New to Mutual Funds

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New to Mutual Funds? Tips for abeginner

First things first..

The first thing an aspiring unit holder must do is to establish what type of

portfolio he wants to build. In other words, to decide the right asset allocation.

Asset allocation is a method that determines how you invest your money in different

investments with the proper mix of various asset classes. Remember, the type or

class of security you own i.e. equity, debt or money market, is much more important

than the particular security itself.

The popular thumb rule forasset allocation says that whatever the investors age,he should keep that percentage of his portfolio in debt instruments. For example, if

an investor is 25, he should have 25% of his investments in debt instruments and the

rest in equity. However, in reality, different circumstances and financial position for

each individual may require different allocation. Portfolio variable is another factor

that one needs to understand to practice asset allocation. These are age,

occupation, number of dependants in the family. Usually the younger you are, the

more riskier the investments you can hold for getting superior returns.

How to pick the right fund/s?

Next, focus on selecting the right fund/s. The key is to select the fund/s based on

their investment philosophy and consistency in terms of returns. To ensure you are

selecting the right type of funds that are appropriate for your needs, consider

following:

Determine what your financial goals are.

Are you investing for retirement? A childs education? Or for currentincome?

Consider your time frame. Do you need money in three months time or three

years? The longer your time horizon, the more risk you may be able to take. How do you feel about risk? Are you in a position to tolerate the ups and

downs of the stock market for the possibility of higher returns? It is necessary to

know your own risk tolerance. It can be a guide for choosing the right schemes.Remember, regardless of the potential returns, if you are not comfortable with a

particular asset class, you should consider other options.
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Remember, all these factors will have a direct impact on the fund you choose and

the return that you can expect to get. If you are a long-term investor with some

appetite for risk and are looking for returns to beat inflation, equity funds are your

best bet. MFs offer a variety of equity and equity-oriented schemes (See table

Fund Candy). For a beginner, it makes sense to begin with a diversified fund

and gradually have some exposure to sector and specialty funds.

Investment Strategies that will help you make the best of your MF Investment and

Traps that you should avoid.

Keeping track..

Filling up an application form and writing out a cheque is not the end of the story. It is

equally important to keep an eye on how your investments are performing. While

having a qualified and professional advisor helps both in terms of making the right

decision as well as measuring performance, it makes sense to know how to do

yourself with a little help from these sources:

Fact sheets and Newsletters:

MFs publish monthly fact sheets and quarterly newsletters that contain portfolio

information, a report from the fund managerand performance statistics on the

schemes managed by it.

Websites:

MF web sites provide performance statistics, daily NAVs, fund fact sheets, quarterly

newsletters and press clippings etc. Besides, the Association of Mutual funds in

India, AMFI, website, contains daily and historical NAVs, and other scheme.

Newspapers:

Newspapers have pages reporting the net asset values and the sales and

redemption prices of MF schemes besides other analysis and reports.

Remember, it is very important for you to be well informed. To achievethis, you need to spend a little time to understand and analyze theinformation to enhance the chances of success. Even if you spend one

percent of the time that you spend on earning money, itll be a goodbeginning. Above all, take help of a professional advisor to select the right fund as

well as the right mix of one time investment, SIP and the STP.
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10 must-reads in an MF offerdocument

MF investments are subject to market risks. Please read the offerdocument carefully before investing." Ajay Bagga tells you what to

read in the 100 page document.

You would have come across this line in all Mutual Fund advertisements, Mutual Fund

investments are subject to market risks. Please read the offer document carefully before

investing. Its an open secret that this 80 to 100 page bulky document is not simple to read

and the legal information it contains is not easy to understand for most investors.

However, Sebi has made the investors job easier by evolving an abridged form, the Key

Information Memorandum. Also, Sebi has served the cause of investors by stipulating standard

sections and standard disclosures in all Offer Documents. Hence, the Offer Document can be the

friend and guide of an enlightened investor. Here is a guide to what an Offer Document is, why it

is important and what are the 10 Most Important Things to Read in an Offer Document for

investors.

What is a Mutual Fund Offer Document?

It is a prospectus that details the investment objectives and strategies of a particular fund or

group of funds, as well as the finer points of the fund's past performance, managers and financial

information. You can obtain these documents from fund companies directly, through mail, e-mail

or phone. You can also get them from a financial planner or advisor. All fund companies also

provide copies of their ODs on their websites.

10 Most Important Things to Read in an Offer Document:

Date of issue

First, verify that you have received an up-to-date edition of the OD. An OD must be updated at

least annually.


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Minimum investments

Mutual funds differ both in the minimum initial investment required, and the minimum for

subsequent investments. For example, equity funds may stipulate Rs 5000 while Institutional

Premium Liquid Plans may stipulate Rs 10 crore as the minimum balance. (Also read -How to

reduce risk while investing?)

Investment objectives

The goal of each fund should be clearly defined from income, to long -term capital

appreciation. The investors need to be sure the fund's objective matches their objective.

Investment policies

An OD will outline the general strategies the fund managers will implement. You'll learn what

types of investments will be included, such as government bonds or common stock. The

prospectus may also include information on minimum bond ratings and types of companies

considered appropriate for a fund. Be sure to consider whether the fund offers adequate

diversification.

Risk factors

Every investment involves some level of risk. In an OD, investors will find descriptions of the risks

associated with investments in the fund. These help investors to refer to their own objectives and

decide if the risk associated with the fund's investments matches their own risk appetite and

tolerance. Since investors have varying degrees of risk tolerance, understanding the various

types of risks in this section( eg credit risk, market risk, interest-rate risk etc.) is crucial. Investors

must raw be familiar with what distinguishes the different kinds of risk, why they are associated

with particular funds, and how they fit into the balance of risk in their overall portfolio. For

example, a Post Office Monthly income plan assures an 8% monthly income payment for its 6

years tenure. A Mutual Fund MIP invests in a portfolio of 80% to 90% bonds and gilts and 10% to20% of equities, to generate capital appreciation, which is passed on to customers as monthly

income, subject to availability of distributable surplus. In 2004, a lot of mutual fund customers

underestimated this market risk and were caught by surprise when the MIPs gave low/negative

returns. (Also read - Fear interest rate risk? Here is the solution)
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Past Performance data

ODs contain selected per-share data, including net asset value and total return for different time

periods since the fund's inception. Performance data listed in an OD are based on standard

formulas established by Sebi and enable investors to make comparisons with other funds.

Investors should keep in mind the common disclaimer, "past performance is not an indication of

future performance". They must read the historical performance of the fund critically, looking at

both the long and short-term performance. When evaluating performance, investors must look at

the track record of a fund over a time period that matches their own investment goals.

They must check that the benchmark chosen by the fund to compare its relative performance is

appropriate. Sebi is doing a fine job of ensuring this as well. In addition, investors should keep in

mind that many of the returns presented in historical data don't account for tax. They must look at

any fine print in these sections, as they should say whether or not taxes have been taken into

account.

Fees and expenses

Mutual funds have two goals: to make money for themselves and for you, usually in that

order.- Quote from Fool.com. Entry loads, exit loads, switching charges, annual recurring

expenses, management fees, investor servicing coststhese all add up over time. The OD lists

the limits on these fees and also shows the impact these have had on the fund investment

historically. (Also read - How to build your MF portfolio?)

Key Personnel esp Fund Managers

This section details the education and work experience of the key management of the fund

company, including the CEO and the Fund Managers. Investors get an idea of the pedigree and

vintage of the management team. For example, investors need to watch out for the fund that has

been in operation significantly longer than the fund manager has been managing it. The

performance of such a fund can be credited not to the present manager, but to the previous ones.

If the current manager has been managing the fund for only a short period of time, investors need

to look into his or her past performance with other funds with similar investment goals andstrategies. Only then can they get a better gauge of his or her talent and investment style.

Tax benefits information

Mutual funds enjoy significant tax benefits under Sec 23 D and Sec 115 .For example, Equity

funds enjoy nil long terms capital gains and nil dividend distribution tax benefits. A close reading
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of the tax benefits available to the fund investors will enable them to plan their taxes better and to

enhance their post tax returns. (Also read -How to ride the rising interest rate tide?)

