be aiming to use funds as a loss leader to get you as a customer and then try and sell other, more lucrative products like unit linked insurance plans (ULIPs) where they can get fat commissions.

At the lower end, small and individual distributors are having a tough time trying to find the right level to charge. Typically, most of them do not offer meaningful advice but do offer great operational service. Since most of them are known to investors, their personal service levels tend to be substantially better than the larger and slicker outfits. If you are already dealing with such a distributor, you should recognize that he offers a real service and expect to pay him a fair fee for his time and effort.

At the other end of this marketplace, there are plenty of large distributors who are making a pitched attempt at continuing to charge a percentage that is close to what they were getting earlier. I know of at least a few foreign and Indian private banks that are continuing to give their wealth management and personalized-advice spiel. You should not entertain such claims. You should be paying a fair value, but the days of paying a full two per cent or so are gone. In fact, the days of paying the same percentage regardless of the amount invested are also gone.

My advice is that if you are a knowledgeable do-it-yourselfer (and since you are reading this publication, you probably are), and then the best option is to make your own investment decisions. All you need is someone to service your decisions at a reasonable cost.

Depending on your inclination, the best options could be a low-cost online broker, or a neighborhood small-timer.

Saturday, September 12, 2009

Electrifying Prospect


In 2007, with a return of 124.42 per cent, it truly impressed. But in all fairness, it is a sector fund and the relevant stocks were trading at a significant premium to their earnings.

Since the fund's fortunes are restricted to those of the sector, a slump could badly hit the fund. But the fund's mandate allows it to invest in energy, power, financial institutions and banks engaged in funding power projects, as well as any company associated in some way or the other with the power sector. Besides this broad base, the fund manager is not restricted in terms of market capitalisation or asset class. He has the leeway to be fully invested in fixed income securities (of companies that fall within the mandate) or even cash.

So, while one can expect anything, the fund manager has worked hard to mitigate the danger. Towards the end of 2007, the fund began to take on a large-cap tilt and also increased the number of stocks to around 27. Simultaneously, the allocation to the top five holdings has drastically reduced from an average of 43 per cent in 2006 to around 20 per cent, end 2008.

This diversification, coupled with an increased cash allocation helped it get away with a modest fall of 50 per cent in the market crash last year. However, in the recent run-up from March 9-June 30 2009, the fund has gained an impressive 76.52 per cent.

The fund manager has a tough job partly because he is managing a sector fund and partly because of the large asset base - this is the largest equity fund. But he has delivered admirably, has taken the risks into consideration and looks well poised to capitalize on power sector reforms in the future.

Monday, August 17, 2009

Mirage In The Markets

There are 2 opposing sentiments that need to play out in world stock markets in general.

The bulls believe that the world is returning to ‘normal’, while the bears believe that the world can still come to an end. At the moment, the bulls have an upper hand, but I have certain behavioral indicators that suggest that the bears may have a point. You can’t increase global Money Supply by an estimated 25 per cent, take the Fiscal Deficit to 12-15 per cent in major countries, and not increase inflationary expectations. Ignore this at your own peril….

So, then what explains the rally so far? Call it the return of ‘animal spirits’, people who have just got tired of waiting, and who don’t know what to do with their freshly-earned cash; maybe the stimulus money waiting to go somewhere. Or just late-stage momentum…? The return of the stock market ‘tipster services’, the revival of brokerages and the quick resurgence of day-traders tells me that this is a late-stage bull rally already, with little change by way of fundamentals. That would suggest that market (volatility) risk has gone up dramatically.

Let us look at how fundamentals have changed since 2007. First, the Asian savings glut. China is no longer buying US Treasuries, and the US Current Account Deficit has halved (to $400 bn). So the supply of limitless liquidity with low inflationary expectations has gone; it has been temporarily replaced by the promise of Government Fiscal Stimulus, which will fuel inflationary expectations if they actually happen. Governments are already working hard at promising Bond markets that these funds will never be let loose, otherwise the world is headed for a 1971-like inflationary shock. Look at what the G8 just said; no further talk about pumping cash, but some pious statements about how to pull them back in, once things return to normal.

If China is no longer there to drive down Treasury yields, who subscribes to those US Bonds at the margin? The US citizen now has a 5 per cent savings rate, but he expects inflation at 3-5 per cent, which means T-bills go at 7 per cent. That is above the historical average, in the middle of the worst recession since 1929. Hardly the stuff that promises recovery…!!! More important, if the supply of T-bills continue, it could fuel inflationary expectations, driving the US into a hyperinflation loop with a Dollar collapse.

