Investor Education: Exit MFs at right time for higher gains

Investing isn't just about picking the right funds and products. Unless you are able to maximise your returns by making the exit at the right time, you wouldn't be able to fully realise the fruits of your well-thought out investment plan. Even the best products are susceptible to the vagaries of the market and can make your investments look like duds in the short run. While timing the market isn't something that average investors are good at, one can cut losses, and benefit from market upswings by making exits at periodical intervals.

A systematic withdrawal plan (SWP) allows you to do just that. SWP is the opposite of systematic investment plan (SIP) and lets you to automatically redeem a predefined amount of your investments at regular intervals. With even dividends from diversified equity mutual funds (MFs) to be taxed at 5% under the new direct taxes code (DTC), investors can take the growth option and pull out the gains through an SWP.

"SWPs will become more popular after the DTC comes into effect as it is tax neutral (not much change in tax structure)", says R. Raja, Head - Products, UTI MF. "The biggest advantage with SWPs like SIPs is that it eliminates the risk of timing the market. Only if you try to time the market you lose. With SWPs you neither exit at the opportune moment nor at the inopportune time and by this you can average out your withdrawals (from the corpus)", he adds.

"SWP is a good way of disciplined profit booking. Just like one has an investment discipline (through SIPs), a discipline in selling is also necessary", says Lakshmi Iyer, Head (Fixed Income and Products ), Kotak Mahindra MF.
"However, SWPs, unlike SIPs, are not widely used by investors because they are more used to redeeming their units as and when they want", she says. But inert investors may hold on to the gains and cash out at the wrong time leading to losses, say observers. An SWP would help an investor to rebalance the portfolio and reallocate cash to other efficient asset classes depending on market conditions, they say.

But it has its downside as well. SIPs and SWPs are not a sure recipe for success. They would lose out in a continuously falling market, says an industry official. With the markets trading within a band, one needs to be careful about exercising such options, say observers. The amount to be withdrawn through an SWP is based on an individuals requirements and the corpus which is invested.

Source: The Times of India, September 7, 2010

7 common investing mistakes you must avoid

We all make mistakes, don't we? Some mistakes are minor that you get a second chance to make amends. However, there are some mistakes that will prove to be very, very costly and cannot be easily amended.

Investment is one such tricky area where you just cannot afford to go wrong. So what should you do before making an investment? Or do you know what the most common mistakes that you should avoid when making an investment? Well, here's a list of the seven common investing mistakes that you should avoid at any cost.

1. Confusing between trading and investing
This is perhaps the most basic confusion that you should avoid, lest you make big losses and lose the confidence to try again: the confusion between trading and investing. Trading is something that you do without much planning or research. That is, you are said to be trading when you buy and sell stocks and mutual funds at will. Frankly speaking, trading might not help you build long-term wealth but could bring good money to your broker. So it is important to understand the basic differences between trading and investing before taking the plunge. Investing takes a lot more research and well-thought out planning in the different avenues of the investment. Your investment amount, your investment goal, your risk appetite, the present market conditions and some basic studies about the future of the markets and many other factors go into making the best investment strategy for you.

2. Taking very conservative stand
Most people prefer to take a very conservative stand and invest in traditional products like bank deposits, public provident fund (PPF) and so on. Their argument is that the traditional products ensure guaranteed returns though they are comparatively lower than returns from stocks or mutual funds or equities. However, a good investment is not only about guaranteed returns but about real returns. Real returns are returns post inflation. And it is always better to calculate these real returns with an expert's help considering the complexities involved in today's economic scenario especially inflation.

3. Taking very aggressive stand
Not taking a very conservative stand doesn't mean you should play aggressive in the markets. An investor is bound to lose money even if he chooses to take a very aggressive stand by investing his money in high risk avenues such as equities without even taking enough care to understand how they work. The middle path is always better so that you can always make changes to your investment basket according to market conditions.

4. Holding on to the dud stocks
This is one of the most common mistakes some investors make, holding on to the dud stocks. A dud stocks need not necessarily mean only non-performing stocks; it could also mean purchasing stocks of unheard companies. Never buy stocks of unheard companies even if they are doing well while you are planning to buy them. It could well be just a short term stint because these unheard companies never have in them the thing to perform well on a long term and their stocks might soon turn to be duds. There are many instances of such companies and their stocks turning dud over a period of time. Hence, it is important to invest in performing stocks, and at the same time have a backing from a good fund manager. For example, you could invest regularly in small amounts through Systematic Investment Plans (SIP) and make money by holding on to them for a long term.