Investor services

Shareholders may have access to certain services, such as automatic reinvestment of dividends

and systematic investment/withdrawal plans. This section of the OD, usually near the back of the

publication, will describe these services and how one can take advantage of them.

Conclusion

After reading the sections of the OD outlined above, investors will have a good idea of how the

fund functions and what risks it may pose. Most importantly, they will be able to determine if it is

right for their portfolio. If investors need more information beyond what the prospectus provides,

they can consult the fund's annual report, which is available directly from the fund company or

through a financial planner.

This investment of time and effort would prove very beneficial to investors.

- Ajay Bagga

The writer is CEO, Lotus India AMC.

7 good reasons to invest in SIPs

Systematic Investing in a mutual fund makes good sense especially in

volatile markets. Sanjay Matai tells you why.

Fact No. 1: Over a long term horizon, equity investments have given returns which

far exceed those from the debt based instruments. They are probably the only

investment option, which can build large wealth. Fact No. 2: In short term, equities


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exhibit very sharp volatilities, which many of us find difficult to stomach.Fact No.

3: Equities carry lot of risk even to the extent of loosing ones entire corpus. Fact No.

4: Investment in equities require one to be in constant touch with the market. Fact

No. 5: Equity investment requires a lot of research. Fact No. 6: Buying good scrips

require one to invest fairly large amounts.

Systematic Investing in a Mutual Fund is the answer to preventing the pitfalls of

equity investment and still enjoying the high returns. And it makes all the more sense

today when the stock markets are booming. (Also Read - 5 corners of a sound Investing

Strategy)

1. Its an experts field Lets leave it to them

Management of the fund by the professionals or experts is one of the key advantages of investing

through a mutual fund. They regularly carry out extensive research - on the company, the

industry and the economy thus ensuring informed investment. Secondly, they regularly track

the market. Thus for many of us who do not have the desired expertise and are too busy with our

vocation to devote sufficient time and effort to investing in equity, mutual funds offer an attractive

alternative. (Read more -The Investors biggest Dilemma)

2. Putting eggs in different baskets

Another advantage of investing through mutual funds is that even with small amounts we are able

to enjoy the benefits of diversification. Huge amounts would be required for an individual to

achieve the desired diversification, which would not be possible for many of us. Diversification

reduces the overall impact on the returns from a portfolio, on account of a loss in a particular

company/sector.

3. Its all transparent & well regulated

The Mutual Fund industry is well regulated both by SEBI and AMFI. They have, over the years,

introduced regulations, which ensure smooth and transparent functioning of the mutual funds

industry. This makes it safer and convenient for investors to invest through the mutual funds.

(Check out -Foolproof strategies to maximize your profits)

4. Market timing becomes irrelevant

One of the biggest difficulties in equity investing is WHEN to invest, apart from the other big

question WHERE to invest. While, investing in a mutual fund solves the issue ofwhere to

invest, SIP helps us to overcome the problem ofwhen. SIP is a disciplined investingirrespective of the state of the market. It thus makes the market timing totally irrelevant. And

today when the markets are high, it may not be prudent to commit large sums at one go. With the

next 2-3 years looking good from Indian Economy point of view, one can expect handsome

returns thru regular investing.

5. Does not strain our day-to-day finances

Mutual Funds allow us to invest very small amounts (Rs 500 Rs 1000) in SIP, as against larger
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one-time investment required, if we were to buy directly from the market. This makes investing

easier as it does not strain our monthly finances. It, therefore, becomes an ideal investment

option for a small-time investor, who would otherwise not be able to enjoy the benefits of

investing in the equity market.

6. Reduces the average cost

In SIP we are investing a fixed amount regularly. Therefore, we end up buying more number of

units when the markets are down and NAV is low and less number of units when the markets are

up and the NAV is high. This is called rupee-cost averaging. Generally, we would stay away

from buying when the markets are down. We generally tend to invest when the markets are

rising. SIP works as a good discipline as it forces us to buy even when the markets are low, which

actually is the best time to buy. (Read more - Invest wisely and get rich with equity MFs)

7. Helps to fulfill our dreams

The investments we make are ultimately for some objectives such as to buy a house, childrens

education, marriage etc. And many of them require a huge one-time investment. As it would

usually not be possible raise such large amounts at short notice, we need to build the corpus over

a longer period of time, through small but regular investments. This is what SIP is all about. Small

investments, over a period of time, result in large wealth and help fulfill our dreams & aspirations.

7 common investment mistakesyou should avoid

What are the important lessons for people wanting to create wealth

through equities? The cardinal rule is to make as few big mistakes as

possible.

The other day I got a call from a friend. He wanted to know my opinion on StockA, which was proposed to him by an old hand in the stock market. He was told thatthe stock would double in a few months and the person who had recommended thestock also had bought some. I told him that this stock was crap and unless anoperator was running the stock, I did not see strong reasons on why this stock woulddouble. I said this not because I have the ability to spot stocks that will double in veryshort periods of time, but because I am yet to come across people or experts whocan do this feat every time.

So in a nutshell I told him to stay away from this stock. Nevertheless he went ahead

and took some exposure in the stock, as the seduction of making quick bucks was

very high. Exactly 3 days down the line this stock is 18% down with 10% being


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knocked off in 1 day. He was now skeptical about making equity investments with

the losses suffered in a couple of days. He blamed the stock markets as well as

others for his misfortune, but at the same time wanted to participate in the growth of

the Capital Markets and our economy.

However, never ever did this friend ponder over the mistake he had committed. I bet

there are plenty of people who are guilty of committing the same mistake or others,

but never get down to really understand what went wrong and try to learn from their

mistakes.

So what are the important lessons for people wanting to create wealth through

equities? The cardinal rule is to make as few big mistakes as possible.

Though the list can be pretty long, here are seven common mistakes people make

when investing in equities and that you should stay away from.

Mistake No 1: The first and biggest mistake is not to admit making a mistake

People stubbornly hold on to stocks where they are making sizeable losses in the

belief that they can exit when the price reaches their buying price. Most of the minds

are not trained to acknowledge the fact that they have made a mistake and probably

the best thing is to move on. There was this gentleman who had bought a penny

stock at Rs. 9 following a tip and hoping that it would double in a few months. Thestock first rose by 20% and then declined by almost 40%. He was unwilling to let go

of the position with the belief that he will do so only when the price reaches his buy

price and it will happen sometime soon. The gentleman is still holding on to the stock

and the stock has lost a further 40%. He could have exited the stock with a loss of

just 28% initially (considering the appreciation of 20%). Now his losses are around

56% and he is still holding the stock. This happened in October 2005. Even several

blue chip stocks have actually doubled or tripled since then.

Mistake No 2: Buy on tips and khabars and wanting to make a quick buck

Technology has made our lives much easier but at the same time has caused a lot of

overload as well. We are subject to SMSes , emails and flyers with lucrative offers

forbuy and sell tips , commodities trading etc. that at the end of the day leaveyou confused. In this state only two things can happen, (a) One is that you

procrastinate and not take any action with the fear of screwing it up and (b) Succumb

to these offers for making you rich quickly.


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The point that I am trying to make is that how people who are conservative or sane

can take dangerous calls and sabotage their own well being. I remember having met

this conservative gentleman who was targeting only 12% returns but still could not

resist the stock market temptation when the broker called and showed him some

tantalizing figures.

Mistake No 3: Buying a loser on its way down thinking you are averaging your costs

Mistake No 4: Ignoring Risk in the investment and looking only at the returns

Risk is an integral part of every equity investment and some equity investments are

more risky than others. People however look at the returns without giving due

importance to risk. Stock Futures can give you great returns but at the same time

they can wipe out your capital as well. In the mutual fund context, people look at

returns when investing in the fund, but do not consider the kind of risks the fund

manager has taken whether it be concentration in stocks or sectors etc. At the sametime betting heavily in Futures & Options, Commodities without understanding the

nuances of the same is fraught with risk. Understand the risk i.e the downside

inherent in every investment and volatility associated with it.

