Thursday, December 29, 2011

Irrational Pessimism

At the end of the year, I generally write about how the returns of the various categories of mutual funds and other investments have been during the year. However, this year I’m not so sure whether anyone would have all that much enthusiasm for such an exercise for 2011. It’s been a most forgettable year and everyone who has any kind of market-linked investment knows very well what they have lost and would like to put that behind them as soon as possible. My putting some percentages to the pain will probably be neither interesting nor useful.
Unfortunately, most people seem to see as many problems looking forward as they do when they look back. It’s hard to recall a time when the general mood among investors and businessmen was of such pessimism. So much so that one has to wonder how much of this actually makes sense on any rational basis. Remember the phrase ‘irrational exuberance’ that was used to describe the heady days of 2003-2007? Now, it might just be the opposite. We could well be in an ‘irrational pessimism’ or an ‘irrational melancholy’ phase. We could be in a negative bubble (if you could visualize such a thing) and which is as hard to see from inside as the normal sort of bubbles are.
It’s not hard to trot out a litany of economic catastrophes that could hit us. However, the mental weightage that we assign to them could be excessive. The problem is that some of these catastrophes could be self-fulfilling prophecies. If a whole lot of businesses don’t invest in their future, well then the investments won’t be justified. And that’s the same for the investment markets. The irrational exuberance was not justifiable, but I think some rational exuberance may be in order.

(Courtesy: -

Thursday, December 8, 2011

Yahi hai right way--to create wealth

All that an investor needs is to be able to differentiate a bad investment from good one—in order to create wealth successfully. However, over the last 4 years, it has become clear that managing one’s reaction to panic situations is as important if not more. It matters how you see and stay through the crisis. 

Data from Mutual Fund registrars suggests a manifold jump in investors investing through SIP. However, it is times like the present ones that have a potential to break this style of investing.  Investors (Informed or otherwise) either cancel or pause their SIPs (and/or lump sum investment) whenever stock markets have crashed sharply over a short period of time. The general message that we get during our regular interaction with investors is “My sip (or lump sum investment) has just completed a year and it’s running in a loss. Markets are looking bad, so I will renew my sip or invest further –as the case may be—once the situation—domestic or global—improve!

We try to impress upon our clients that it’s the worst thing to do—if not disastrous! The whole idea of SIP is to invest regularly through highs and lows of the market. More often than not we witness the case of another investor who started investing when markets started improving –having stopped at a high level (high defined by hindsight only)! They believe they have done a smart thing…but have they really?

We have a case study (though hypothetical) to prove our point.

Consider an investor who invests regularly in fund that tracks sensex. The investor invests Rs. 10,000/- per month regularly since 1997. In the 15 odd years, he would have invested close to Rs. 17.50 lacs. The investment would be worth approximately Rs. 48 lacs—a return of 13% CAGR.

Contrast this with an investor who pauses every time the market crashes. This investor—typically one amongst us—would be congratulating himself on stopping his investments sometimes in the year 2000 when the market dropped to sub-4000 levels from a peak of 5900. He would have probably started investing when the market approached the 4000 levels again. He would have stopped investing again when the market crashed to 15000 levels from a high of 21000 sometimes in 2008 mid. He would have in all likelihood started investing again in the middle of 2009 post general elections—when the market went up spectacularly.
This strategy—which seems to be the most natural thing to do—would have lowered his returns. Instead of earning a profit of Rs. 30 lacs on an investment of Rs.17.50 lacs, he would have earned Rs. 16.50 lacs on an investment of about Rs. 12.30 lacs.

Moral of the story: - We do not know how long the market will remain listless…however, what we do know is that the only sensible thing to do is to continue with your investments. Or as Lord Krishna would have preached: - karma karte raho….Since, SIP ensures that you also buy when markets are down, you should be glad that the market is giving you an opportunity to buy low. Seems to be some kind of a cruel joke, but then is it not the truth….

Saturday, December 3, 2011

PPF rate increase to 8.6%--should you be worried?

Till now, it was easy to project and build a corpus using the fixed rate offered by PPF—the best instrument till 30/11/2011 offering tax free 8% p.a.