5. Asset allocation holds the key
Your investment basket should be filled with the right type of assets for good long term returns. And remember to fine tune the basket at regular intervals depending on how the market behaves and in line with your risk appetite and financial goals. Improper asset allocation like investing in too much of debt for the long term or irregular investments in equity for the coming quarters could put you in an awkward position and leave you with no or little returns.

6. Timing the market
This is one area where even the experts fumble. Markets are highly unpredictable even in the short to medium terms. Though there are some parameters to predict the market like the changes to the country's socio, economic, political and business spectrums, there is no fixed rule to say how markets would react to these turn of events. Hence, it is advisable to stay away from reading too much into such parameters while timing the markets. Instead, you could go in for a closely controlled investment strategy that could help you make money in the long term.

7. Overconfidence
Ask the long-term players in the markets and they will perhaps warn you against being overconfident with recent successes. There is nothing wrong in hoping for the best times but overconfidence is something an investor should do away with. It is important to understand that your recent successes in the markets could have been due to many 'hidden' factors that might have escaped your attention. Overconfidence in your so called 'perfect management of portfolio' might spell trouble and you might end up losing money.

Avoid these common mistakes at any cost. After all, a good beginning is half the battle.

Source: http://www.rediff.com/, September 6, 2010

Slew of IPOs likely to hit Dalal Street in September

People planning to invest money in primary market would have a number of choices to park their savings this month, as about a dozen of companies are expected to bring out their IPOs in September. As many as 11 small to medium scale companies, including tutorial service provider Career Point and entertainment and media firm Eros International, are preparing to launch their initial public offerings this month, merchant banking sources told PTI.

The companies, which are planning to come out with their IPOs include Indosolar, Commercial Engineers, VA Tech Wabag, Ashoka Buildcon, Electrosteel, You Broadband and BS Transcom. "All these companies are trying to hit the market before September because otherwise they will have to re-file the June quarter financial results with the capital market regulator Sebi. Till September, they can go with March quarter financial results", said a person involved in a number of these IPOs. However, independently, these firms could not be reached for comments on their expected time frame to hit market.

"The huge response received by several issues in recent times is also an encouraging factor for these companies to cash in the opportunity", said a merchant banker. Recently, the public issues of a number of entities including SKS Microfinance, Prakash Steelage Ltd. and Gujarat Pipavav Port Ltd. got huge response from investors and were oversubscribed. Listing of these firms was also stellar. The follow-on public offer of the state-run Engineers India Ltd. has also received a robust demand from investors.

Corporate India raised over Rs. 47,800 crore through the public offers during the fiscal 2009-2010, a period during which the stock market benchmark Sensex gave a handsome return of over 80 per cent. Apart from some big initial public offers such as that of JSW Energy and Adani Power, the fiscal also saw divestment of the government's stake in NMDC and NTPC through the follow -on offers. According to an analysis, about 44 companies -- including PSUs -- raised Rs. 47,867 crore during the April 2009 to March 31, 2010 period.

Source: The Economic Times, September 6, 2010

CRISIL assigns top rating to Coal India IPO

Rating agency, CRISIL, on Friday said that it has assigned a CRISIL IPO Grade 5/5 (five-on-five) to the proposed initial public offer (IPO) of state-run Coal India Ltd (Coal India). This grade indicates that the fundamentals of the IPO are 'strong', a CRISIL statement said.

State-owned Coal India Ltd (CIL), the country's largest coal mining company, is planning to raise Rs. 13,000-crore (Rs. 130 billion) through an IPO to fund the infrastructure projects in the country. This will be the largest IPO in the Indian capital market after Reliance Power's offer in January 2008 through which the company had raised Rs. 11,500 crore (Rs. 115 billion). The Union Cabinet has approved a divestment of 10 per cent of Government stake in the Navratna PSU. The Centre currently holds all the equity in the company. The company will offload around 630-million shares through a book-building process which is to be launched from October 18 to 21.

Coal India, the largest producer of coal in the world has the largest resources of 64.8-billion tonnes. In FY 10, it produced 431-million tonnes of coal, which accounted for 81 per cent of the coal production in India. The company owns and operates 471 coal mines --- 163 are open cast, 273 are underground and the rest are mixed. Coal production is carried out by the seven subsidiaries of the company.

Source: The Economic Times, September 3, 2010

Investor Education: Use MF investment tools to grow wealth

Mutual funds offer a host of tools for the lay investor to enter the equity market and most of these are free of cost. Using these tools, you can not just create a portfolio, but enhance your portfolio returns and manage risks.