The DXY Index is falling, despite a halving of the Current Account Deficit. That suggests capital flight, and we can see where the money is going: to commodities (like oil) and Emerging Markets, especially those who are seen as ‘commodity currencies’ like Brazil and now Russia. India, one of the beneficiaries of low oil prices, could see one of the false rallies, as oil prices go back up, the Current Account Deficit balloons and its invisibles account sees a dip because of the weakening purchasing power of the Dollar (which reduces IT flows).

A key threat to the Dollar’s destiny is the Bond market’s view on the $12 tn (83 per cent of GDP) that the US Fed has committed. The Fed now has to convince the Bond markets that this money will never be released; else there will be a run on the Dollar. This is the key theme running through currency markets just now. Contrarians are punting on the possibility of the Fed actually raising rates just now (even with 9+ per cent unemployment) to get back some Dollar strength. If the dam breaks on the other side, it may be impossible to retrieve Dollar credibility. Will the Fed do it? Let us look at what happens if it doesn’t. You will have a clear bubble in oil, even with falling demand. This will anyway fuel inflation and affect growth, puncturing the famous India story, for example. It will also push global stagflation, hardly the stuff recoveries are made up of.

Why should you worry about Dollar weakness? A desperate Euro, with 9.6 per cent unemployment and 2 sovereign defaults within its community, is trading at a 2-Sigma high (it has been higher only 5 per cent of the last 5 years). Does this look normal? The traditional formula of increasing Money Supply only works till people feel that money is valuable. At some inflexion point, if people lose that faith, you become a Zimbabwe. This is called Rational Expectations Theory, and is the exception to the Keynesian “pay money to dig holes” prescription for coming out of a recession.

There is a point at which you need to focus on building the credibility of the currency, like Paul Volcker did when he triggered the 1987 recession with 14 per cent government bond rates, but clearly stood on the side of a ‘strong Dollar’. This credibility was subsequently destroyed by Greenspan. Maybe the cycle has to repeat itself….

So is there a genuine demand-led recovery anywhere in the world, which needs to be discounted in its stock markets? I can’t see it anywhere, despite the specious media arguments that ‘we are an exception’. This is no different from the ‘India Shining’, ‘India Decoupled’ and ‘India Great’ arguments, where a cricketing victory has been seen as indirect evidence of future Indian greatness, justifying a bull market. The property market is even more ridiculous, mainly because more people have property than have shares. This last property boom-bust was larger, more widespread and deeper than ever before. Why would the cycle be shorter than ever before? It normally takes 3 years to run out inventory; this time, if anything, it should take longer because of weaker incomes and lesser availability of good credit.

This bull market is more the creation of the mutual fund industry and the media than anything else I have ever seen. If you can trade your way out of this shallow and artificial ‘bull run’, go for it. If you have the courage and the skills, get in with a trader’s eye, and ride a big spike in stock prices that could leave you richer but unhappier than before. A trader’s life is not a good one, because you have to learn to live with losses.

Most retail investors lose money to the markets. Japan, Korea and Taiwan, even China have seen huge economic growth, but volatility in the stock markets has never created wealth for its citizens, just as Las Vegas has never made the gamblers rich. Long-term wealth in stock markets is created for the retail investor only by good companies that grow without volatility, like the “FERA companies” created wealth for our parents through a generation of bonuses and dividend payouts. Remember Colgate and HLL? The difference is made by Corporate Governance and a culture of sharing with minority investors, not the absolute amount of profits generated. This is missing in Asian companies, but thankfully, we have some honorable Indian exceptions (like the Tatas, Infosys and Bharti).

Warren Buffet has fed the notion that long-term investors in general make money. This is not true, unless you have the skills and perspicacity of Buffet. With the exception of GE, no company has lasted long enough to make sustainable money for its investors. Yes, markets may appreciate over the long term, so investors who invest in Index Funds might make money, but not buy-and-sleep investors who invest in companies.

If you think this rally is for real, you are making a mistake and should get out as soon as possible. If you lost money in 2007-08, then history is not on your side….

Saturday, July 11, 2009

Fund Analysis-- DSP BR Opportunities Fund

Fund Objective

The scheme seeks to achieve long term capital appreciation by responding to the dynamically changing Indian economy by moving across sectors such as the lifestyle,pharma, cyclical and technology.