Mistake No 5: Buying penny stocks thinking they are cheaper and ignoring stocks,

which are priced above a certain number like Rs. 1000 thinking, they are expensive.

Mistake No 6: Exiting Winners early and sticking to Losers

Ask yourselfSuppose I have a choice of 2 boats. Boat A is strong, consistent andhas traveled the sea through many rough weathers as well. Boat B is showing some

cracks and leaks in certain places. Water seeped in through this boat sometime

back. Which boat will I choose to safely get me from this shore to the next? I bet all

would opt for Boat A and no person in his right mind would opt for Boat B. Yet when

this same logic is applied to stocks, people will stick to losers (Boat B) but exit

winning stocks (Boat A) to make a small profit.

Mistake No 7: Just thinking but not doing anything

Finally doing makes all the difference. There is no substitute for action. Just knowingthat exercise is good will not keep you fit. In the same vein, just knowing this stock is

good is of no use unless you buy it.

I come across so many intelligent people who know many things but are simply

unable to implement because of lack of time and busy schedules. I knew this stockwould do well, wish I had put in money here orI missed a good time to enter thisstock are some common responses you hear. Whatever the reason be, in the end


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what matters is whether you did what you knew was right. A better option for people

here is to put their investments on Autopilot (Automatically investing fixed amounts

every month in stocks and mutual funds).

To be a successful investor and create wealth through equities, you should shun the

costly mistakes outlined. And yes if you have made any one of the above mistakes,admit it and correct it. More importantly Stop Hoping.

At the end of the day Hope is not a Strategy in the Equities Market.

Demystifying NAV mythsThe term NAVin mutual funds has been misunderstood by a large

section of the investing community. Sanjay Matai clarifies.

The NAV of a mutual fund has not been correctly understood by a large section ofthe investing community.

This is quite evident from the fact that Mutual Funds had been recently collecting

huge corpus in their New Fund Offers or NFOs, whereas the collections in the

existing schemes were negligible. In fact, investors sold their existing investments

and invested in NFOs. This switch makes no sense, unless the new fund hassomething different and better to offer.

Misconception about NAV

This situation arises from the perception that a fund at Rs 10 is cheaper than say Rs 15 or

Rs 100. However, this perception is totally wrong and investors would be much better off

once they appreciate this fact. Two funds with same portfolio are same, no matter what their NAV

is. NAV is immaterial.

Why people carry this perception is because they assume that NAV of a MF is similar to the

market price of an equity share. This, however, is not true.

Definition of NAV


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Net Asset Value or NAV is the sum total of the market value of all the shares held in the portfolio

including cash less the liabilities, divided by the total number of units outstanding. Thus, NAV of a

mutual fund unit is nothing but the book value.

NAV vs Price of an equity share

In case of companies, the price of its share is as quoted on the stock exchange, which apart

from the fundamentals, is also dependent on the perception of the companys future

performance and the demand-supply scenario. And hence the market price is generally different

from its book value.

There is no concept as market value for the MF unit. Therefore, when we buy MF units at NAV,

we are buying at book value. And since we are buying at book value, we are paying the right

price of the assets whether it be Rs 10 or Rs.100. There is no such thing as a higher or lower

price.

NAV & its impact on the returns

We feel that a MF with lower NAV will give better returns. This again is due to the wrong

perception about NAV. An example will make it clear that returns are independent of the

NAV.

Say you have Rs 10,000 to invest. You have two options, wherein the funds are same as far as

the portfolio is concerned. But say one Fund X has an NAV of Rs 10 and another Fund Y has

NAV of Rs 50. You will get 1000 units of Fund X or 200 units of Fund Y. After one year, both

funds would have grown equally as their portfolio is same, say by 25%. Then NAV after one yearwould be Rs 12.50 for Fund X and Rs 62.50 for Fund Y. The value of your investment would be

1000*12.50 = Rs 12,500 for Fund X and 200*62.5 = Rs 12,500 for Fund Y. Thus your returns

would be same irrespective of the NAV.

It is quality of fund, which would make a difference to your returns. In fact for equity shares also

broadly this logic would apply. An IT company share at say Rs 1000 may give a better return than

say a jute company share at Rs 50, since IT sector would show a much higher growth rate than

jute industry (of course Rs 1000 may fundamentally be over or under priced, which will not

be the case with MF NAV).

New Fund Offer: Things to notebefore you invest


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As an investor, you often confront this dilemma as to where to invest. The

dilemma gets confounded by the fact that there are a slew of

offerings from different mutual fund houses. So what to do? Amar

Pandit tells some dos and donts to follow while taking your

important investment decisions.

Most of us like to try out new things whether its dining at restaurants, buyingmobile phones and cars to name a few. Some go to the extent of changing mobilephones every 1 year and a car every 3 years. Well this is a matter of personalpreference and lifestyle and might give you some kind of emotional happiness whichis good in some sense.

But when it comes to most new funds, there is hardly anything different, unique or

really NEW about it. It's just that the name gets more exotic, dressing gets much

better or a new marketing ploy such as Invest in India's Growth potential as if other

options available are not investing in India's growth potential. (Also read - Have a

Dravid and a Dhoni in your portfolio)

To put it simply most of the new fund offers are Old Wine in a New Bottle. They are

packaged very smartly with fancy marketing ideas to entice the client to buy. There was a

deluge of New Fund Offers in 2005 and early part of 2006.

SEBI on its part took a series of steps. Firstly, SEBI objected against the use of the word IPO and

instead had every fund house use NFO (New Fund Offer), to confuse with Stock IPOs, to curb

rampant mis-selling of new funds.

Secondly, SEBI had Mutual Funds launching open-ended New Funds charge the initial issue

expenses within the entry load itself whereas close ended funds could still charge 6% initial issue

expense. (Also read - Invest, but choose the right mutual fund)

This is precisely one of the reasons why most of the mutual funds have been launching closed

ended New Fund Offers so they could pay a higher brokerage of around 5 to 6% to distributors.

Thirdly, SEBI has taken note of this deluge of similar funds being launched and made itmandatory for the trustees of Mutual Funds to personally certify that their new schemes are

different from the old ones. Despite this some of the fund houses have been launching me too

schemes.

Some fund houses such as DSP Merrill Lynch have not launched any new offering in the last 12-

15 months, except for the Super SIP (which was a genuine attempt to offer something new that
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was relevant), whereas others such as Tata Mutual Fund and SBI Mutual Fund have been strong

contenders for the Top Slot in the New Fund Euphoria.

So the question boils down to How does then one decide if the New Fund Offer of the so

many being launched every other month is suitable for me.

Before answering this question, first 3 Common Mistakes all investor should be aware of:

(a) Too less or Too many arent good enough

I have seen many investors having anywhere between 16-85 funds or some who have just one or

two. Having too many in the name of diversification is no good and in fact defeats the very

purpose of diversification.

After all the one of the reasons you opt for a mutual fund is to diversify your investments but

having all large cap funds in your portfolio is unlikely to do any good.

At best based on the size of your portfolio, spread your investments across in 4-9 different funds

spread across different Mutual Funds, fund managers, investing styles, expense ratios, portfolio

turnover, market capitalization and whether its an all equity, balanced, or tax planning fund. Give

Sectoral funds a complete miss unless you are very bullish on the sector and understand the

risks well.

(b) Rs. 10 NAV is not cheaper than Rs.100 NAV

What you should be concerned about is the% fall or% rise. A Re. 1 fall in a NAV 10 fund is the

equivalent of Rs.10 fall in a NAV 100 fund. In fact Rs.100 means proven competence and a long

track record of capital appreciation. (Also read - Demystifying NAV myths)

(c) Dont fall for fancy terms

Dont fall for fancy and general terms such as Investing in Indias growth potential,

Options and Derivatives to diversify your portfolio. See if there are any existing funds with longer

track records with similar investment objectives & strategies.

