History repeats itself.

When I say so I really mean it. It’s the same old story people jumping the bandwagon at the end of the bull run and burning their fingers and when its time to invest, nobody is investing. After achieving the peak of 21,000 in Jan 2008 the sensex has touched a low of 7,700. When the sensex was at its peak everybody was taking about long term investment and were purchasing shares as if there was no tomorrow. Now the same people are shying away from the market. Many are waiting for the Bull Run to return but does anybody know when the sensex will head northwards? No one was able to predict the fall in January. Similarly no one will be able to predict the return of the Bull Run. Investors should not wait for the bull market or the bear market. If one has a long term horizon of 8 to 10 years then anytime is good time for investing. We cannot expect Bull Run to continue for ever. Similarly bear market too doesn’t last long. Its plain logic. Whatever goes up comes down and vice versa. Anybody who invested 10,000 in the month of May 2008 would have got only 11 shares Tata Steel at the rate of around 900. If you invest the same amount today then you will get 50 shares of Tata Steel. Then what are we waiting for?

Worrying About The Entry Load?

Entry load is the fees charged by the mutual fund for the expenses they incur. Usually it is 2.25%. That means if you invest Rs.1, 00, 00 then 2,250 will go towards the expenses. Now for some that might seem to be a lot of money. Considering the returns mutual funds generate one shouldn’t worry much about the entry load. After all if you invest directly in share market then too you have to pay the brokerage. Now one might argue that fixed deposits don’t charge anything and they give guaranteed returns. Then why should we invest in mutual funds? Well, that’s true but considering the 8% returns that FDs give we can definitely have a look at mutual funds. On the other hand returns from fixed deposits are taxable. Mutual funds do charge an entry load and they also carry a market risk but if we consider the past record, mutual funds have given a return of more than 20% annually. No other investment avenue has given such high returns. The only thing is to stay invested for a long time. The longer you stay invested greater will be the benefit. If you have the appetite for risk then investment in mutual funds is definitely a good idea.

Busting The NAV Myth.

Mr. X was very happy after he made his investments in mutual funds. He boasted about how he avoided some costly mutual funds whose NAV were above 300 and went for new funds available at Rs 10. His argument was that the old funds have already reached 300 so the chances of it climbing further are very low. In fact he got rid of some schemes he had bought few days ago after his advisor told him to sell high NAV mutual funds and instead invest in funds which have a low NAV. There are thousands of Mr. X who are following the same principle. They fail to realize that NAVs are different from share prices. A fund having a NAV of Rs.10 is the same like a fund having a NAV of Rs 300. In fact a fund with NAV of 300 has proved that it has performed well and has reached 300 whereas a new fund with face value of 10 is yet to prove itself. While rising or falling it is the percentage that counts. If a fund with a NAV of 300 falls to 240 it means it has fallen by 20% in the same way when a fund with a face value of 10 falls to 8 then it has fallen by 20% as well, but many people argue that it has fallen by only Rs.2 while the former has fallen by Rs 30. NAV of Rs.10 should not be the sole purpose of investing in a new fund. Another myth is that fund with a face value of Rs.10 wouldn’t fall much. Well there is no explanation for this. I can only say that a fund with a face value of Rs.10 can also fall to Rs.1. Moral of the story? Invest in mutual funds by not looking at the NAV but at the performance and theme of the fund.

Why Mutual Funds?

Professional Management
One of the main benefits of mutual funds is that an investor avails services of experienced and skilled professionals. The funds invested are managed by experienced fund managers. A good investment manager is certainly worth the fees you will pay. They are backed by dedicated investment research team which analyses the performance and prospects of companies and invests accordingly to give maximum benefit to the investors. It’s very difficult for any individual to do research on any company before buy the shares of that company. It requires lot of hard work, time and patience.
Diversification
Mutual fund invests across many sectors and industries. This diversification reduces the risk because hardly all stocks decline at the same time. You can achieve this diversification through Mutual Fund with far less money than you can do on your own. By pooling your funds with others, you can quickly benefit from greater diversification. Mutual funds invest in a broad range of securities. This limits investment risk by reducing the effect of a possible decline in the value of any one security.
Low Cost
Mutual Funds are a relatively less expensive way to invest compared to directly investing in the capital markets.
Good Returns
Over a medium to long term Mutual Funds have the potential to give good returns as they diversify over a number of securities.
Convenience and Liquidity
In open ended schemes you can conveniently withdraw partially or fully at any time though this practice should be strictly avoided. Thus the liquidity is very high in Mutual Funds.
Transparency
Regular information can be obtained any time from the Mutual Fund house. The information can be of any kind like the actual value of your investments, the companies in which you money has been invested, the proportion invested in each asset class etc.
Well Regulated
All Mutual Funds are registered with SEBI (Securities and Exchange Board of India) and they act according to the strict regulations to protect the interests of investors. The working of Mutual Funds is regularly monitored by SEBI.