Fund Manager's Biography:- Anup Maheshwari

Since: Nov - 2006

Mr. Maheshwari holds a BCom Degree and is an MBA from IIM (Lucknow). He joined DSPML in April 2001, prior to which, he was with Chescor as Senior Analyst. He has also worked for IRIS and SCICI as analyst and project officer.

Volatility and spectacular returns to be a thing of the past

This one is probably as safe as you can get with an opportunities fund. Consistent returns, a very diversified portfolio with a tilt towards large caps will make investors feel safe here. But in providing this level of comfort, it has moved away from being a true opportunities fund.

But that's not how it started off. In its early years, it stayed loyal to its mandate. To cite just one example, in the three month period between February and April 2001, its allocation to construction moved from 13 per cent to just 3 per cent and back to 17 per cent. During that same period, allocation to diversified moved from 12 per cent to 7 per cent to bounce back to 12 per cent. While energy inched upward from 18 per cent to 21 per cent to drastically drop to 9.77 per cent. It was not just its movement in and out of sectors, it also boldly rode its bets - be it stock specific or sector. Allocation to technology in its early days at one time touched 60 per cent (June 2000) while the number of stocks averaged 21 in its initial years.

But the fund has mellowed over the years to now resemble a more diversified offering. The number of stocks averaged 80 in 2008 and this year has hovered around 70. Since 2003, the allocation to a particular sector has not crossed 20 per cent. Prior to that year, allocation to a particular stock often exceeded 7 per cent but has happened just four times after that. The fund is no longer that nimble and around three quarter of the stocks it has invested in so far, are held for six months or more with stocks like Grasim Industries and Infosys Technologies being there almost since inception. The returns too reflect the tamed nature. In 2003, the fund delivered a return of 138 per cent. No longer will you see such spectacular returns, but neither will you have to deal with volatile ups and downs.

This fund has delivered an annualized return of 16.56 per cent over the past five years (as on April 30, 2009) with the second lowest standard deviation (30.47) in its category. In fact, this is around 2 per cent lower than the average standard deviation of equity diversified funds. Low volatility, consistent returns and lack of aggression are the marks of this oldest player in the opportunities fund category.

Tuesday, June 16, 2009

Is it the right time to invest???

Opportunity, they say, favours the prepared mind! The one good thing the leftists have done for India is getting off the back of the government and giving Dr. Manmohan Singh an opportunity to realize the potential of an idea (India) whose time has come!

The outcome of the parliamentary elections results caught everyone --retail as well as institutional investors (Local + foreign) unawares! They were left sitting on cash, while the market galloped beyond 15000 levels! The question on top of everyone’s mind is “What now?” The one question that we normally come across is whether now is the right time to invest? If yes, where? If anything, this market has proved the adage that it is not your thinking that makes big money, it is sitting—through good and tough times.

Though in the forthcoming budget it will be extremely difficult to get the fine balance between revenue growth and revenue expenditure but, one thing will be clear that there might be lot of focus on how improve the credit delivery mechanism (due to low interest rate) to those projects which can drive faster economic recovery. Basically, infrastructure spending, in our view, will gain more prominence in the next 18 months so as to get the growth back on track. Therefore, the Government would probably leave the fiscal issue at this point of time as it is and focus on growth through changing the climate for investment in India per se. We feel this will also get added flip and boost confidence, if the monsoon, turns out to be normal from rural India perspective. Any positive feelers on this front would increase the confidence of the Government in bringing down agri commodity lead inflation in the coming months. If we have to summarize the potential outcome and portfolio positioning, it may turn out to be as follows:

Ø Low interest rate regime combined with pro growth stable Government at the centre, we feel there will be renewed focus on – Power & related sectors, Nuclear Power, Rural road, agriculture and Urban development (through metro railways) etc.

Ø Low interest rate and suitable policy environment will create renewed interest in Real Estate and SEZs. Real Estate could be the biggest beneficiaries as this sector not only drives the demand for steel, cement and overall growth in the economy, it also provides huge employment.

Ø Domestic lead growth would keep up the interest in telecom sectors even going forward targeting towards much bigger penetration level. Auto sectors will also benefit with lower interest rates and overall improved environment.

Ø FDI could become the big area of focus in sectors that needs huge capital investment. It will be largely in the space of Insurance, Media and Airlines. However, retail FDI may not be the area of focus at this point of time given the sensitivity attached to the local vendors

Ø Banking and Finance would continue to drive the growth. However, we feel Private sector banks could be the biggest beneficiaries as some of them will benefit out of opening up of FDI in areas like Insurance.