If there are, opt for the tried and tested ones rather than going from newer exotic ones.

How to decide if the New Fund is an appropriate one for you?

1. Take a look at your Financial Plan if you have one or at your existing portfolio. What kind

of funds do I have in my existing portfolio? Are they large cap funds, mid cap funds, flexi cap

funds, balanced funds, tax planning funds?

2. The next to see is how does this new fund really add value to my existing portfolio? How

does this New Fund fit into my portfolio, my asset allocation, and help achieve my goals? This is

a million-dollar question. (Also read -Investment lessons from Sachin Tendulkar)
http://news.moneycontrol.com/mf/news/news_detail.php?autono=237581&call_section=MFhttp://news.moneycontrol.com/mf/news/news_detail.php?autono=229225&call_section=MFhttp://news.moneycontrol.com/mf/news/news_detail.php?autono=237581&call_section=MFhttp://news.moneycontrol.com/mf/news/news_detail.php?autono=229225&call_section=MF


15/46

3. Is this really a New Fund with an interesting theme that might fit well within my portfolio?

Understand the investment objective, strategy and asset allocation of the fund.

4. What has been the fund managers track record of managing other schemes? Which

are the other schemes managed by this fund manager? How have they performed in the past?

Especially what has been his previous funds performance during tough times like the May 2006

mayhem, 2000 crash etc.

5. How stable is the investment team of the fund house and how many schemes are they

managing? What is their track record of launching new funds? If the fund house is notorious for

launching new schemes once every 2-3 months, you will be better off skipping such schemes or

fund houses altogether. (Also read - 7 investment tips to improve your returns)

6. If after doing this, you still cannot figure out if you should opt for the new scheme, seek

the advice of your financial advisor.

Just look at the track record of the some of the New Fund Offers launched in the last 12-18

months and compare with the some of the existing funds with a 5-10 year track record (marked in

yellow)

Returns as on 01-Sep-2006

Scheme 3 mth 6 mth 1 yr 2 yr 3 yr 5 yr

Reliance Vision (G) 11.82 7.31 44.21 53.98 51.48 62.11

Franklin India Bluechip (G) 13.78 7.18 44.06 48.20 46.37 43.03

SBI Magnum Sector Umbrella - Contra (G) 7.20 9.01 42.86 63.98 41.58 42.16

HDFC Premier Multi-Cap Fund (G) 10.14 2.08 28.93 N.A N.A N.A

Birla Gen Next Fund (G) 9.89 -1.37 24.28 N.A N.A N.A

UTI Contra Fund (G) 5.59 N.A N.A N.A N.A N.A

Tata Contra Fund (G) 7.72 1.02 N.A N.A N.A N.A

Prudential ICICI Fusion Fund (G) 0.70 N.A N.A N.A N.A N.A

HSBC Advantage India Fund (G) 7.39 0.68 N.A N.A N.A N.A

Birla Top 100 Fund (G) 12.22 6.03 N.A N.A N.A N.A

ABN AMRO Future Leaders Fund (G) -1.42 N.A N.A N.A N.A N.A

ABN AMRO Dividend Yield Fund (G) -1.43 -12.69 N.A N.A N.A N.A


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We can arrive at the conclusion that indeed existing funds have surpassed newer ones by a mile

and we would be much better off sticking to existing funds with excellent track records than

running after fancy terms, names & themes.

In true Munnabhai style, OLDbole tho GOLD.

- Amar Pandit

The author is a practising Certified Financial Planner and runs My Financial Advisorwww.myfinad.com. He

can be reached [email protected]

Growth or Dividend - How tomake the right choice?

Growth, dividend payout or dividend reinvestment? Choosing the correct

option is as important as choosing the right fund. Sandeep Shanbhag

lists out the various factors to be considered before you take your

pick.

Mutual Funds offer three options:

Dividend

Dividend Reinvestment and

Growth

Which is the best and why?

In my experience as a financial and investment planner, I have largely found that

investors tend to give a lot of time and importance to the process of selecting amutual fund. However, once a particular fund is chosen, choosing an investment

option is done on an almost arbitrary basis. Some like the idea of receiving periodic

Dividend, some like recurring investments and hence choose the Dividend

Reinvestment option and others choose Growth. And some even leave the entire

exercise to the discretion of the agent or distributor.
http://www.myfinad.com/http://www.myfinad.com/mailto:[email protected]://www.myfinad.com/mailto:[email protected]


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However, choosing the correct option is perhaps as important to the health of the

investment as choosing the particular mutual fund is. What are the various factors

one should consider and why?

BackgroundThere are two factors that are of prime importance when choosing an investment

option - a. Fiscal policy b. Your investment needs and goals.

Both these factors play an important role and let us see how we can tweak each for

the maximum benefit.

Choosing the Dividend Option - Drawbacks

Before considering the drawbacks, let us look at the benefit of choosing the Dividend

option.

The foremost and the most obvious benefit is that the dividend is tax-free --- in the

real sense of the term. Though all MF dividends are tax-free, dividends received

from non equity-oriented schemes are subject to a distribution tax of 14.025%. This

means that though such dividend is tax-free in your hands, you are receiving

14.025% less than what you would have otherwise received. This by inference

means that it is you who is bearing the 14.025% tax, the MF only pays it on your

behalf.

Dividends from equity schemes do not suffer this distribution tax and hence are trulytax-free. Then shouldn't all investors choose the Dividend option? Isn't this entire

discussion a non-issue?

Not so fast. Let's consider a live example --- that of Franklin India Prima, a scheme

that has been in existence since November 1993.

As on 19th June, 2006, the NAV of the Growth Option of Prima was Rs 153.86

whereas that of the Dividend Option was Rs 48.99 - almost 68% lower. Why is this?

The difference is the dividend received by the investor.

It should be understood that dividend from a mutual fund, unlike stock dividend, is

your own money coming back to you. Therefore, had you invested in the Growth

option of the scheme, the NAV of Rs 153.86 would apply to you. But since you have

chosen the dividend option, periodically, some of your investment amount was paid

back to you (by calling it dividend) and hence the market value of your units is Rs

48.99.


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Now, also note that the scheme performance is calculated based on the Growth

option NAV. Actually, technically, it doesn't matter, which NAV is chosen, as the

dividends received are assumed to have been reinvested in the scheme at the

Internal Rate of Return or the IRR. But without getting into mathematical jargon, it

suffices to say that the Prima performance (which has been nothing less thanspectacular) is based on the NAV of Rs 153.86 and not Rs 48.99.

So far so good. As long as you needed the dividend, all this really doesn't matter.

But my next question is what one should do when the dividend comes and sits in

your bank? Do you reinvest it in the same scheme or for that matter into another

scheme? If so, do realize that you are reinvesting the money in the same asset class

--- Equity. It needn't have come out of the asset class (in this case Prima) in the first

place! Plus you may have to bear a load for the fresh investment. Of course, your

distributor is happy since this means extra commission.

The second problem is agility. You may forget that the scheme has paid dividend

and the money is lying in your bank. It happens. Or even if you are well aware of the

fact, the market is behaving in a whimsical manner and this volatility is delaying your

decision to enter. The money again sits in your bank.

All this time, when the money relaxes in your SB account, the rate of return of your

investment is falling. The reason is simple arithmetic. The capital that is invested in

Prima is growing at the IRR as discussed above (44% for the last year, 69% over 3

years and almost 26% since inception). However, the dividend that is lounging in the

bank is growing at just 3.5% p.a, which is the SB interest rate. Over time, thissubstantial difference in the two rates dilutes the net return on the investment. More

the time spent in the bank, more the dilution.

Other Reasons for choosing Dividend...

Other Reasons for choosing Dividend

Of course there are a couple of excellent reasons given to me by investors for

choosing the dividend option. One is of course, needing the funds for day to day life.

The second one was that getting dividend in a rising market is like partial profit

booking, which is good form. The funds representing dividend can be invested into

fixed income avenues or even fixed maturity plans thereby rebalancing the assetallocation.

