Saturday, October 22, 2011

Prajna Capital

Prajna Capital

Review investment if your fund is below peers consistently

Posted: 21 Oct 2011 09:37 PM PDT

 

Absolute returns may mislead as it captures point-to-point returns LOOK at different periods. If the performance is still bad, look at peer

DEPENDING on market conditions, new fund offers (NFOs) and existing schemes of mutual funds will throw up varied returns. As an investor, worst fears come true when your fund shows below-par returns or negative returns.

Should an investor react to point-to-point returns or should he/she wait to see regular performance to spot the dud fund?


Experts advise that there is no `magical' way to decide whether a fund is a lemon but ask investors to use different parameters to adjudge its success or failure.


Absolute figures may mislead: If your mid-cap fund is down 12 per cent in a one-year horizon that does not mean that the fund manager is fleecing you.


Comparing absolute returns may be misleading because they capture point to-point returns. The first step is to look at relevant index or benchmark, such as BSE Midcap.

But then, if the fund shows underperformance, don't give up fully on it.


Look at different periods: If the performance is still bad, look at peer performance. It may well be that the markets were soft during a single period due to which the fund's absolute performance for say 12 months looks poor. As an investor, if you see that the fund does not have sufficient historical data, you have two choices -stay or exit. Stay put or exit immediately? That is a timeless question. Research and different studies point out that investors attach emotion to their investments, even if it is a mutual fund. As a thumb rule, if your money in an NFO does not increase in three years, it could be time to review the investment.

You have to admit it was a bad investment for you as you could not make money. Take a hit and then take a fresh call

Admittedly, certain categories of funds like thematic funds or sector funds are riskier bets than a plain vanilla diversified fund that has no bias towards a particular sector or theme.
The possibility of disappointment is higher in the thematic/sector funds, experts pointed out.


Other factors: Due to fund manager change or takeover by another fund management company, investors should pay more attention. If the sole reason for your investing in a fund was due to star manager who has quit, any below-par performance in the fund would make an investor anxious.

It is very rare that a fund or a category of funds continue to perform badly over long stretches of time.
Do not take decisions based on six-month time periods.
One thing should be clear.
A mutual fund manager has to be given time to perform. But if he/she still can't, then investors have every reason to be angry
 

Target based strategy is vital for volatile markets

Posted: 21 Oct 2011 08:58 PM PDT

 

BEAR markets make investors wary and many desist from making fresh investments fearing stagnation or losses. But, review of historic data reveals that over the past one decade, irrespective of a bull or bear phase, there was over a 30 per cent chance that around 12 per cent returns would accrue over a three-month period.

(Source: MFI Explorer, http://www.bseindia.com). On the other hand, bull markets create euphoria, leading investors to continue to invest at expensive valuations, thereby, increasing downside risks. So, it is good strategy to invest for a long term, but it is also essen tial to keep a target and follow a prudent divestment strategy based on asset allocation.

As an investor toils over the dilemma of which approach to take, the most effective and fundamental principals of investing often are overlooked -that of asset allocation and objective-oriented investment strategy.

In an environment where volatility is expected to be the only constant, is there a way that investors can create wealth for themselves? The answer is a simple `yes' and usually lies in the most fundamental basis of investing -asset allocation and goals.
Efficient asset allocation means investing in underperforming asset classes and reducing exposure in outperforming asset classes. This would have meant investing in equity from 2001 to 2003, investing in equity in 2008 and increasing exposure to debt in 2009 after the elections. Within equities, it would have meant investing in defensive sectors like technology, pharma in 2007, investing in mid-caps in 2008 and investing in infrastructure in 2009.


Asset allocation is, therefore, about removing emotional biases in investing.

Hence, in the present environment marked by volatility, investors need to follow asset allocation strategies or invest in funds that facilitate asset allocation.
With time and resource bandwidth being constraints, options in the mutual fund space, such as asset allocation of funds and trigger-based funds, would help investors get better returns.

In case of diversified funds with dynamic asset allocation, the allotment keeps varying across various assets class equity and debt depending on market movements. This approach reduces exposure to equities when the market is high and vice-versa and would be a safer and profitable option for investors. Also, straddling across market capitalisation with equity, based on the valuation attractiveness, also helps generate alpha for asset allocation funds. ICICI Prudential Dynamic Plan is one such fund. It is a blend of aggression and defence in the present equity market scenario. The fund with its mandate to take market capitalisation and cash calls based on valuation helps investors effectively capi talise on volatility. The other option of objective-based trigger funds can help investors take decisions on investment goals. All of us have a tendency to get greedy on the upside or to chase losses on the downside.