Ø Engineering and Capital goods sector will also begin to benefit out of the pro investment policies as we well as potential rupee appreciation again USD.

Ø PSU reforms could be on the agenda; however, this will happen at a slower phase. But, there is a probability of supply of paper in the PSU space through Government divestment to meet the fiscal targets. One may look for public issues from BSNL, NHPC etc.....

Having identified the road map as above of the government coupled with various policy intents of Dr. Manmohan Singh, we believe that over the next 1-2 years focus on the large cap diversified funds along with economy related (which includes infrastructure sector) schemes of Mutual Fund would pay off well. The schemes to be considered and which are included in our universe of schemes are as under:-

ü DSP Blackrock TIGER (The Indian Growth & Economy Related) Fund

ü Reliance Infrastructure Fund (NFO now open)

ü Reliance Diversified Power Sector Fund

ü Reliance Banking Fund

Having focused on the investment avenues, the one answer that all investors want is whether this is the right time to invest – having missed the current rally?

We would not able to comment whether this is the right time to invest or not. However, what we may emphatically answer is that the time to invest has arrived as there is no reason to believe that the current rally will be last one.

If your portfolio does not contain any of the economy related fund then we would strongly recommend investment in Reliance Infrastructure Fund

NFO is now open. Please feel free to contact us for any query; we’re just a phone call away

Thursday, May 28, 2009

How Long Term helps


Some Wealth Inspiring thoughts

Ø      Timing is vital. It is much more important to buy cheap than to sell dear.

Ø      Time in the market is more important than timing the market.

Ø      It is never your thinking that makes big money, it is sitting.

Ø      Success in market usually comes to those, who are too busy to be looking for it.

Ø      Managing money requires more skill than making it.

Wealth as they say is like old wine. The more time it takes the longer it stays for you to savor it!!

Stock Market is generally feared by all! And may be rightly so!! Investors usually see – or rather made to see—the short term fluctuations rather than the long term upside potential which comes steadily but without much of an announcement! It’s the short term upheavals are talked about in every newspaper—much to the contrary!!!

Stock prices are a matter of individual perception and every investor has his own views on a particular stock and its target price. Unfortunately we fail to sell a stock even if our target price is met. For example at Rs. 850 levels (November 2007) TISCO was not that great a company and it is indeed worth much more than Rs.150 levels it fell to in November 2008. In fact we get so carried over by our emotions and views expressed by so called "experts" on business channels that we do just the opposite -- buy at Rs.900 levels and sell off at Rs.150 levels.

Hence we at AIMS believe it is better and much safer to access the stock market through mutual funds rather than practice do-it-yourself equity and burn a big hole in your bank account.

It is not that we despise or discourage direct equity—direct equity is preferable only if you have the habit of digesting the fluctuations and also have the time to do your research because investing in shares without proper research is like playing cards without looking at them.

Another compelling reason for investing in Mutual Funds is highlighted in the last wealth inspiring thoughts stated above—managing money requires more skill than making it!

There are very few options currently available where the real returns -- returns in excess of the inflation—are positive. Hence investments in PPF, Post Office; RBI Bonds or bank deposits tend to depreciate your retirement corpus in real term rather than appreciate. They will in all likelihood not see you through your retirement or even be able to fund your child’s higher education! Only Equity has the power to give you inflation adjusted returns to provide you with the retirement corpus to enable you to “SAR UTHA KE JIYO”. Consider this :- a monthly investment (on 1st. of every month) of Rs. 1,000/- in DSP Merrill Lynch Equity Fund(Dividend reinvestment option) from 02/05/1997 till date would have grown from Rs. 1,43,000 to about Rs. 7,75,000/-( valuation as on 27/05/2009) -- a compounded annual growth of 25.83% (Source DSP Black Rock Mutual Fund). AND THAT TOO TAX FREE!! AND THAT TOO after all the downfalls over the years.

The thought now looming in your mind is “What Now”? “Where will the market stabilize”? Whether this is the right time to invest or not??

We must admit frankly that we are unable to forecast the index level from where the markets would start climbing up! No body in this world – not even the legendary Warren Buffet—will be able to predict the index level!

As for “WHAT NOW” – we can only say that the India story is very much alive and with a heavy discount sale currently on – GRAB IT—before it’s too late!!

At the end we would only repeat what Lord Krishna said to Arjun during Mahabharata – tum karm karo, phal ki chinta mat karo (Do not worry about the results, just do your duty!)

Investing is your duty today!

Happy Investing!!