Chosing a Mutual Fund.

The boom in the share market has increased the number of mutual funds in the market. With so many funds it becomes a difficult choice to select the right mutual fund. Any wrong selection can make a huge difference in the returns. We should keep few things in mind before investing.
Ascertaining the risk profile.
The first step before investing in any Mutual Fund is to check our risk profile. There are various schemes in the market which carry high risk. Mostly sector funds which invest only in one particular industry like power or infrastructure offer high returns, but at the same time are very risky. The investor should always ascertain what his risk taking capacity is, high, medium or low.
Past performance
while it is clearly mentioned in the offer document that the past performance is not an indicator of the future, it does help us in selecting the fund. While checking the past performance we should have a look at the time frame of more than 3 years. There are few funds which perform in haphazard manner by giving returns inconsistently. One should also check how the funds have performed in the bull and bear markets of the immediate past? Tracking the performance in the bear market is particularly important because the true test of a portfolio is often revealed in how little it falls in a bad market.
Know your fund manager
Check the track record of other schemes managed by the same fund manager. Check out if the fund manager has changed recently. If a new fund manager has just taken up the assignment then check previously managed funds by him.
Read the Offer Document
The offer document of the scheme tells you its objectives and provides useful details like the track record of other schemes of the same fund house.
Keep an Open Eye
The revolution in print and television industry has benefited many. Why shouldn’t we take the advantage of such a revolution? There are so many financial news channels and newspapers that we can have enough knowledge about various types of funds. There are experts who give advice on how to select a good mutual fund on these channels.

Types of Mutual Funds

Open-ended schemes
Open-ended schemes do not have a fixed maturity period. Investors can buy or sell units on any business day. This provides good liquidity.
Close ended schemes
Schemes that have a fixed maturity period are called close-ended schemes. One can invest in this type of scheme only at the time of initial issue. The initial issue period of the scheme can be one month 2 months or more depending on the scheme. After closing of the initial issue investors cannot invest in the scheme.
Growth Schemes
They Provide capital appreciation over the medium to long term. These schemes normally invest majority of their funds in equities. Growth funds are suitable for investors who can afford to assume the risk of potential loss in value of their investment in the hope of achieving substantial and rapid gains. They are not suitable for investors who must conserve their principal or who must maximize current income.
These schemes can further be classified into the following
1. Small Cap Fund: - these funds primarily invest in companies which are small in nature. They invest in companies that have started recently. Usually small cap comes under a very high risk category because they invest in companies which have a limited track record.
2. Mid Cap Fund: - These funds primarily invest in companies which are medium in size. These funds carry less risk as compared to small cap funds.
3. Large Cap Fund: - As the name suggest it invests in well established companies.
4. Sectoral Fund: - These funds invest only in one particular sector such as health care, technology, power or infrastructure. For example a Power fund will invest only in companies related to power and not in companies related to textiles or pharmaceuticals. Similarly and infrastructure fund will invest only in companies such as cement, steel, etc which are vital for developing infrastructure.

Balance Schemes
Balance schemes invest in both shares as well as fixed income securities according to the proportion mentioned in the offer documents. These funds are for those who don’t want to put their entire money in equities. Returns as well as risk in these schemes are less as compared to growth schemes. Such funds usually invest a portion in safer instruments such as treasury bills, certificate of deposits etc.

Money Market Funds/Liquid Funds
For the conservative investor, these funds provide a very high stability of principal while seeking a moderate to medium returns. They invest in highly liquid, virtually risk-free, short-term debt securities of agencies of the Indian Government, banks and corporations and Treasury Bills.