Traditionally the future projections for PPF corpus, a product with 15 year maturity period, revolved around an approximate annual compounding return of 8 per cent. Most people use their provident fund for purposes such as children’s marriage, higher education, or buying a house. 

Not any more!!

Effective 01/12/2011, Government of India made the following changes with regard to small savings which will impact those who prefer fixed return instruments --in particular PPF investors:-

  • PPF rates increased to 8.60%
  • Investment limit raised to Rs. 1 lac from present Rs. 70000
  • Interest on loan from PPF balance raised to 2% from 1%.
  • Commission on PPF deposits abolished.
  • Maturity period of NSC and MIS reduced to 5 years.
  • Maturity bonus of 5% on MIS scrapped.
  • Kisan Vikas Patra (KVP)—a preferred instrument for money launderers—scrapped.
  • THE ERA OF FIXED RATE IS GONE! Yes, you read it correctly. The Government has made returns from PPF market linked. Interest on PPF would now be linked to the G-Sec of similar maturity with a positive mark up of 0.25%.
The applicable annual interest rates will be notified by the government before 1st. April every year.

How will this affect the aam aadmi?

The government’s move implies that it wants the investor to bear the burden of risk of interest rates movement while enjoying the tax breaks.

Being market linked, the rate of return would come down whenever there is a downward revision of interest rates, making it difficult for a person to work towards a long term financial goal, like building retirement corpus, through instruments like PPF.

The strongest message of this move is: - the era of fixed rate of return has in India ended and supremacy of market forces enforced. 

Tuesday, November 22, 2011

Trust your Financial Planner

In the world of investing, trust is the basis of all relationships.

Consider the following situation which though real but many may still ask—aisa bhi hota hai? Imagine yourself going to your family physician for a checkup, who thereafter writes a prescription stating the ailment and the medicines to be taken. Would you turnaround and tell the doctor that you want a different set of medicines as you think the ailment is something different?

The situation seems bizarre outright as no one in his senses would do so. However, this is precisely what people do when it comes to their investments and their life goals!

Investors in all likelihood assume that they know more than (sufficiently) enough to know what investments they want to do. As financial planners we do come across investors to whom we suggest to subscribe to SIP in equity funds to be able to meet their goals-- but instead they ask us to recommend FD and NSC or disclose their wish to invest their retirement funds in property!

Recommend term insurance and they will suggest Endowment or ULIP instead!

People approach us for advice, agree upon a fee and ask for a comprehensive plan to be made for them based on the inputs provided. All said and done, they want to dictate the final course of action.          

Invariably, the reason for this illogical behavior/suggestion is that a close friend of his has chided him for being amateurish by investing in mutual funds suggested by some unknown entity/professional. Confused, they now seek advice of another colleague who being a stock market buff instead suggests “hot picks”. The logic (and belief) being that mutual funds are for not so informed while FDs are for elderly.

By now the client being totally brain washed, works out a compromise that will suit his ego! A portion of money goes towards equity (tips) as suggested by office colleague and the rest into FDs or Post office MIS. Our analysis, strategy and experience be damned!

In any endeavor, things will work out only if the advice is followed completely. You will not strike water by digging two feet at 20 places. You’ve got to follow the advice and dig 40ft at a single place.

We believe that the root cause of such a mindset is that investors think that since they are familiar with the product they can do it themselves. This DIY (Do –it-yourself) attitude more often than not does more harm than good. Once the investor has the recommendation in front of them, they would tend to argue with the planner about the logic in their own line of thinking as regards investments and insurance. (Why DSP Blackrock MF and not ICICI Prudential MF? Why term insurance and not with profit endowment plans?) At the end, the investor goes ahead and implements only a part of the recommendations while the rest is done as per their own thinking and belief! So much for our plan and effort and experience!!

All this does not make sense! The relationship between a financial planner and his client will work only when there is complete trust amongst them. Just like a trapeze trusts his partner and let go of the bar himself!

Having satisfied yourself after the due diligence about the planner, simply let go. 

After all it pays to invest trust along with your money!!

Thursday, November 17, 2011

Do you have a checklist of Dos & Don'ts??