Thursday, May 14, 2009

A Simple Way

A couple of days ago, I watched a short interview with the legendary investor Warren Buffett on an investment news channel. The interview was conducted shortly after the annual general meeting (AGM) of Buffett’s company Berkshire Hathaway. Buffett said many interesting things—as he always does—but the really educational part of the interview was the contrast between the world that Buffett inhabits and the world that his interviewer seemed to come from. It was like listening to members of two different species talk. If a fly (which lives for perhaps a few hours) and a tortoise (who can survive for a hundred years or more) had a conversation, it would probably sound like Buffett and that interviewer. 

At one point, the interviewer asked Buffett to comment on how his companies would cope with the downturn. Buffett replied that things were certainly down at the moment but he expected them to be OK in three to five years. I could see that the mere mention of a time scale like three to five years had derailed the interviewer’s thought process. Coming as she did from a world where three to five hours or at most three to five days is the standard unit of time; the idea of an investor talking in years seemed to have thrown a spanner in her works. 

Next, she pulled out the day’s newspaper and drew the old man’s attention to a news item that US unemployment was up to 700,000. She wanted to know what he thought of the news. Buffett said that he was sure that five years from now, the employment situation would be much better than it was today. Again, this epic timescale put an end to that line of questioning.

However, this Methuselah of investing had reserved his best shot for the last. When the interviewer asked him about whether the economy was getting any better, Buffett upped the ante sharply. He said that the Dow Jones index had started the twentieth century at 66 points and ended it at 11,000 points. During these hundred years, there had been two world wars, a great depression, an oil shock and countless recessions. But in the end they had all worked out so he wasn’t really worried about the future. 

There is simply no meeting point between an investor who is comfortable with such long time periods and the modern investing ‘process’. As you can see from the stock markets, there is no one around who actually takes the long view. Curiously, the normal investment-industry types frequently express scepticism about what Buffett stands for. 

Some time ago, I read a newspaper article which quoted some investment managers on Buffett. Many of them suggested that Buffett's approach to investing was unrealistic— real investors need to be more 'flexible'. They seemed to suggest that Buffett is a hermit living in a cave whose teachings are too impractical for the real world. Except that Buffett lives in the same real world and his real world investors have made returns of some 5,000 times. 

Taking the arguments in the Indian context, our good old sensex came into being in 1985 with 1979 as the base year. Since its launch the sensex had reached a level of 21000 levels on 09/01/2008. The sensex has given a compounded annual return of roughly about 20% since inception. During this period we have witnessed catastrophes like wars, flood, famines, assassinations, et all. Can we say that the next two, three decades will be any different? The signs of growth are already visible. What requires is the conviction. The question we should be asking ourselves is do we have the same level of conviction as foreigners have about our economy? 

Far from being impractical, Buffett’s success suggests—or even proves—that the only practical way of making money is to do a handful of straightforward things and keep doing them for decades.

Tuesday, May 12, 2009

Strange Facts -- for a change

In the 1400's a law was set forth in England that a man was allowed to beat his wife with a stick no thicker than his thumb. Hence we have 'the rule of thumb'
 Many years ago in Scotland , a new game was invented. It was ruled 'Gentlemen Only...Ladies Forbidden'...and thus the word GOLF entered into the English language.
The first couple to be shown in bed together on prime time TV were Fred and Wilma Flintstone..
Every day more money is printed for Monopoly than the U.S. Treasury.
Men can read smaller print than women can; women can hear better.
Coca-Cola was originally green.
It is impossible to lick your elbow.
Intelligent people have more zinc and copper in their hair.
The first novel ever written on a typewriter: Tom Sawyer.
The San Francisco Cable cars are the only mobile National Monuments.
Each king in a deck of playing cards represents a great king from history:

Spades - King David Hearts - Charlemagne Clubs -Alexander, the Great Diamonds - Julius Caesar
111,111,111 x 111,111,111 = 12,345,678,987,654,321
If a statue in the park of a person on a horse has both front legs in the air, the person died in battle. If the horse has one front leg in the air the person died as a result of wounds received in battle. If the horse has all four legs on the ground, the person died of natural causes.
Q. Most boat owners name their boats. What is the most popular boat name requested?
A. Obsession
Q. If you were to spell out numbers, how far would you have to go until you would find the letter 'A'?
 A. One thousand
Q. What do bulletproof vests, fire escapes, windshield wipers, and laser printers all have in common?
 A. All were invented by women.
Q. What is the only food that doesn't spoil?
A. Honey
In Shakespeare's time, mattresses were secured on bed frames by ropes.