Systematic Investment Plan (SIP)
Assume you are one of those who realised the importance of equity in portfolio in their euphoric times by the end of 2007. Had you invested Rs. 1,000 everyday starting January 1, 2008, in S&P CNX Nifty till date, you would have been sitting on Rs. 8.21 lakh on a cumulative investment of Rs. 6.39 lakh. This looks even better if compared with a one-time investment of Rs. 6.39 lakh on January 1, 2008, which would have stood eroded to Rs. 5.65 lakh. The experiment ignores the fact that you can't buy fractions of Nifty.

Those who ignored the noise of death of SIP in late 2007 pinpointing its underperformance vis--vis one-time investments did well in the downturn of 2008 though the market still quotes below the highest level hit in early 2008. SIP not only offers you rupee-cost averaging, but also helps you invest as you earn.

Value SIP can be a better option for investors investing at regular intervals due to better returns it offers, on the back of more purchase of equities when the markets quote at a lower level, advises Abhinav Angirish, Managing Director, http://www.investonline.in/, a mutual fund distribution portal. Value SIP is an SIP where instead of a fixed sum, the investors investment amount is dependent on the market value of his portfolio. He invests more if the markets are down. If the market goes up, he would invest less as the portfolio value goes up.

Systematic Transfer Plan (STP)
If you have run into a windfall or managed to accumulate savings of a few lakhs, the only way you can really put your money to work is by investing in equities. But how do you avoid the risk of investing all your money at the top? The answer lies in Systematic Transfer Plans. STP allows investors to take exposure to equities over a period of time and gets you more returns than what it would have earned in a savings bank account as the lumpsum amount is invested in a debt mutual fund, Swapnil Pawar, Head-HNI Services, Karvy Private Wealth.

STP can be utilised by investors with no appetite for timing risk and who have a lumpsum amount to invest. You can also consider daily STP where you have to invest in the liquid fund, and the fund house will transfer a certain fixed amount daily into equity fund. In most cases, you have to commit a minimum investment in the range of Rs. 13,000-20,000.

If you are a low-risk investor and intend to taste equities, you can choose to enroll with STP where the fund house transfers the appreciation you enjoy in liquid schemes to equity mutual funds at regular intervals. This offers to protect the capital. If you maintain your emergency funds in liquid scheme, you can consider doing the same.

Trigger
Profit booking is key to wealth creation in equities. This need was felt with more intensity, post the meltdown in equities in 2008. Fund houses came out with the trigger-based action facility. You may define profit booking levels using various parameters such as value of your investments, a particular date, level of index and so on. You can choose to either take home the money or keep it in some debt mutual fund. You can also choose to take only profits off the table or take home the entire investment. The shortcomings of this arrangement include exit loads, if any, and payment of tax on short-term capital gains if the trigger gets activated in less than one year. To answer this problem, you can avail of dividend trigger facility.

Dividend triggers enable funds to have a disciplined approach towards disbursing appreciation in value. Particularly in a situation where dividends are tax-free from equity funds, investors like their profits to be booked and given back to them in the form of tax-free income periodically, says Ved Prakash Chaturvedi, Managing Director, Tata AMC. Though the dividend triggers help you save on the short-term capital gains tax front, please note that the dividend declaration is done taking into account the NAV movement in comparison with the previous exdividend NAV, and not your entry point. The extent of the dividend payout need not be exactly the amount of appreciation on the base of ex-dividend NAV, but it is the fund managers prerogative. So, choose wisely how you intend to book profit.

Systematic Withdrawal Plan (SWP)
They say, in equities exit is equally important if not more than entry. If you have invested in equities for, say, 10 years after the dotcom bust, you must have been sitting on a good corpus. If you are nearing the end of your time horizon, just do not wait for the last day. Opt for a systematic withdrawal plan and log out of equities over a period of 6 months to 3 years depending on your risk appetite, your financial needs and time in hand.

This informative article written by Nikhil Walavalkar
Source: The Economic Times, August 9, 2010

Investor Education: Don't bank only on price-to-earning ratio

Valuations have been the big buzzword on Dalal Street for a while now but its suddenly gaining momentum. These days every conversation begins with the P/E ratio (price to earning ratio, which compares the current price of the share with its per share earnings) and ends with a loud proclamation that the valuations look a bit stretched.