Your income is regular and so should be your financial and investment plan. However, you should be a little more careful while writing out investment cheques. Your advisor is the right person to guide you in the maze called investments. Apart from being safe, your investment should not only be conforming to your financial plan (if it is in place), but should also be earning more than inflation.

However, if you are one of those DIY (do it yourself) investors, given here below is a negative list which should always be flashed before your eyes when you are contemplating an investment:-

  • Do not put all your eggs in one basket. No matter how promising a particular investment may appear, it is prudent to diversify your portfolio across asset classes.
  • Investments decisions based on free advice can give nasty surprises at times. It is impossible to make a crore by investing in a tip aired on a business channel or appearing in a financial newspaper worth Rs. 2. Consult your financial advisor for his feedback/opinion.
  • If you are investing in stocks, do not put blind faith on your broker. Trust, but verify.
  • Do not sell out too quickly. Always re-look at the bigger picture before pressing the panic button when market goes down.
  • Do not invest in instruments about which you do not have full information. Avoid investment just because your friend has invested.
  • Do not try to time the market. Remember it is time in the market and not timing the market that matters.
  • Remember, it is not your thinking that makes big money. It is sitting! Avoid trading. Be it stock or mutual fund.
  • It is time to be cautious when you hear/read the sentence “it’s different this time.” Time to get out of the market lock stock and barrel.
  • Last but not the least; appoint a qualified financial advisor who has your concerns in mind rather than his gains. 

Monday, October 31, 2011

Comments on Concept Paper on Regulation of Investment Advisors--Part II


At the outset, I wish to introduce myself as an AMFI qualified Independent Financial Advisor having ARN number 18533.

Sir, the broad mandate given to SEBI is to safeguard the investors’ interest. The said concept paper on regulation of investment advisors is another step—whether right or wrong only time will tell—in that direction.

Having read the Concept Paper on Regulation of Investment Advisors, I firmly believe that India is not yet ready for such sea change in the way investment advice is given and accepted. The reasons have been outlined as hereunder:-

  • Para 2.1:- Tackling conflict of interest in Distribution of financial products:-       
You believe that because of conflict of interest, investors’ interests are compromised. Sir, may I humbly ask you to point out any industry where conflict of interest is absent? Just as a businessman strives to maximize his revenue/profits, the client hopes to keep his costs minimum-- can we say that there is a conflict of interest between his business and his clients? Every manufacturer believes that his products have an edge over the competitors’ products and rightly so! Similarly, the consumer buys the product only after doing sufficient research about the similar products available in the market; thereby mitigating the conflict of interest as far as possible. 

  • Para 2.3(a):- You believe that a distributor—being only loyal to himself—would happily churn his investors’ portfolio and also squeeze more commission from the manufacturer. 
Sir, with due respect to your knowledge and expertise in the domain of investor protection, may I humbly state that today a  distributor is able to receive commission from the manufacturer as well as fees from his investors only because you have authorized him to do so. By abolishing entry load from mutual fund investments w.e.f. 01/08/2009, you have allowed not only the AMCs to pay upfront commissions to the distributors (albeit out of their own pockets), but also authorized the latter to simultaneously collect advisory fees from their investors as mutually agreed amongst themselves. How can you now blame the hapless distributor for an act authorized by you? At the time of abolishing entry loads, you should have barred the AMCs from paying any sort of incentives (upfront) to their distributors so as to prevent such conflict of interest! The first conflict of interest has only been accentuated by you rather than being mitigated.

You further go on to state that it is because of the dual stream of fees, the distributors are churning the portfolios of their investors. Sir, do you really believe that the today’s investor—whose cause you are championing—is so na├»ve so as to allow the distributor to churn his portfolio without any commensurate gains—direct or indirect? However, I do not rule out such churning done by a section of the distributors! But to paint the entire community of IFAs as irresponsible and un-ethical because of the act of a few is least expected of you.