Excellent arguments that cannot be argued with, per se. Only one hitch. Unlike fixed

income avenues (such as PPF, RBI Bonds etc.) when the interest is fixed, not only in

terms of the amount but also the timing thereof, dividends from mutual funds are at

the discretion of the mutual funds. One never knows how much would one receive

and when. In other words, the fund manager may decide not to distribute dividend.


19/46

Or he may decide to distribute much less than what you need. Or much more than

what your intended shift of the asset allocation dictates. What do you do?

There is a simple solution. Ask for the dividend yourself.

Yes, you read that right. You can ask for the dividend. To put it differently ---

'When the MF pays you money, it is called dividend. When you yourself

withdraw an equivalent amount, it is called capital gain!

We all know that after one year, withdrawals (capital gains) from a mutual fund are

tax-free. Therefore, for your annual dividend requirement, do not depend upon the

whims of the mutual fund concerned, instead withdraw the funds as per your

requirement.

This way, you can earn dividend not at the whim of the Mutual Fund, but atyour fancy! The value of your investment remains the same, whether dividend

is paid to you by the MF or whether you redeem units of an equivalent amount.

To Sum Up

The psychology of investing, fiscal policy and your requirements from your

investments, all go hand in hand in deciding the optimal option to choose from. As

fiscal policy stands today, the dividend option doesn't stack up against the

alternatives. However, if tomorrow, long-term capital gains tax is imposed, this

strategy wouldn't work and the dividend option would once again come to the fore.

To check out the pros and cons of the Dividend Reinvestment option vis a vis Growth,

read -Dividend Reinvestment v/s Growth Let your taxes decide

- Sandeep Shanbhag

The writer is Director of A N Shanbhag NR Group, a Mumbai based tax and investment advisory

firm. He may be reached [email protected]

Beware of MF dividenddeclarations!
http://news.moneycontrol.com/mf/news/news_detail.php?autono=224249&call_section=MFhttp://news.moneycontrol.com/mf/news/news_detail.php?autono=224249&call_section=MFhttp://news.moneycontrol.com/mf/news/news_detail.php?autono=224249&call_section=MFhttp://news.moneycontrol.com/mf/news/news_detail.php?autono=224249&call_section=MFmailto:[email protected]:[email protected]://news.moneycontrol.com/mf/news/news_detail.php?autono=224249&call_section=MFmailto:[email protected]


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As an investor, you are very often tempted by the dividends declared by

mutual funds, little realizing that such declarations are a bait to get

investors to invest. Amar Pandit tells you why you shouldn't fall for

this.

XYZ Scheme is declaring 100% dividend and my distributor is telling me to invest inthis scheme . This is important information which I have received from myrelationship manager that ABC Scheme is declaring a dividend of 50%. I comeacross statements like this every now and then where dividends declared by mutualfunds are used as a bait to get investors to invest. The scenario is presented in amanner that if you invest Rs. 1 lakh today , you will receive a Rs. 30000 as dividendor some other amount based on the NAV of the fund. Nothing could be further fromthe truth.

Dividends are not any form of additional gains that you can expect. In fact,

dividend in Mutual Funds is a function of Capital Appreciation. Let's say youinvest on 20th September Rs. 5 lakh at an NAV of Rs. 50. This means you end up

getting 10000 units (have excluded Entry load for simplicity).

Happy arent you to receive Rs. 1 Lakh as dividend. I wish it was this simple andeasy to make money in just a few days . There would be far more billionaires and

millionaires than we have now.

InvestmentRs. 500000

NAVRs. 50

Number of Units10000

Dividend Declared100% (i.e Rs. 10)

Dividend Received

Rs.10 * 10000 = Rs.

100000


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Now for the catch, after the dividend is declared the NAV of the fund falls down from

Rs. 50.00 to Rs.40.00

Value of your holding = 10000*40= Rs. 400000. This along with the dividend already

received of Rs. 1 lakh will translate into your original investment of Rs. 5 lakh. So

you see things are not as rosy as they are projected to be.

So how should one react to these advertisements that a 100% dividend is being

declared or should anyone invest just on the basis of this information. The

answer is an outright no. However, People have utilized a strategy called Dividend

Stripping on the basis of this information. This was more rampant when Mutual

Funds used to declare dividends a month or so before the record date.

POST DIVIDEND

NAVRs. 40.00

Number of Units10000

InvestmentRs. 400000

Dividend Received

Rs.10 * 10000 = Rs.

100000

Total Amount in hand

Rs. 5000000 same as

earlier


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The way it works is as follows. Suppose you have a short term gain of around Rs.

100000 . Instead of paying a short term capital gains tax of Rs. 10000 (considering

10 % short term capital gains), you make an investment of Rs. 100000 in a fund to

declare a dividend of say around 25% (NAV= Rs. 25 ) .

Number of Units you have : 4000

Dividend per unit = Rs. 2.50 (25%)

Total Dividend Received : Rs. 10000

Value of your investment now : 4000 units * NAV (RS. 25-10%) Rs. 22.50 = Rs.

90000

Redeem your investment now for Rs. 90000 and you have a Rs. 10000 Short Term

Capital Loss.

Here you have received tax free dividend and you have been able to offset this

against your short term capital gains.

POST DIVIDEND

NAVRs. 22.50

Number of Units4000

InvestmentRs. 90000

Dividend Received

Rs.2.50 * 4000 = Rs.

10000

Total Amount in hand

Rs. 100000 same as

earlier


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Now your short term gain is around 90000 instead of earlier Rs. 100000. This results

in a saving of around Rs. 1000 or 10% for you.

IT Department through its annual budget have tried to fix this loophole by increasing

the holding period of the investment post the record date based on whether it wasbought 3 months before the record date or within 3 months of the record date.

SEBI on the other hand issued guidelines that required the AMC to issue a notice

communicating the decision to distribute dividends within 1 calendar day of decision

by the trustees. At the same time the record date should be 5 calendar days from the

issue of this notice. Though these are steps in the right direction and dividend

stripping has been slowed to a certain extent, AMCs in the race to gather more

assets are still using this as a ploy.

Dont fall for this or any such trick as your purpose of investing in equity orientedfunds should be capital appreciation and not because a dividend is being declared.

Dividend Payout, Dividend Reinvestment and Growth are options to choose based

on your situation and need. Mutual Funds can only pay out dividends if they have

made gains on the portfolio. Dividends are like fruits on a tree...If you do not give

Short term Capital GainRs. 1,00,000

Loss from sale of

investment post dividend

Rs. 10,000

Net Short term Capital

Gain

Rs. 90000

Saving in Short term

Capital Gains tax

10% of 10,000 = Rs.

1,000


24/46

enough time for the tree to grow...where will the fruits come from...Dont knowabout this but your dividend will certainly come out from your principal.

- Amar Pandit

Is your Mutual Fund Agenttaking you for a ride?

The standards for being a mutual fund agent are shockingly lax and its

critical to do some due diligence before taking financial advice from

anyone

Being a mutual fund agent is one of the easiest things to do in India anybodycould do it. All a person, call him Mr. Anybody, needs to do is pay Rs. 500 to AMFIand score fifty out of hundred on a test where most of the questions are somethinglike this, What does an equity fund invest in?. The options are, (a) debt, (b)equities, and (c) neither. Mr. Anybody will then receive an AMFI RegistrationNumber (ARN), regardless of whether he is a bored housewife, a steel magnate, oranybody else for that matter. He is now licensed to tell you where to invest yourhard earned money, and of course, earn a healthy commission along the way. Nowonder there are more than 90,000 AMFI registered distributors in India. I wontclaim to have spoken to all of them, but of the 500 I spoke to, I can confidently saythat most of them are as qualified to give me financial advice as Mr. Anybody.

Thats a pretty scary thought.

Our otherwise stringent regulatory system is the first culprit, in particular the

Association of Mutual Funds of India (AMFI), which certifies mutual fund agents.