When you pulled on the ropes the mattress tightened, making the bed firmer to sleep on. Hence the phrase......... 'goodnight, sleep tight.'
It was the accepted practice in Babylon 4,000 years ago that for a month after the wedding, the bride's father would supply his son-in-law with all the mead he could drink. Mead is a honey beer and because their calendar was lunar based, this period was called the honey month, which we know today as the honeymoon.
In English pubs, ale is ordered by pints and quarts... So in old England , when customers got unruly, the bartender would yell at them 'Mind your pints and quarts, and settle down.'

It's where we get the phrase 'mind your P's and Q's'
Many years ago in England , pub frequenters had a whistle baked into the rim, or handle, of their ceramic cups. When they needed a refill, they used the whistle to get some service. 'Wet your whistle' is the phrase inspired by this practice.
At least 75% of people who read this will try to lick their elbow!
 - Now....

Don't delete this just because it looks weird. Believe it or not, you can read it.

cdnuolt blveiee that I cluod aulaclty uesdnatnrd what I was rdanieg. The phaonmneal pweor of the hmuan mnid Aoccdrnig to rscheearch at Cmabrigde Uinervtisy, it deosn't mttaer in what oredr the ltteers in a word are, the olny iprmoatnt tihng is that the first and last ltteer be in the rghit pclae. The rset can be a taotl mses and you can still raed it wouthit a porbelm. This is bcuseae the huamn mnid deos not raed ervey lteter by istlef, but the word as a wlohe. Amzanig huh?


Tuesday, March 31, 2009

Two Sides of a Story

We are just through with a week which has seen an upsurge of hope in investment markets around the world. All around the world stocks are up and there's talk that a turnaround is now visible. Every major index is up from anything between five to fifteen per cent over just a few days. So is this it? Are the dark clouds lifting? Is there a turnaround on the way which the markets have foreseen? It's possible but there are plenty of solid arguments against this view. Let's see what the arguments on both sides of the investments picture are.

 The Turnaround is here: It's true that the world economy is taking a severe beating, but equity prices have more than kept pace. In every equity market around the world, prices have fallen so sharply that there are plenty of great stocks available at ridiculously low prices. Sure, the economic downturn will impact many companies' profits, but eventually the profits will rise again. Such stocks will never again be available at such bargain basement prices. In any case, this is not about stock prices alone. From anecdotal evidence like Citibank's two profitable months to the improvement in the India's IIP to improving consumer confidence around the world, there's evidence that the global economic decline is not as bottomless as the doomsayers would have had us believe.

 They may have been slow of the blocks, but governments around the world have done a great deal to stave off the worst effects of the crisis. It takes some time for these actions to have an impact at the ground level, but the massive interventions of governments will start showing up strongly from now on. All things considered, there appears to be strong evidence that the worse is behind us and the turnaround is in sight.

 OK, that was one side of the argument, now let's hear it from the side that thinks that the worse is still ahead: Equities don't turnaround when they ought to turn around, but when investors start buying them in serious numbers. The evidence for this is still thin.

 The sudden upsurge in world stock prices is entirely the work of short-sellers scrambling for cover and short-term traders. In India, none of the constituencies of stock buyers are about to start pouring money into stocks. This holds for everyone from the biggest institutions (both domestic and foreign) to the retail investors. Moreover, the collapse in sales and profits has barely started showing up in corporate results yet. To think that the

impact on stock prices is over and done with is a mistake. What governments are doing is to try and re-inflate the same bubble, and what the cheerleaders are doing is to try and convince us that the clock is about to turn back eighteen months. If this downturn teaches one thing, it is that the situation is unpredictable. The markets are supposed to be foreseeing good times to come, but don't forget, the same 'markets' haven't been able to foresee anything correctly for almost two years now.

 Those are two sides to the debate and the logic for both is impeccable. Which one will appeal to you more depends on what sort of a mood you are in. That probably depends on how the downturn is affecting you personally. Which is where the key to understanding the situation lies. At this point of time, the real malaise is the tremendous loss of confidence in the future that has happened to individuals, businesses and institutions.

 Would you care to predict when that will get cured?

Thursday, March 19, 2009


There was a joke going around a few years ago that Alan Greenspan (then the U.S. Federal Reserve Chairman) would be remembered more for his phrase making than his monetary policy making. In 2005-06 he coined the term “bond market conundrum” to refer to the decline in U.S. bond yields in the face of Fed-induced increases in money market interest rates and rising U.S inflation.