  • Para 2.3 (b):- Distributors to sell products of manufacturers offering highest commissions:- 
Sir, you have visualized a situation, where a distributor would sell products only of those manufacturers who offered highest commissions---is more hypothetical than real! If this had been indeed true, then in all likelihood the bottom 10 AMCs (by AUM) would have been the Top 10 AMCs (by AUM) since August 2009. However, since this has not happened only goes to prove that distributors as well as investors have started to subscribe to schemes of MF with regard to its past performance, funds’ suitability to their goals etc. and that commissions do not play a major role in fund selection.

  • Para 2.5:- UK to phase out the upfront commission. 
Sir, please note that markets like UK, USA are more matured than ours and to expect India to adopt advisory fee system overnight is a trifle too early! Investors as well as distributors in UK have been given time for the said transition. It will be disastrous for the distributor community (and by logical extension—the investors) at home—many of whom depend on MF advisory to run their households—to move over to advisory without any safety net. There is still a significant amount of resistance amongst investors as far as paying fees for an advisory service is concerned. Investors have first to be educated that paying fees for advisory services is same as paying fees to a doctor! This resistance is visible in the metro cities itself—where the investors are supposed to me more learned than their counterparts in Tier II & III cities (where you plan to make mutual funds popular in time to come). Education and not regulation is the requirement of the time!

  • Para 6.2:-- Chartered Accountants like advocates are exempt from registration:- 
The sole job of Chartered Accountants is to audit the books of accounts; while an advocate is supposed to render legal advice. Can a Chartered Accountant/advocate be the right person to offer investment advice or is it a Certified Financial Planner a better person to offer investment advice which is in sync with the financial goals of the investor? Mandate of a Chartered Accountant/Advocate is totally different from that of a CFP. I AGREE with you, though, that only those persons with a certain minimum professional qualifications should be allowed to offer investment advisory services. 

Sir, the distributor community has done a service to the investor and also to the nation by taking the Mutual Funds to Tier II & III cities. It is they who have tried to bring about an inclusive growth in Mutual Fund industry! In a study (conducted jointly by Boston Consultancy Group and CAMS) published in it has been shown that over a period between 2003 and 2010, share of Mumbai, New Delhi and next Top 8 cities in Mutual Fund holdings have gone down from 90%(47%+14%+29%) to 75%(32%+12%+31%) respectively. Simultaneously, the share of next 90 cities+others has gone up from about 9% to 25% during this same period. Certainly, this shift would not have been possible without the MF agents/advisors! And now to expect them to work virtually for free—given the resistance to paying advisory fees—is akin to doing injustice to the entrepreneurial ability of the advisor.

Sir, at the end I only wish to state that what we need is an atmosphere where both the advisor as well as the investor—can work for each other’s benefit. Series of regulations have been counterproductive to investors’ interests— as it has only been directed at the so poor distributor –without any voice or lobby--leaving out the manufacturer as well as the investor. The earlier system of simultaneous existence of entry load & no entry load regime was to my mind the most transparent system where investors knew exactly what they are paying. Such a regime had worked perfectly-- in absence of dual commissions—for the growth of a healthy and transparent growth of mutual fund industry—the ideal vehicle to channelize the people’s savings to equity market.

Lastly, I only wish that you take a balanced view of the present ground realities while framing regulations for investor protection. 


Neena V Mehta


Friday, October 28, 2011

Concept Paper on Investment Advisors' Regulations--Comments


At the outset, allow me to introduce myself as an AMFI qualified Mutual Fund advisor.

I have read the Concept Paper on Regulation of Investment Advisors!

It is heartening to note that you are keen to make the world of investments a safer place for the investors at large. But the moot point is whether it is going to make the life of an IFA any better—an important link between the AMC and the investor-- whether we like it or not.

I believe that the said concept paper will not be able to deliver the results as anticipated by you.  One possible reason is that you are targeting just one segment of the financial market while investment world also covers secondary equity market and life insurance. An investor willingly pays upfront charges while buying an insurance policy but is hesitant in paying fees to his financial advisor is contradictory and self defeating.