The person selling mutual funds is not selling soap, he is making asset allocation

decisions that shape his clients lives. If fund management selecting a fewstocks from the hundreds out there requires professional qualifications andexperience, why doesnt wealth management selecting a few funds from thethousands out there? SEBI on its part has set outstanding standards for fund

managers. Mutual funds need five years of stellar investment track record and a net

worth of ten crores. Portfolio managers pay ten lakhs in fees to SEBI and complete

an application that scrutinizes everything from their professional qualifications to their

IT infrastructure to their office space. That is why we have only 40 mutual fund

houses and 250 portfolio managers. Why isnt a mutual fund agent often yourfirst entry point into investing in the markets held to a comparable standard?


25/46

The industrys compensation structure is also guilty and consumers are oftenunclear and unaware of how their agent is compensated. Agents are paid a

commission by the mutual fund comprising of an upfront fee and a trail fee later in

the year. Although SEBIs recent regulations have improved the situation, theincentive for your mutual fund agent is still two-fold. One, sell you the mutual funds

that are earning him the highest commission, and two, convince you to move fromone fund to another frequently, to increase the amount of upfront fees he earns.

Agents get paid nothing for either giving you good advice or for picking good funds

for you, a grave misalignment of incentives.

The solution is for AMFI and SEBI to upgrade the mutual fund agent into an

investment advisor, a full time professionally qualified individual who can say more

than choose equities over debt when you are young and choose the best performing

fund of the week. An investment advisor should understand the entire range of

products available to various classes of investors, the risk profile of each, systematicasset allocation, and the basics of manager selection. Give us good advice and

charge us for it. As for buying mutual funds, we dont need someone to do that forus. We buy stocks online, and with an online platform for mutual funds, we should

be able to do the same. I would certainly be happier paying for good advice and

knowing I am investing money in whats right for me, not what makes money formy agent.

What should you do with your favourite mutual fund agent in the time being? For

starters, check his qualifications at the minimum, he should have a degree ineconomics or finance and multiple years of experience in investment or wealth

management. Then, test his asset allocation skills ask him how hisrecommendations would change for different individuals in various hypothetical life

situations? What does he define as risk and how does he measure and quantify it?

Finally and most importantly, understand his incentives and how they are influencing

his recommendations. Is he always advising you to choose equities over debt

because commissions on equity funds happen to be much higher? Does he

periodically recommend you switch to a different fund, because he is running low on

commissions? If you suspect that his recommendations favour his interests more

than yours, confront the problem.

Its about time Mr. Anybody stopped giving us financial advice. Moneymanagement isnt rocket science, but it isnt anybodys business either.


26/46

How to secure your child'sfuture?

The initial celebrations on the arrival of a child gradually leads to a soberreflection on how best to ensure his / her comfortable upbringing

and education. Investment advisor Ramganesh Iyer addresses the

finance aspect of this concern.

On at least one aspect, I think several of the insurance company advertisementshave got it spot on. The initial celebrations on the arrival of the child gradually leadsto a more sober reflection on how best to ensure his / her comfortable upbringingand education. Doubtless, finances are but one aspect of this concern; but they arean important one! Moreover, they are probably much easier addressed than some ofthe softer and other cultural aspects of parenting.

INVESTMENTS

Investment is distinct from Savings

Savings simply mean you set aside a portion of your income for future use. Yet, it is

(careful and planned) investing that makes maximum use of these savings and

optimizes your portfolio in later years. This is especially important since inflation

tends to erode the purchasing power of money over a period of time. A headline

inflation of 6%-7%, actually translates into a lifestyle inflation of 10%. Thus, if your

money is lying in a deposit fetching 7% interest rate, you are actually eroding wealth!

India is the best growth story to invest inIn contrast, with the medium to long-term prospects of Indias growth being asstrong as they are, the long-term returns on equity can be assumed to be 15%.

Thus, this provides an effective way to not get left behind the growth story that is

India. In addition, investing in equity as an asset class, if well researched and

carefully done, enjoys various benefits, such as:

High liquidity, to withdraw money in desired quantity whenever needed

High flexibility in terms of investing as and when funds are available Favourable tax treatment (especially compared to real estate and fixed

deposits) Low transaction costs

High degree of transparency in knowing how your corpus grows

The power of compounding

Returns on investments exhibit the effect of compounding. Very simply put, it means


27/46

that the returns earned on the investment in the first year, gets added to the corpus

in subsequent years and fetches its own returns. Thus, in the illustrative returns

shown above, if you invest Rs. 1 crore today in equity @15%, the corpus would grow

to Rs 4 crore in 10 years time. In contrast, in a fixed deposit @7%, the corpus would

only be Rs 2 crore in 10 years time.

Index investing

Investing in the index is possibly the best long-term way to benefit from the India

growth story. You can invest in the index either one-time, or systematically as you

earn more, or a combination of these. The benefit of index investing is the low

transaction cost and low need for research involved. Thus, for those not very

comfortable with the markets, or with those having no time to do extensive research,

it is also a good starting point to gain familiarity with the working of equity markets.

Once you are more comfortable with equity markets and with how an investment

portfolio works, you can consider allocating funds to more actively managedportfolios as well. These require much more research and active management, but at

the same time have the potential to generate higher returns than the index by

leveraging existing market conditions.

Trust formation

Very often we come across customers desirous of making a trust in each of their

childrens names. In India, unlike in some other countries, such trusts bythemselves have no special tax benefits. Yet, they often have softer benefits such as

helping mentally allocate resources for each childs milestones, monitor each set of

investments clearly, etc. Given the formalities and procedures around trustformation, maintenance and reporting, we would recommend this to people having a

large corpus only. With most others, the money may be managed through mental

accounting alone, without going through the legal procedures around trust creation.

LIFE INSURANCE

The concept of life insurance is to secure the lifestyle and indeed the financial well

being of the family in the unfortunate event of the breadwinner not being around.

Due to cultural reasons, this often brings unpleasant thoughts, and hence the subject

of insurance gets pushed under the carpet.

However, we would rather look at it as a means to lead a more secure and worry-

free life. While the emotional trauma of loss of a family member is unavoidable,

insurance atleast spares the financial burden that this could bring. Thus, an

insurance of five to seven times annual earnings is a useful benchmark to have as

amount of life insurance.


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A term plan is a simple and effective life insurance policy. Very roughly, the annual

premium for a healthy 35-year old, for a life cover of Rs. 1 crore, should amount to

about Rs. 45,000. There are two important points to note here: the earlier you start

the life cover, the lower the premium rate you can lock-in (once locked-in, the

premium does not ever change). Secondly, it is a huge benefit to start life insurance

when one is healthy and unaffected by any chronic ailments. This ensures muchlower premiums, and a hassle-free claims process.

We would, at this stage, advise against the more complicated unit linked products; or

the typically low yielding traditional insurance products. These are useful forinvestors only in very specific cases, and only when the investors have understood

the cost-benefit equations of these plans very carefully. The insurance agents very

seldom do such elucidation; and hence it may be useful to stay away from these for

a while.

KEY NEXT STEPS

Just as it is impossible to learn swimming without jumping into the pool,we believe a start has to be made sometime along both these dimensions.And there is no better time than today!

Thus, we would recommend a simple starting point for parents thinkingabout their childs future:

Invest a lump sum in an index fund, and plan to systematically build this through

authorising smaller additional investments monthly. You can look at research to seewhich are the good funds, and keep your portfolio under periodic monitoring.

Insure your life, for atleast five times your annual earnings. Again, a simple shopping

expedition should get you the best term insurance cover applicable for your age and

health.

- Ramganesh Iyer

-

Start planning early for your

retirementThough it is a well known fact that we need to save to build a retirement

nest egg, many of us fail to do so. Investment expert Hemant

Rustagi tells you how to achieve the desired results.
http://www.moneycontrol.com/mccode/news/searchresult.php?search_str=Ramganesh%20Iyer&datesel=2http://www.moneycontrol.com/mccode/news/searchresult.php?search_str=Ramganesh%20Iyer&datesel=2


29/46

Retirement planning is a process of establishing retirement goals and working outallocation of finances to achieve these goals. This process, if properly followed, cango a long way in ensuring the right level of preparedness required for a dream retiredlife.

