Prajna Capital

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• SBI MF Launches New Debt Funds
• Use Exchange Traded Funds (ETFs) as Hedge in a Portfolio
• What is Arbitrage in Investing?
• Emergency fund has lot of significance in financial planning

SBI MF Launches New Debt Funds Posted: 02 Nov 2011 03:01 AM PDT SBI MF Launches Debt Fund Series 367 Days -9 & Series 90 Days -51    SBI Mutual Fund has announced the launch of new fund offers (NFOs) of SBI Debt Fund Series 367 Days –9 & SBI Debt Fund Series 90 Days–51. Both the schemes will be open for subscription on November 1 and November 2 for series 9 and Series 51, respectively. The minimum investment amount will be Rs. 5000 and in multiples of Rs. 10 for both the schemes. The schemes will have growth as well as dividend option. They will be listed on Bombay Stock Exchange.   -----------------------------------------------------------------   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 IDFC Mutual Funds Online   Invest in UTI Mutual Funds Online    Invest in SBI Mutual Funds Online   Invest in L&T Mutual Funds Online   Invest in Edelweiss Mutual Funds Online

Use Exchange Traded Funds (ETFs) as Hedge in a Portfolio Posted: 02 Nov 2011 01:53 AM PDT Exchange Traded Funds (ETFs) as an investment basket come with some unique features that make them an ideal avenue for hedging an existing equity or a multi-asset-class portfolio. The key attribute is a defined set of rules that determine the composition of an ETF or the underlying index. ETFs, therefore, fall into any of the parameters that define market sectors or asset classes. For example, banking sector ETF, gold ETF, or the more exotic re-weighted broad market ETF and foreign ETF. Characteristics Of A Hedge Before we get into the characteristics of a hedge we must first define what a hedge is. Investopedia defines a hedge thus: Making an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security. This forms a simple hedge where an investor takes an offsetting position in a derivative contract. However, given the complexity and leveraging effect of derivatives, these are not suitable for all investors. A better approach to portfolio hedging would be to use a correlation based hedge, in instruments (like ETFs), which the investor is comfortable with. Unlike a normal investment objective, the importance of a hedge is simply to protect against downside risk. This can be achieved by using weakly correlated assets or some that are weakly/negatively correlated. An example of this kind of hedging is to use investment portfolios from different geographies like India and the US. The long term and intermediate term correlation between the Indian large-cap index, the Nifty, and the growth NASDAQ-100 Index is between .25 to .27 depending on the exchange rate used and interpolation techniques to align the two data sets. An Example A sample portfolio is constructed by taking an equal proportion of the NIFTY (via any Nifty ETF) and using a NASDAQ-100 ETF such as MOSt Shares NASDAQ 100. The portfolio is denominated in Indian Rupees, hence, is not a currency hedged investment. The portfolio is rebalanced exactly once every year to equalise the proportion of the Nifty and NASDAQ-100. As the weak correlation comes into play and the two indices, being high growth, do not move up or down in tandem, the volatility that the investor is subjected to gets reduced. This, in turn, reduces the draw downs (except in extreme market conditions like the bursting of the tech bubble in the early naughties). The rebalancing has the precise effect of profit booking, thereby preventing downside risk post a high-growth period. In the simulation that was run for the above example, for the 15-year period from February 1995 to February 2011, the Nifty gave annualised returns of 11.7%, the NASDAQ-100 returned 14.7% and the sample portfolio returned about 15.5% and that too at lower volatility. Conclusion While this example looks at two indices, ETFs can be used to hedge any actively managed, stock selection portfolio. Additionally, using some of the commodity/metals ETFs, inflation (which has a direct bearing on commodity prices) can be hedged. Interest rate positions can be managed by using fixed income or money market portfolios.   -----------------------------------------------------------------   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 IDFC Mutual Funds Online   Invest in UTI Mutual Funds Online    Invest in SBI Mutual Funds Online   Invest in L&T Mutual Funds Online   Invest in Edelweiss Mutual Funds Online