The reasons why the said concept paper will fail to bring the desired changes are:-

  • Low Level of Financial Literacy and awareness in India(Para 2.4):- 
There are 2 parties to any advisory business—the advisor—giving advise and the investor—the person receiving the advise. For an advice to bring desired results it is imperative that both the parties are on the same plane. Consider the real life case of a Client X who stopped all his SIPs only because he thought the markets would crash. (the SIPs had been started to build the retirement nest). The client—who holds an important position of Sales Head in a private insurance company—cannot be considered as a layman to investments. In such a situation, who is to be blamed—the investor or the advisor? If this be the case in case of an informed investor what more can we say about an average investor? The fact that client has to be informed/knowledgeable enough to appreciate the value of the advice given so as to enable him to meet a goal in his life. Further, since the level of financial literacy is low, the concept of paying fees to the advisor is also rarely accepted.

  • Conflict of Interest(Para 2.3):- 
In any business, the distribution channel has a cost. Nowhere in the world would you find a distributor working for free. If churning is what you want to prevent, then is the MF industry the only place where churning happens? The possible solution to the issue of the so called divided loyalty is by doing away with upfront (and mostly differential) commission altogether. If there are no upfront commissions coupled with advisors being able to charge advisory fees, or better still, linking the quantum of commission to the age of the investment, then the urge to churn would not be there! The proposed regulation will in all likelihood kill the industry and then there will be nothing left for SEBI to govern. 

  • FSA, UK model (Para 2.5):- 
You have quoted the case of Financial Services Authority, UK as a reference. However, what you have overlooked is that a market like UK is far more matured than ours. To expect an Indian investor to start paying advisory fees overnight is too optimistic given the level of financial literacy in India.

  • Educate rather than regulate 
Having admitted that financial literacy is low in India and that roughly less than 10% of the population in India have access to equity markets, the key to healthy—enough to regulate-- development of financial markets is investor education rather than intermediary regulation. If investors are made to realize that equity markets are supposed to be a vehicle to plan and fulfill their goals and that a financial planner is a vital link between the investor and his goals by virtue of his expertise and knowledge. And that such expertise has a cost. A healthy industry is characterized by healthy growth of all stakeholders. Ensure that education and experience comes to play a distinctive role in the evolution of the industry a la medical profession.

Sir, a regulators job is to regulate the market and ensure healthy growth of all its stakeholders. Regulate by all means—but you should also see that the industry survives—for you to continue to regulate. The earlier regime of concurrent existence of entry load and no entry load structure was in my opinion fair enough. The investor chose for himself whether or not he is willing to pay fees?

Sir, an Independent Financial Advisor is an important link between the product manufacturer and the investor. It is imperative that he survives so that the investor can even dream about fulfilling his goals—meeting them successfully is another story! Hence, I request you not to implement the proposed Investment Advisors Regulation which will be nothing but a death knell to the already ailing investment advisory services industry!


CA Vijay Mehta CFPCM

Wednesday, August 31, 2011

Investment blunders to avoid

Your income is regular and so should be your financial and investment plan. However, you should be a little more careful while writing out investment cheques. Your advisor is the right person to guide you in the maze called investments. Apart from being safe, your investment should not only be conforming to your financial plan (if it is in place), but should also be earning more than inflation.

However, if you are one of those DIY (do it yourself) investors, given here below is a negative list which should always be flashed before your eyes when you are contemplating an investment:-

  • Do not put all your eggs in one basket. No matter how promising a particular investment may appear, it is prudent to diversify your portfolio across asset classes.
  • Investments decisions based on free advice can give nasty surprises at times. It is impossible to make a crore by investing in a tip appearing in a financial newspaper worth Rs. 2. Consult your financial advisor for his feedback/opinion.
  • If you are investing in stocks, do not put blind faith on your broker. Trust, but verify.
  • Do not sell out too quickly. Always re-look at the bigger picture before pressing the panic button when market goes down.
  • Do not invest in instruments about which you do not have full information. Avoid investment just because your friend has invested.
  • Do not try to time the market. Remember it is time in the market and not timing the market that matters.
  • Remember, it is not your thinking that makes big money. It is sitting! Avoid trading. Be it stock or mutual fund.
  • It is time to be cautious when you hear/read the sentence “it’s different this time.” Time to get out of the market lock stock and barrel.
  • Last but not the least; appoint a qualified financial advisor who has your concerns in mind rather than his gains.