When markets start moving up, investors often shift their previously set target upwards, without booking profits. Realisation sets in only when markets correct and reaches levels where investors either end up not gaining, or, sometimes, even losing their investment.

Triggers manifest investment objectives of investors, where, by sticking to pre-set targets an investor can avoid getting too greedy when he or she has already made a healthy profit and met investment objectives. The entry trigger, on the other hand, helps an investor enter equities when valuations are correcting. In line with the philosophy, `Buy on bad news and sell on good news' -when equity markets are rising and hitting targets, the pre-set trigger helps investors rebalance their investments. The strategy enables investors to buy into equity when markets are falling and acts as an asset allocation rebalancing tool and keeps emotion and sentiment out of the investment process.

Hence, instead of investors standing on the sidelines and worrying on timing and, thereby, losing opportunity, the above strategy of asset allocation and goal-setting provides the fundamental solution for wealth creation.

Fund house or Fund manager – Which one?

Posted: 21 Oct 2011 09:50 AM PDT

The mutual fund (MF) sector has come a long way. In 1987, the doors were first thrown open for entry of the first non-UTI mutual fund. During those early days, only the public sector was allowed to operate MFs.

Then, in 1993 (a watershed year for MFs), private sector mutual funds made their appearance. Kothari Pioneer (now merged with Franklin Templeton) was the first in India. In a relatively short span, the assets under MF management have grown phenomenally to around `7.5 lakh crore. But it is still only the tip of the iceberg; the bulk of Indian savings are parked in bank deposits. But, over time, as investors gradually discover it is indeed the instrument of an MF that is the ideal vehicle to build one's capital over a period of time, the figure will increase manifold.

That said, it is strange that one needs qualifications to distribute (sell) funds, there are none needed to manage these! One would think that if distributing funds is a responsible task, managing the distributed funds would be more so. Currently, anyone can be a fund manager regardless of their qualifications.

Basically, the issue thrown up is, how important is the role of the fund manager in the overall scheme? Are qualifications and credentials of an individual more critical or are the systems, processes and risk management strategies put into place by the MF that employs him? Does the fund manager's investment style take precedence over the fund's investment process or is it the other way around?

MANAGER VERSUS HOUSE

There is no plain yes or no answer and it depends upon the fund and its philosophy. When you invest, you are implicitly reposing a certain amount of trust into the fund manager's expertise and capability. You are essentially hiring a professional to manage your money and pick your stocks and because of the cost sharing with thousands of others, the professional expertise comes at an economical price.

Conventional logic would say it is the ability and the skill of this professional, the fund manager, that should generate the returns. However, is it always so? Investing thousands of crores belonging to hundreds of thousands of investors is clearly not a one-man job. What's more, now even the international markets are being opened for domestic mutual funds.

Typically, MFs are usually managed by a team of managers, backed up by analysts and researchers. Just like a captain is as good as his team, without able support, no matter how skilled a fund manager is, he will not be able to deliver optimally.

Second, it also depends upon the type of fund under management. A passive fund, such as an index fund that mirrors a certain benchmark, does not require the active intervention of a fund manager. Similarly, a quant or an arbitrage scheme, where the mandate of the fund is mechanical and pre-defined and not dependent upon individual calls, requires more of software, systems and IT support, rather than fund management expertise.

The other factor one has to consider is the management philosophy of the fund house -- whether process-driven or one that provides fund managers latitude and flexibility. Some houses give a fair amount of autonomy to the fund manager in taking large sectoral calls, churning the portfolio or even investing in small caps or unlisted companies, subject of course to Sebi regulations. On the other hand, there are fund houses that follow a strong, process-driven investment style and the fund manager's role is to perform within the parameters defined by the institution.
 

Documents you need to prepare IT returns

Posted: 21 Oct 2011 09:13 AM PDT

 

Here is the list some documents you need to keep ready for preparing your tax returns

 


   With hardly a week left for filing your income tax returns, it would be handy to find out which documents you need to keep ready. This will help in filling up the IT returns form without much delay and inconvenience - whether it is done by yourself or with the help of a tax consultant.