Now we have Navneet Munot, CIO, SBI Mutual Fund, refer to it in our context of the RBI lowering rates and pumping liquidity as inflation, bank credit and industrial growth fall. “Bond traders like recession and deflation, conditions when bond prices move up. But alas! The widening government deficit is playing spoilsport and interest rates have actually moved up almost 200 bps over the last 2 months,” he says. Just today, bond yields once again rose ahead of fresh debt supplies this week. Early this morning (March 17), the yield on the 6.05% maturing in 2019 was at 6.48%, above the previous day’s (March 16) close of 6.40%. Munot observes that the “yield curve is in complete disarray with several 'illiquid bonds' offering massive yield pick-ups”. 

The market is clearly worried about the large borrowing programme of the government and is not responding to the indications given by RBI. At the beginning of FY 2008-09, we were expected to borrow 100,000 crore. By the end of 2009, government will be borrowing almost Rs 300,000 crore and for next year we are looking to raise Rs 360,000 crore a year, which is almost Rs 1,500 crore per working day. The size of the borrowing programme is unnerving investors. 

RBI’s recent rate cuts did not result in lower yields. On the contrary, we have witnessed RBI’s recent rate cuts did not result in lower yields. On the contrary, we have witnessed yields going up. Though the market is moving against the wish of the RBI, the central bank has many tools with which it can effectively get desired results. And there is no doubt that the RBI wants to bring down interest rates. 

Munot admits to the chaos but offers some advice: “There is lot of panic and gloom in the bond market. Yields may inch up a bit more but investors with some risk appetite should use that opportunity to move in.”

As of now, there are a number of factors favouring entry into income funds when the 10- year benchmark yield is at 7% levels: 

• Globally interest rates are nearing zero…Bank of England - 0.50%, ECB -  1.50%, FED: 0-0.25%, JAPAN: 0%.

• The WPI is expected to decline and become negative between May and September 2009

• Pressure of government’s borrowing programme will ease in the second half of March 2009

• Banks may turn buyers of gilts for year-end valuation. On December 31, 2008, 10 year G-Sec was valued at 5.25%. Today it is at 7% and banks are expected to reduce their mark to market losses as much as possible.

• RBI will take further action on OMOs and may give the rate signals.


Investors can look at entering income plans but should patiently remain invested… as they say patience pays….

Tuesday, March 3, 2009

Axe the tax!! Time to Act

As soon as realization hits that a new year is upon us, there is another one that lurks around the corner. And that is the start of a new financial year. Which means, you have till March 31 to complete your tax planning exercise? So if you have not completed your investments under Section 80C, you have a little more time to get your act together.

If one takes a look at the past year, what would seem more appealing would be the fixed return instruments like National Savings Certificate (NSC) and Public Provident Fund (PPF). After all, at least you are guaranteed a positive return there. The equity markets are in the doldrums and don’t look like they will be reviving anytime soon. But what investors tend to forget is that investing in equity is not a short-term investment. Even though equity has the potential of delivering phenomenally over the short term, the risk of capital erosion is also very high. To truly benefit from equity, one should have the patience to stick around for at least three years. But the ease of exit makes it virtually impossible for the investor to curb the natural instinct for flight in times of crashes. One mistake is to offload all shares and run when the market heads for a downturn.  

The other is choosing to avoid equity altogether till a recovery is on its way. The truth is one can never really say when the market is going to make a U-turn. But if one gets into the market with the intention of hanging on for a while, it will eventually pay off.

The good thing about an Equity Linked Savings Scheme (ELSS), is that it has the lowest lock-in period when compared to the other options under Section 80C. The minimum period of three years ensures that the investor puts in money that he will not need for a while. The other options start at a minimum of five years.

If we look at the ELSS category over the past five years, on an average it has delivered annualized returns of more than 12 per cent. This is much higher than the returns you will get on the other instruments under Section 80C, which will average between 8 and 9 per cent. The tax implications are also luring. You get a tax benefit when you invest in an ELSS scheme, dividends are tax free and when you sell the units after three years, you pay no tax (long term capital gains tax is nil). This makes it score higher than bank fixed deposits and the NSC. And, in terms of returns and lock-in, it scores over the PPF too. 