Happy (safe) investing!!

Thursday, August 11, 2011

USA Downgrade--An Apocalypse

Every time the markets tumble, not only do we try to find the reason for it, but we try to compare with similar situations in the past. Since Friday 5th. August, 2011, investment media has been awash with articles trying to prove how the present crash is similar to or different from the one of 2008. It was as if the sky had collapsed with USA downgraded. An apocalypse of sorts!

Now there are two ways to react to situations like this. Either you can stay permanently scared, panicking every time conditions resemble the original disaster. Or emerge as a wiser; more confident you-- ready to face what ever the future brings to you.

It is evident that the worst thing to do now is to panic. Agreed that we’ve had a few weeks of nerve-wrecking bad news—regularly flashed by investment media-- globally as well as domestically.  However, you should also remember that the news bites are mostly targeted at short term traders.

However, for long term equity investors (either funds or direct) none of this should matter. We believe that things in India are bad only on a relative basis. Relative to the rest of the world, or relative to what they should have been.  Remember, in crisis like this, you should focus on the absolute rather than relative! For this is an economy that is still growing faster than many others in the world and will continue to do so for many more years. There are and will be plenty of businesses of different sizes that will continue to grow and create wealth.

History is a great teacher. What happened in 2008-2009? The only investors who lost money were the ones who stopped investing—when the markets plunged-- and moved over to safer avenues like fixed deposits. Hindsight tells that all that happened then was that when the buying opportunity was at its best, investors were scared. Those who let their SIPs continue during the crash emerged winners.

So what does the present crisis tells us? Restructure your life around the present condition—as it is going to stay for a long time. You’ve got to live with it—much the same way as we live with a chronic condition—say diabetes. What is it about the rest of the world that’s going to change? Will USA start growing at 5%? Will the EU find a solution to the sick economies? No. However, one thing's for sure that countries like India, China will continue to grow—despite all the impediments—both globally and domestically. The question is not how long you’ll have to wait for the crisis to end to start investing. The question is how long before you realize the truth and get on with your investments.

Your goals are waiting for you to realise this—sooner the better! 

Friday, August 5, 2011

What is your type?

Print media is awash with articles about the type of financial advisor you should be working with, the qualities that a financial advisor should possess et all. We believe that in this season of advisor bashing, it is but natural for print media to be carrying articles with gospel truth for IFAs.

We also believe that while such articles offer a valuable tool in selecting your personal financial advisor—they but are just one side of the coin. Investors can also similarly be grouped according to the traits they display while investing. Though IFAs cannot choose the clients they wish to work or not work with, but working with a like minded client can make life a little easier for the advisor & client.

While it can be interesting to note the kind of investor you are or better should be, it would be even more interesting to know the type of investor you should not be. What ever form of investing you choose, there are few traits that you should avoid while managing your money.

The Collector

This type of investor is an avid collector of stocks/schemes. They are a broker/agents’ delight.

He is so focused on accumulating that he usually cannot review his portfolio which in any case resembles Big Bazaar supermarket. To an outsider, such an investor may appear to be an eternal optimist who holds on to his funds even when it is under performing. The only reason why he cannot sell duds is because he is too busy accumulating new funds/stocks to his already bloated portfolio.

Our advice to such an investor would be to start selling NOW rather than on judgement day! Focus on your goals and tune your investments to achieving them.

The Hyper Investor

Such an investor usually does not hold on to his investments for long. He only needs a slight movement in the market to swing into action—buy a new stock/scheme and/or sell the old one. His portfolio is always in a fluid state---always on the move. So is his financial advisor.

Such an investor believes that constant churning of portfolio is the only way to generate a higher yield. His fund/stock should perform whether or not the underlying market is performing. He is a darling of publishers of investment journals and so called “market gurus” offering tips to their subscribers. The one thing he lacks is patience. He does not believe that “it is not your thinking that makes big money, it is sitting”. It’s one thing he will never be able to do.

Our advice to such an investor would be: - Calm down your nerves and ask yourself if the anxiety and sleepless nights you get with every movement in the market are worth it. Say to your self—“time in the market is more important than timing the market”, five thousand times before even thinking of a portfolio shuffle.