However, many experts believe that looking at a ratio in isolation won't help investors grasp the realities of the market and a higher valuation may not be the only deciding factor driving the market. Valuations matter in the long run, but it need not have an impact in the short run. This is because there is never a right valuation for a stock, as it is a highly individual call, says Mukesh Dedhia, Director, Ghalla & Bhansali Securities. For example, a stock with a higher P/E may be moving ahead further as there is greater demand for the stock because of its higher earnings possibility. So, there is always a bit of confusion about the right valuation, he adds.

If you look at the broader market, it is difficult to get a value pick. But if you are doing a bottom up method, you would still find many stocks in the market with the right valuation, says Rajiv Thakkar, CEO, Parag Parikh Financial Advisory Services. Though he is a firm believer of value investing, he says looking at a ratio alone won't be the right way to investing in a stock.

There are many things you have to consider. For example, you have to find out whether the growth rate is sustainable or how much capital is required to keep the growth. Sometimes, there would be volume growth, but the margins could be under pressure. There are a host of issues to consider, just looking at a ratio is not enough, he adds.

Some experts also believe that the higher valuations could be justified if foreign investors continue to pump money into the stock market with the hope of better performance by Indian companies. The current valuations doesn't justify the long term growth potential of India. The market is trading 17 times the earnings potential in 2011 and around 13.8 times the earnings forecast for 2012. It even carry a premium of around 50% to other emerging markets and around 25% premium to other global markets, says Devendra Nevgi, Founder & Principal Partner, Delta Global Partners. He believes that the premium can be justified if the foreign investors continue to bet on Indian stocks.

This news-story is written by Madhu T., Times News Network
Source: The Times of India, August 9, 2010

Investor Education: Mutual Funds - NAV not an indicator of returns

The performance of any scheme of a mutual fund is denoted by its net asset value (NAV). The NAV is a yardstick used to sum up the performance of a mutual fund. This measure is a key performance indicator for any mutual fund. It is the market value of securities held under the scheme.

Mutual funds invest the money collected from investors in the capital markets. Since market values of securities change every day, the NAV of a scheme also varies on a day-to-day basis. The NAV per unit is the market value of securities of the scheme divided by the total number of units of the scheme on any particular day. For example, if the market value of securities of a mutual fund scheme is Rs. 3 crores (Rs. 30 million) and the mutual fund has issued 10 lakh (100,000) units at Rs. 10 each to investors, the NAV per unit of the fund is Rs. 30. Mutual funds are required to disclose their NAVs on a regular basis --- daily or weekly --- depending on the type of scheme.

The NAV is one of the main parameters used by investors while taking an investment decision on investing in a mutual fund. Some investors prefer a scheme that is available at a lower NAV compared to the one available at a higher NAV. Many prefer a new scheme which is issuing units at Rs. 10, while existing schemes in the same category may be available at much higher NAVs. In reality, in case of mutual funds schemes, lower or higher NAVs of similar schemes of different mutual funds don't have much relevance.

As against the NAV, investors should choose a scheme based on its merits considering its performance track record, dividend history, scrips in the portfolio, service standards, fund manager's track record, professional management etc. For example, assume a scheme is available at a NAV of Rs. 10 and another scheme is available at Rs. 100. Assume both schemes are diversified equity-oriented schemes. Assume an investor has put Rs. 10,000 in each of the two schemes. He would get 1,000 units (10,000 divided by 10) in the first scheme and 100 units (10,000 divided by 100) in the second scheme. Assume the markets go up by 20 per cent and both the schemes perform equally well, and it is reflected in their NAVs.

The NAV of the first scheme will go up to Rs. 12 and that of the second scheme will go to Rs. 120. Thus, the market value of the investments will be Rs. 12,000 (1,000 multiplied by 12) in the first scheme and the same amount in the second scheme too (100 divided by 120). The investor will get the same return of 20 percent on his investments in both the schemes. Thus, lower or higher NAV of a scheme and allotment of higher or lower number of units within the amount an investor is willing to invest, should not be the main factors guiding the investment decision of the investor.

It is quite possible that a better-managed scheme with a higher NAV gives higher returns compared to a scheme which is available at a lower NAV but is not managed efficiently. Efficiently managed schemes at higher NAVs may not fall as much as inefficiently-managed schemes with lower NAVs. Therefore, investors should give more weightage to professional management than lower NAVs of any scheme. An investor may get more units at a lower NAV, but the scheme may not give higher returns if it is not managed efficiently in the long run.

This informative article written by Ashish Gupta, ET Bureau
Source: The Economic Times, August 8, 2010