While it is a well known fact that we need to save to build a retirement nest egg,

many of us fail to do so. No wonder, we often get overwhelmed by the thought of

retirement and end up wondering how we will ever generate the huge amount of

money required to lead a happy retired life.

Many of us face this dilemma because we consider retirement planning as a single

event rather than considering it as a life long process. If we save and invest regularly

over the years, even a small sum of money can suffice for this purpose. The key,

however, is to start investing early as the real power of compounding comes with

time. Unfortunately, few young people look that far ahead.

Another challenging aspect of retirement planning is to calculate how much we will

need to support ourselves and our dependants. As a thumb rule, one requires

around 75- 80% of ones current income to maintain the similar standard of living.Of course, this amount will increase with inflation. Though it is a proven fact that

starting early is an important aspect of retirement planning, it is extremely difficult to

decide how much one will need after retirement. A professional advisor can make

things easy and hence it is always prudent to go for professional advice to ensure

success in the process of retirement planning.

One can also enhance the chances of success by making retirement planning an

integral part of overall investment planning. Hence, it is crucial to examine onescurrent situation and the attitude towards risk. Remember, investing without a clear

picture can be too risky. The key to success is to adopt a disciplined savings

programme as well as have the flexibility of multi-stage approach to investing.

The road to success for this all important and a long-term goal can at times be

bumpy. Therefore, having patience and discipline can go a long way in achieving thedesired results. While it is impossible to anticipate every obstacle, knowing some of

the common mistakes can help in avoiding them. The important ones are not having

a plan as well as a backup plan in place, making frequent changes in the portfolio

and investing too conservatively.


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Investing to beat inflation is an important aspect of retirement planning. To

understand as to how inflation can impact our future requirements, let us take an

example of someone who is 30 years away from retirement. If we assume a 5%

inflation rate, the Rs. 100,000 annual expenditure will increase to over Rs. 435,000

by the time he retires. Therefore, if he plans for Rs. 100,000 per annum for his

retirement, he would be having less than 25% of what he would really require.

Therefore, a retirement plan and the strategy to implement it should cover the

following:

Begin investing early Invest to beat inflation Invest regularly Know your risk tolerance Evaluate your insurance and investment needs Follow a buy and hold strategy Invest in tax efficient instruments like mutual funds.

Investing regularly is another key ingredient of retirement planning. Broadly

speaking, we need to save a certain percentage of our annual income and invest in

instruments that have the potential to give the desired results over different time

horizons. The following can act as a guideline:

Ages: 25 to 40- Depending on the age, 15 to 25% of the annual income should be

saved. The portfolio should be dominated by equities and/or equity funds. These

should comprise 70 to 80 percent of the investments. To balance out the portfolio,

one could rely on stable yet tax efficient investments such as PF, PPF and debt and

debt-oriented mutual funds.

Ages 41 to 50- In this age group, one should save around 25 to 35% of the annual

income. As the time horizon to retirement is still long enough, equity and/or equity

funds should continue to be a crucial part of the portfolio i.e. around 60% or more.

The balance can be invested in PF, PPF and other debt and debt related mutual

funds.

Ages 51 to 60- At this stage of ones life, the time horizon for retirement startsshrinking. Therefore, the prudent thing to do would be to follow a slightly

conservative approach. However, it is important to remember that it may only be a


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few years before one retires, but one may need to depend on retirement funds for

many more years. Therefore, the key is to maintain a portfolio that will continue to

grow for many years after one retires. Equity and/or equity funds should still be a

part of the portfolio, though in a moderate percentage.

If you havent started planning for your retirement yet, you need to do it now.Remember, for every 10 years of delay in the process, you will need to save three

times as much each month to catch up for the lost time.

-Hemant Rustagi..

Is it time to say Goodbye toyour fund?Any decision to sell your fund has to be a well thought out one and not

based on some immediate urge. Sanjay Matai highlights seven points

to be considered while making a decision to sell.

Many investors are still to fully understand the concept of a mutual fund. Theycontinue to treat it similar to investing in shares. Therefore, they tend to buy mutualfunds for wrong reasons - low NAV of a fund; dividend announced by a MF; NewFund Offer etc.

The same misconception is seen in selling too. One of the most common instances

of selling a mutual fund has been to invest in a New Fund Offer. This is under the

false impression that a fund at Rs.10/- is cheap and an excellent opportunity to

invest. Many investors have been misled by distributors into this kind of switching.

(Also read - Invest wisely and get rich with equity MFs)

Further, the profit booking strategy for stocks may not strictly be applicable to mutual funds. It is

the job of the fund manager to keep buying under-valued or fairly-valued stocks, while booking

profits by selling overvalued stocks Therefore, by selling a MF from a profit booking perspective,

we may actually be selling off a fairly valued portfolio - with a good long-term potential.

Therefore, what could be the possible situations for selling a MF?

Financing a need


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A very obvious reason to sell would be when you need money. We all invest money with a view to

finance some need or a desire in the future.

Say, you planned to buy a car or a house; or need to pay your child's fees; or maybe you want to

take a vacation abroad. All this would require you to liquidate some of your investment. (Also read

- Trading tricks that've stood the test of time)

However, proper choice is essential in deciding which fund(s) to sell. You could either sell those

funds, whose performance has not been encouraging; or those where the tax impact is minimal;

or those where the amounts are not very significant; etc. Or sometimes, possibly it may be better

to borrow rather than sell a good investment.

Poor performance

There are more than 200 equity funds and their number is growing. The returns from practically

all funds have been comparatively quite good, given the current bull-run. Even the worst

performing funds have given 30-35% returns in last 1 year. In absolute terms these are excellent

returns. But when compared to the top performers with 110-115% returns, these look extremely

poor.

However, the key here is to look at long-term returns - 1-yr, 3-yr & 5-yr - and compare it with both

the benchmark index and other funds in the peer group. In the short term there could be a

genuine reason for under-performance. Some of the investments may be from a long-term

perspective; certain sectors may have been under-performers; contrarian investments take time

to catch market fancy, etc. (Also read - The Investors biggest Dilemma)

But if the performance of the fund continues to be consistently below par over long periods of

time, then it may be worthwhile considering switching over a better performing fund. If possible,

one should also try and assess the reasons for poor performance. This will give a good insight

into the market.

Rebalancing the portfolio

We all have a certain asset allocation across various investment options such as debt, equity,

real-estate, gold etc.

A change in your financial position may require you to rebalance your portfolio. Suppose you are

presently having a well-paid job and are unmarried with no liabilities. You can, therefore, take

much higher exposure in equity MFs. But with marriage and kids your responsibilities may

increase, which would require you to reduce you equity risk to more manageable levels.

Or the portfolio balance changes with time, due to different assets growing at different rates. Your

equity portion may have appreciated much faster than your debt, distorting the original balance.
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Hence you would need to sell equity and re-invest in debt to restore the original balance. (Also

read - Mutual Funds: Your best personal Portfolio Manager)

Or maybe a new asset class has been introduced in the market - a real-estate fund or a gold fund

- and you want to take advantage of it. Thus you may have to sell a part of your existing

investment and re-invest in this new asset class.

Change in taxation policy...

A change in the tax policy could become a reason to sell and reinvest

somewhere else. (Also read - How to optimize your tax using mutual funds?)

Suppose our risk profile is such that we can take around 50:50 equity to debt

exposure. Thus we had invested in the balanced funds. But, in the recent budget,

the tax laws have been changed wherein a fund would classify as an equity fund

only if the equity component is more than 65%. Therefore, the balanced fundswould have to increase the equity component to 65% so that they can continue to

enjoy the lower tax applicable to equity funds. But with 65% equity it becomes

riskier. Hence, it could be time to exit.