Fighting Inflation

One common mistake we make while planning for investment is not adjusting inflation against the returns. In general inflation means a rise in the level of prices. The price we paid for buying one kilo onion in 2006 was quite less as compared in 2008. Inflation reduces the power of money as the medium of exchange. If we invest in any financial instrument which gives us 8% returns and the inflation increases by 3%, then by roughly adjusting the rate of inflation the net result would only be 5%. Inflation can hugely impact our long term savings. Any x amount 20 years hence might look very big now but its actual value will definitely be far less if we take inflation into consideration. Apart from that we have to pay the tax on the maturity value of our investment thereby reducing the value of our investment further. We should invest in instruments which will beat the inflation and will be tax free. Equities are the best to beat inflation. Though they have an element of risk, the returns offered by the equities are far the best as compared to other avenues of investment. One important thing to remember is that we should not put the entire money in equities but only a portion of our savings and that too at regular intervals over a longer period of time. Inflation not only erodes your interest but your principal amount too. Before chalking out any financial plan we should always calculate the inflation rate. Inflation plays an important part in deciding investments so do not forget this vital factor while deciding to invest.

Important Milestones in Life.

Are we on track to achieve the Important goals in our lives?
Buying a house
Buying a car
Children education
Children marriage
Retirement
To achieve the above mentioned goal we should follow a unique goal achievement programme through systematic investment plan. Under this plan investor invest a specific amount for a continuous period at regular intervals, say monthly or quarterly. By doing this, the investor has the advantage of rupee cost averaging and also helps him save compulsorily a fixed amount each month. The money is invested in the stock market by experienced fund managers. When you opt for SIP, you automatically participate in the market swings. Your amount of investment remaining the same, you buy more number of units in a declining market and less number of units in a rising market so that you do not panic in turbulent market conditions. As said earlier, SIP results in rupee cost averaging, which means that, when you invest consistently the same amount at regular intervals, your average cost per unit will always remain lower than the average market price, irrespective of how the market is rising, falling or fluctuating. It is very easy to become a systematic investor. All you need to do is plan you savings effectively and set aside some amount of money every month for investing in a fund. So if you want to stay calm and sail smoothly in difficult times go for systematic investment plans.

Mutual Funds, an Overview

A mutual fund is a pool of investments managed by professional money managers who have in-depth knowledge of the equity as well as global markets. Investments may be in stocks, bonds, money market securities or some combination of these. When you are investing in mutual funds, you are actually pooling your money with other people who have similar investment goals. For the individual investor, mutual funds provide the benefit of having someone else manage your investments and diversify your money over many different securities that may not be available or affordable to you otherwise. Today, minimum investment requirements on many funds are low enough that even the smallest investor can get started in mutual funds. Just like shares units are allotted to investors for their investment. Units are allocated on the basis of NAV (Net Asset Value). This is the price at which investors buy fund from the company. NAV is calculated at the end of each trading day. For example if the NAV of a fund is Rs.50/- and the investor invests Rs 1000 monthly then he will get 1000/50 = 20units. Next month the investor will get units according to the NAV in that particular month.

Waiting for the Right Time

During the course of my consulting, I came across many people who have good income but yet they are in financial mess. People don’t give much importance to saving. There are many who wait for the right time to save or invest for the future. But one fails to understand about the so called “right time.” Ask anyone and you will get the reply that they don’t have enough to save. They fail to realize that they don’t need a big amount for saving. The pattern usually is to first spend and then save where as it is exactly just the opposite. By writing this I don’t mean that you shouldn’t enjoy life and squeeze out every penny for achieving you future goals. My only point is to accumulate for the time when we’ll have to slow down and then finally retire. There are various types of people 1.who think it is too early to save. 2. Who don’t believe in saving? Their motto, earn and spend today.3. Who want to save, but doesn’t know when and where to invest. And finally 4. Who have put aside and invested but if you ask them where they have put their hard earned money, they will go just blank. Reason, though they have taken the initiative to set aside some money, they don’t have the time to remember or go through the documents of their saving. We should only remember one thing. We work hard for money then why shouldn’t our money work hard for us. There is always a good reason for not investing, but there is actually even better reason to start investing right away. In fact, starting sooner rather than later is one of the best investment decisions you can make. So don’t wait for the right time, start with a systematic investment plan. Be smart. Be systematic.