The status quo investor

Such investor never takes the first step to invest. He has to be nudged into buying/selling. He never updates himself with articles appearing in financial dailies. He for one would rarely refuse to believe “get rich quickly” stories.      

Our advice to him would be to simply stop believing that comes his way. He should also exercise his own judgment in evaluating an investment proposal.

Having talked about the investor that one should not become, let us now highlight traits that should be followed while investing:-

  • It pays to adopt a long term perspective while investing your hard earned money. The basis of an investment should not be maximum returns but your long term goals.
  • Choose an investment option after carefully analyzing your risk profile in consultation with your advisor.
  • Since you have invested for long term, it would be futile to become anxious with every fluctuation in the market. You will only panic and take wrong decision. Look upon short term movements as hurdles while remaining focused on your long term goals.

Remember just as your personality reflects your investment style, the success of your investments will reflect your lifestyle. It pays to be a confident, sensible, long term investor.

Happy Investing!

The data/information in this article is meant for general reading purpose only and not meant to serve as a professional guide / investment advice for readers. This article has been prepared on the basis of publicly available information. Whilst no action has been suggested or offered based upon the information provided herein, due care has been taken to endeavor that the facts are accurate and reasonable as on date. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investments. We shall not be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits in any way from the data / information / opinions contained in this article.

Thursday, July 21, 2011

Hold on to a Lazy portfolio

Have a mix of index funds, diversified equity schemes and fixed deposits. Nobel Prize winning economist Paul Samuels on had famously said: Investing should be m ore like watching paint dry or grass grow. If you want excitement, take $800 and go to Las Vegas.”

With stock markets going nowhere and fixed income instruments offering high returns, a typically active retail investor would like to juggle around his portfolio to earn the best return on investments.

But what happens, when the markets turn around in say, six months or one year?

Over dependence on debt would mean that to participate in the equity rush’ one has to break fixed deposits (FDs) and move into stocks or equity funds.

The confusion can be worse because taking out money mid-way and moving into equities would mean loss of interest income and, perhaps, even a penalty. With market and interest cycles turning every three to four years sometimes even sooner, retail investors cannot always keep churning portfolio.

To ride a wave of uncertainty and continue to earn returns, albeit lower in bad times, one needs to stay invested. And importantly, be lazy. Do not get fidgety or nervous with the yo-yoing markets or the rising interest.

Being lazy does not mean you don't track investments? It means not wanting to take advantage of every situation.

Constructing a lazy portfolio is quite simple. For equity investments, find the best performing equity diversified funds and invest, either through systematic investment plans or a lump sum.

If you are not confident of picking the right fund or the statutory warning 'past performance is not a guarantee of future performance' scares you, certified financial planner, Gaurav Mashruwala’s solution is index funds.

These funds replicate the market. Keep tracking your portfolio on a quarterly bas is. But do not churn regularly. Stay invested for as long a time horizon as you can. And never try to time the market, said Mashruwala. For the fixed part of portfolio, invest in FDs for over five years to take advantage of 80C benefits.

There are three main reasons why lazy portfolios can be winners. For one, theyre simpler. You will never need more than a few mutual fund schemes. So forget the hundreds of schemes out there.

Two, you save on commissions and transaction costs that you would have to incur if you are a hyperactive investor.

Three, you save enormous amount of time and effort that an active investor would spend worrying about investments.

Forget about the frequent rebalancing, market timing and active trading. Just create a well-diversified portfolio and s top tinkering.

Say you have decided on an 80:20 portfolio, the equity investments should be in few well diversified funds.

One could take five-year returns of 40-50 diversified equity mutual funds available in July 2006 and invest 20 per cent of the lump sum or through Sips.

If one were to take the lump sum route, a scheme like UTI dividend yield fund, would have returned 21.6 per cent annualized over five years (from 15 July, 2011), or in absolute term 166.2 per cent.

Similarly, locking into five-year fixed deposits would have returned 8.5 per cent annually. An 80:20 portfolio would have earned around 18.98 per cent annually. Even in high inflation times, these returns would comfortably beat it.

(Source: Business Standard 19/07/2011)