Change in Fund-Style or Objective

We invest in a fund with a particular objective or style in mind. Suppose, we

already have exposure in mid-cap funds and in order to diversify our portfolio, we

choose a large-cap fund. However, after some time we observe that the fund is

taking exposure in mid-cap sector too. This increases our overall exposure tomid-cap. Thus it may be time to sell and move to a truly large-cap fund. (Also

read - 5 corners of a sound Investing Strategy)

Or say, we choose a fund for its' passive style of investing. But later the fund

manager starts following an aggressive style with frequent churning. If this style

does not suit our risk profile, it may be the time to say goodbye to such a fund.

Or take the case of some technology funds. These came at the time of tech

boom and subsequently fared very badly. However, at Rs.4-5 NAV these looked

quite attractive from a long-term perspective and some investors, confident of

recovery in the tech sector, invested in these funds. But in the meantime, the

AMCs in their anxiety to improve the performance of such funds, changed the

investment objectives. This defeated the very purpose with which some investors

had taken exposure in these funds; and hence had to consider exiting.

Change in the Fund Manager
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When investing, one of the criteria is to evaluate the expertise, knowledge, experience and past

performance of the fund manager.

However, while the fund manager is a key player in managing our money, one should not forget

the contribution of the research team, the investment committee, the top management and AMC's

investment philosophy.

Therefore, a change the fund manager need not necessarily mean exiting the fund. But it may be

worthwhile keeping the fund under a close watch. If there is a perceptible decline in the

performance, one could consider selling.

Change in the Fund's Size

Sometime the size of the fund starts affecting the returns. As we have also recently seen that

certain mid-caps funds took a voluntary step to stop accepting fresh money into the fund, when

the size became too large to manage. This is because (i) the mid-cap space is limited (ii) even

small purchase of such stocks sent their prices soaring and (iii) too large a holding in such stocks

will be difficult to offload when required. (Also read -Investing situations that cause Panic)

Here, of course the funds took a proactive step to protect the returns of the existing investors. But

if the funds themselves do not take such a step, we investors should keep track of the fund sizes.

The moment they become too large to manage or say too small to capture new investment

opportunities, it may be time to exit.

There could, of course, be other reasons to sell, more specific to one's circumstances. The basicidea is to define, beforehand, certain rules for oneself for selling one's investments. This would

reduce the day-to-day dilemma and ad-hoc decision-making, thereby make investing more

scientific and unemotional.

How to optimize your tax usingmutual funds?

Mutual Funds by their very nature are not tax saving instruments but

investment products that may offer tax concessions. But the

question is whether these should be looked at as tax saving

instruments? Moneycontrol tells you how to kill two birds with one

stone - how to optimize tax while getting the best from mutual

funds.


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Mutual Funds by their very nature are not tax saving instruments but investmentproducts that may offer tax concessions. But the question is whether these should belooked at as tax saving instruments?

Moneycontrol tells you how to kill two birds with one stone - how to optimize tax

while getting the best from mutual funds.

Equity Linked Savings Schemes (ELSS) Are Strong Favorites:

ELSS schemes give twice the benefit as compared with diversified equity schemes.

They give you tax sops on investments and are also exempt from long term capital

gains tax.

These are special equity funds, which have to invest at least 80% of their corpus in

equity, and investments are locked in for a period of 3 years. Investments can get

you benefits under Section 80 C i.e. investments of upto Rs 1 lakh in such schemes

can be reduced from your gross income.

Hemant Rustagi, CEO, Wiseinvest Advisors believes that ELSS is the best example

of an investment option that provides you a very simple way of investing in stock

market and save taxes while doing so. Being equity oriented schemes, ELSS havethe potential to provide better returns than most of the options under section 80C.

Also, as per the current tax laws, an ELSS investor is not only entitled to earn tax

free dividend but also the long term capital gains are not taxable, he adds.


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Click here to know the Best Funds to Buy

But should an investor go the whole nine yards and put in the entire

permissible amount of 1 lakh in ELSS? Probably not!

Ranjeet Mudholkar, Head - Certified Financial Planners Board, cautions that Sec 80

C covers your principal on housing loan, PF, pension plan, life premiums, so only

what is left after that can give you a benefit if invested in ELSS.

ELSS

Returns (in %)Assets

(Rs in cr)3 Year 5 Year

Can Robeco Equity

TaxSaver

16.6 11.1 362.35

Fidelity Tax Advantage14.8 7.5 1,167.14

Franklin India Tax Shield15.2 8.5 812.36

HDFC Tax Saver14.8 6.5

3,114.00

Reliance Tax Saver (ELSS)16.0 6.5

1,972.80

* Returns are Annualised
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All Smiles From Equity Funds:

Apart from ELSS schemes, diversified equity schemes are a good investment

considering that capital gains in equity funds below one year are taxed at a rate of

10% and over a year are tax-free. This option can be best excercised using a GrowthPlan offered by mutual funds. The primary objective of a Growth Plan is to provide

investors long-term growth of capital.

Dividend paid in Dividend Plans is tax free, and no distribution tax is deducted.

However, every time we buy or sell equity shares a Securities Transaction Tax, STT,

of 0.25% is paid and further when you redeem your investment, again STT is

deducted from your redemption price.

So what strategy will help to reduce the burden of STT to the minimum

possible extent?

Investment expert Krishnamurthy Vijayan advises to choose the dividend option,

while it remains tax-free. Though both decisions are by and large tax-neutral, your

STT will go down if your profits have already been taken out by you in the form of

dividend, he adds.

Equity Diversified SchemeReturns (in %) Assets

(Rs in

cr)3 Year 5 Year

Reliance Equity Oppor - RP24.7 9.80

3,325.34

ICICI Pru Dynamic Plan16.1 8.301

4,092.27

Tata Dividend Yield Fund19.8 11.4

273.03

HDFC Growth Fund 14.6 8.50 1,261.95

* Returns are Annualised
http://www.moneycontrol.com/mutual-funds/nav/reliance-equity-opportunities-fund-retail-plan/MRC089http://www.moneycontrol.com/mutual-funds/nav/icici-prudential-dynamic-plan/MPI038http://www.moneycontrol.com/mutual-funds/nav/tata-dividend-yield-fund/MTA129http://www.moneycontrol.com/mutual-funds/nav/hdfc-growth-fund/MHD004http://www.moneycontrol.com/mutual-funds/nav/reliance-equity-opportunities-fund-retail-plan/MRC089http://www.moneycontrol.com/mutual-funds/nav/icici-prudential-dynamic-plan/MPI038http://www.moneycontrol.com/mutual-funds/nav/tata-dividend-yield-fund/MTA129http://www.moneycontrol.com/mutual-funds/nav/hdfc-growth-fund/MHD004


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Debt Funds Can Benefit From Indexation:

Debt funds have lost their sheen thanks to falling interest rates and paling tax sops

when compared with equity schemes.

Any fund wherein the average holding in equity is 65% (as per Budget 2006) or

below is treated as a debt fund. If you invest for less than 1 year in the growth option

of a debt fund, you will have to pay Capital Gains Tax on your "profits" at the rate at

which you pay income tax on your income. But, if you stay invested for over a year,

you can either pay 10% tax on the profits or pay 20% after reducing the rate of

inflation (indexation benefit). So if you are invested for three or four years, your tax

may become much, much lower than 10%.

Nevertheless for the risk averse, there are ways to reduce the tax burden on

returns.

Investors can also benefit from double indexation benefit (when you invest late in

one financial year say on March 28, 2005, and redeem early in the next financial

year say on April 2, 2006, you use the index of both Financial Year ending March

2006 and March 2007 to get this benefit for as little as 366 days) provided the two

financial years' index adds up to more than 10%.

In the dividend option, dividend is tax free in your hands. But the dividend distribution

tax deducted at source also comes out of your NAV. So you end up paying a tax of

10%. Further any increase in NAV over and above the dividend distributed, is taxed

as in the case of the growth option.


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Vijayan advises most debt fund investors who have a reasonable horizon to invest

for at least one year or more, in any case and choose the growth option, since by

and large this would prove most tax efficient for retail investors in the lower tax

brackets.

- Re

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