What is Arbitrage in Investing? Posted: 01 Nov 2011 11:38 PM PDT Arbitrage is a practice to capture the price differential between two or more markets to earn a risk-free profit. One has to simultaneously enter into deals in two markets where there is a price differential. For example, one can buy shares of Company XYZ in the cash market at . 100 a piece and, at the same time, sell a future contract of equal number of shares at . 105. This allows the individual to catch the price differential of . 5 per share. By the end of the expiry of the futures contract, the prices in the cash and futures market converge, offering a risk-free profit. As the prices converge, the trader reverses the positions in both the markets — ie, sells in the cash market and buys in the futures markets—and pockets the price differential captured at the time of initiating the trade. On the other hand, one may sell in the cash market and buy in futures if the price in the cash market is higher than the futures market. This requires an efficient security-lending arrangement. In India, due to lack of a cost-efficient security lending mechanism, market participants prefer to buy in the cash market and sell in futures to realise risk-free profits from equities. Arbitrageurs — a class of market participants — identify arbitrage opportunities across asset classes and across markets. The continuous tracking of markets and availability of good amount of cash are must to carry out an arbitrage business that offers scope for making decent money. Narrow price differentials or spreads also limit the rate of return. This makes the life difficult for an individual with limited resources. Mutual funds come to the rescue of those who intend to take the arbitrage route but lack the expertise. The schemes hereaim to make risk-free profits by capturing the price differentials across markets arising out of the inefficiencies of the markets. You can invest in such funds with a minimum of . 5,000. The ideal time horizon of an investment in these funds ranges from one year to two years. The expected rate of return can be slightly above that from bank fixed deposits of similar tenures.

Emergency fund has lot of significance in financial planning Posted: 01 Nov 2011 10:55 PM PDT Priyansh was earning a healthy pay check, owned a luxurious home in an uptown community, a brand new car parked at his door, branded clothes, eating out in good restaurants - life could not have been better.  As luck would have it, the economy took a downturn and he was laid off from work. He also had to face huge losses in the stock market. To add to his misery Priyansh's father had to be hospitalized and the expenses for his medical treatments were exorbitant- his happy family picture vanished in no time! Not only did he go through an emotional upheaval but also was in deep financial crisis. The EMIs on the home loan and car loan started becoming a burden and soon he started defaulting payments. The heap of unpaid medical bills also kept increasing with time. Why did a well educated man, earning so well, face such a situation? Couple of reasons - a lavish lifestyle with little emphasis on savings, lack of insurance, incorrect investments and most important reason was that Priyansh had not kept aside an emergency fund. As the name suggests, an emergency fund is money that can be used in cases of financial emergencies. Unexpected expenses can take a toll on your financial health - it could be a single large expense like a sudden illness or loss of job or it could be consistent little things that add up over time such as a broken pipeline expenses, car repair expenses etc. An emergency fund can be used to meet the unexpected expenses without digging into long term savings. How much should you invest in an emergency fund? The quantum of your emergency fund depends upon your lifestyle, ability to save, your stage in life and your financial obligations. For a bachelor in his early 20s, just joining the employment scene, with no family responsibilities and no debt obligations, the purpose of an emergency fund would be pretty simple like taking care of living expenses if he is out of job for a while. Hence the emergency fund could be about 6 pay checks in value or rather living expenses for a period of 6 months including obligations like LIC payment, insurance payment etc.  On the other hand, if a person has a home loan and has a family to support, his emergency fund should take care of his living expenses, financial obligations like LIC payments, plus the EMIs on the home loan for a period of 6 months at least. It is also a good idea to have a component for medical expenses in your emergency fund in the event of an accident or sudden hospitalization, in case your company does not provide health insurance and you have not purchased one for yourself or your family members. You need not transfer a lump sum into the emergency fund account. Small but consistent deposits will not put pressure on your current spending and also build a reasonable fund over a period of time. If you think you do not have extra funds, find ways of cutting expenses and divert these funds into an emergency fund. For example, use your bonus to invest in an emergency fund, skip going to a restaurant or a movie night at the theatre. These small sacrifices will help you build a good emergency fund over time. Wedding expenses, retirement savings, children education expenses are not a part of an emergency fund obligation. Your long term savings should take care of these planned, known expenses. Where should you keep it? You should be able to instantly withdraw money from your emergency fund hence it should have liquidity. At the same time, keeping the money idle is not practical - even your emergency fund money should grow! However, invest in a completely safe avenue - even if it earns lower returns. Remember the primary objective of the fund is to protect you on a rainy day. A savings account is the best place to keep your emergency fund. People had money piled up in their homes in the good old days. With 24 hour ATMs this is not necessary. Most savings accounts have the auto sweep facility between savings and fixed deposits. Invest in such a savings account as you will earn a better interest rate than a mere savings account. Short term deposits are also a good investment avenue for an emergency fund. Gold also is a traditional form of emergency fund. Buy 24 karat gold coins especially to meet emergency cash needs. A credit card can also be used as an emergency fund, although use it only if it is your last option. Never use your credit card limit as an emergency fallback if you do not have the money to repay the credit card bill. The interest rates are overbearing. So, unless you have some money coming up surely, like a FD maturing, do not even consider a credit limit for an emergency expense.   -----------------------------------------------------------------   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 IDFC Mutual Funds Online   Invest in UTI Mutual Funds Online    Invest in SBI Mutual Funds Online   Invest in L&T Mutual Funds Online   Invest in Edelweiss Mutual Funds Online

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