Thursday, February 26, 2009

Dividend Stripping Simplified

I had bought units worth Rs 49,000 of a mutual fund about a month back and had chosen the dividend payout option. I have received dividend of about Rs 5,000 during the last one month and the current value of my units is about Rs 40,000. I would now like to redeem the units as I need the money. Would I be eligible for a short-term loss of  Rs 9,000 or would this constitute dividend stripping which is not allowed? What are the rules on dividend stripping and how do I calculate tax in case there is a genuine need to redeem?

The benefit of dividend stripping is no longer available. Under the revised laws, it has been provided that if an investor were to acquire a unit within a period of three months from the record date and sell or transfer the same within a period of nine months from the record date, then any loss arising from the transaction shall be ignored to the extent that the loss does not exceed the amount of such dividend. Hence, the capital loss exceeding the amount received as dividend is eligible to be claimed as a short term capital loss.

If you withdraw your investment at Rs 40,000, then you incur a short-term capital loss of Rs.9,000. Out of this, you have already received Rs 5,000 as dividend. So as per the income tax regulations, the balance Rs 4,000 can be claimed as short term capital loss.

Wednesday, January 28, 2009

Why investors must look beyond returns

Ask an investor, which investment avenue he wants to invest in and there’s more than a fair chance that he will say – the best performing one i.e. one that can deliver the highest returns. Sounds reasonable, doesn’t it? Why would an investor like to settle for anything less than the best, right? The trouble with such an approach is that it oversimplifies the investment process. As a result, emphasis is laid only on the returns aspect; vital factors like risk and suitability are ignored.

Far too often, investors and advisors alike are guilty of falling prey to the allure of high returns. The rationale being, investing is all about clocking the highest return, hence any avenue that can deliver on this front gets the thumbs up. Don’t get us wrong. We are not suggesting that returns aren’t important or that there is necessarily something wrong with an avenue simply because it can deliver a better showing on the returns front vis-à-vis other avenues. However, selecting an investment avenue based solely on its performance is certainly a flawed approach.

In the first place, such an approach erroneously assumes that the investment avenue (say a mutual fund for instance) is an end, rather than a means to achieve an end. While investing, the end should be a tangible goal like providing for one’s retirement, buying a car or simply wealth accumulation, expressed in monetary terms. And once the target sum has been established, appropriate avenues to achieve that end should be chosen. Conversely, if the investment process begins with the selection of the investment avenue, the investor ends up investing in an aimless manner and may never achieve his goals.

Second, by investing in an avenue based solely on returns, the investor runs the risk of getting invested in an avenue that might be unsuitable for him in terms of the risk involved. For instance in the equity funds segment, by and large one would expect a diversified equity fund (which invests its entire corpus in equities) to outperform a balanced fund (which invests around 65%-75% of its corpus in equities and the balance in debt instruments) in times when equity markets are rising. But from an investor’s perspective, the key lies in determining what’s right for him.

For example, assume that a balanced fund can deliver a 12% CAGR over a 5-Yr period; conversely, a diversified equity fund is equipped to deliver a 15% CAGR over the same time frame. Say an investor wishes to accumulate Rs 500,000 for a holiday 5 years down the line. Now the investor has to choose between investing in a balanced fund or in a diversified equity fund. Should the investor decide to build a corpus using a balanced fund, he will have to invest around Rs 6,223 per month or Rs 78,705 pa. Conversely, opting for an equity fund will necessitate a lower investment i.e. Rs 5,792 per month or Rs 74,158 pa.

Most investors might instinctively opt for the equity fund option on account of the higher return (i.e. a lower investment amount). However, while making the choice, the risk factor has been ignored. On account of the debt holdings in the portfolio, the balanced fund is invested across asset classes i.e. equity and debt. Over the 5-Yr investment horizon, should equity markets witness a rough patch, the balanced fund will be better equipped to protect the investor’s corpus. In effect, the trade-off for the higher investment amount is the proposition of delivering during a downturn in markets. Before making a choice, the investor should first evaluate his risk appetite and then choose between the balanced fund and the equity fund.

Another reason investors opt for the best performing avenues is excitement. Yes, you read that right. There is a section of investors, which believes that the investment activity should be exciting; hence selecting investment avenues offering the highest returns is justified. For the record, investing has nothing to do with excitement; on the contrary, investing is serious business and is all about achieving one’s predetermined financial goals. Seeking excitement from the investment activity amounts to trivialising it.

In conclusion, investors would do well to look beyond just returns while making an investment decision. Sure, returns are important, but certainly not a parameter to be considered in isolation. The key lies in looking at the investment activity in totality and then making a decision. If not, investors run the risk of missing the wood for the trees.