This is a general list of documents that should be readily available:

For salaried taxpayers

Salary and pension details Details of various allowances - HRA, LTA etc. Usually, these will be mentioned in the TDS certificate issued by the employer

For other taxpayers

Expenditure proofs: Rent receipts and agreements, tuition fees receipts for fees paid for children, copies of tickets to claim LTA deduction, medical bills to claim medical deductions

Proof of savings

Deposits in Public Provident Fund NSC certificates Receipts of premium paid towards LIC, ULIP, annuity plans, mediclaim, pension funds Proof of investments in five-year fixed deposit and tax-saving mutual funds Proof of purchase of infrastructure bonds (maximum limit is Rs 20,000) Details of other incomes, amounts received, sources, TDS deducted etc

For taxpayers with interest income

Interest statement or certificate from the bank
TDS certificate issued by the bank


Others documents to be kept ready:


Donation receipts from specified institutions


Details of capital gains or losses


Broker notes, details of securities bought and sold


Details of rent received and rent agreement in case of property income Interest and home loan repayment certificate from bank


Details of interest paid in the past towards an under-construction property. This is allowed to be deducted in five equal instalments after the completion of construction of the property


House tax receipts


In case of capital gains from sale of property, details of property sold, amount of consideration received, amount invested in specified capital gains bonds, amount invested in another property


Copy of last year's returns - this is required to check if there are any carried-forward losses and whether they can be set-off against the current year's income, or carried forward again. Different types of carried-forward losses have different treatments under the Income Tax Act.


Permanent Account Num-ber (PAN). The PAN needs to be quoted on all returns. So it is essential that the PAN number is readily available
Bank details - account and MICR numbers


Details of bank Account in which you want to receive your income tax refund if any. This includes bank's name, branch, account and MICR numbers
Details of any advance taxes or selfassessment taxes paid - the challans should be available for these payments

Collate documents

Keeping all these documents together expedites the process of preparing the tax returns. Apart from these, you need to keep any other documents relating to transactions that may have an implication on income tax ready. No documents need to be attached with the returns of income. So, you can keep photocopies of these for the purpose of preparing the returns. However, the originals must be kept in a safe place as they may be required at a later stage.

 

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Also, know how to buy mutual funds online:

 

Invest in DSP BlackRock Mutual Funds Online

 

Invest in Reliance Mutual Funds Online

 

Invest in HDFC Mutual Funds Online

 

Invest in Sundaram Mutual Funds Online

 

Invest in Birla Sunlife Mutual Funds Online

 

Invest in UTI Mutual Funds Online

  

Invest in SBI Mutual Funds Online

 

Invest in Edelweiss Mutual Funds Online

 

Invest in IDFC Mutual Funds Online

 

 

Financial planning for those who are in their twenties

Posted: 21 Oct 2011 08:21 AM PDT

 

You have just crossed your 24th birthday, when you've gained the education and/or skills you need for the career you've chosen, and you're earning money and learning how to handle it. Ok, ok you are not in your twenties but are in your thirties and have started looking at financial planning. Fine, this article will be just as applicable to you — only that the time advantage of a 24 year old is not available to you.

AN EARLY START!

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

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

For an example of the power of compounding, take a 23-year-old who invests a paltry Rs.10,000 a month — he will accumulate about Rs. 15 crores for his retirement. Contrast this with a difficult Rs. 51,000 for a 35 year old to accumulate the same amount. Not bad for an early start right? And I am increasingly seeing young people starting 25 year SIPs…surely these kids will benefit by the long term compounding effect…

GOALS!

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

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

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

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

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

Too many of my clients ask me to prioritize their goals. Sorry this is your job as a client.

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

Just do it! It may be wise to invest in Savings Bank accounts, Mutual funds, etc. for your short-term goals, and unit linked policies for your medium and long-term goals. Historically, the stock market has outperformed any other type of investment over time, but it's not for the faint of heart.

Its volatility makes it a less than ideal investment for short-term funds, unless you have a very high tolerance to volatility. Remember equity or debt is never the question — it is only how much of each. You can enter the equity market or the debt market through vehicles like Mutual funds or unit linked policies. As an ad for a shoe company says, "Just do it".

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

 

 

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Also, know how to buy mutual funds online:

 

Invest in DSP BlackRock Mutual Funds Online

 

Invest in Reliance Mutual Funds Online

 

Invest in HDFC Mutual Funds Online

 

Invest in Sundaram Mutual Funds Online

 

Invest in Birla Sunlife Mutual Funds Online

 

Invest in UTI Mutual Funds Online

  

Invest in SBI Mutual Funds Online

 

Invest in Edelweiss Mutual Funds Online

 

Invest in IDFC Mutual Funds Online

 
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