Time to check health of your portfolio

This is the best time to rebuild existing portfolio by unlearn what we have learn about financial market and once again learn what is financial market all about and make new portfolio accordingly.

By this weekend gives you best portfolio which i had given in 2008 which had delivered amazing return.

https://indian-mutualfund.blogspot.com/2008/11/suggested-portfolio-as-per-current.html

Placing Small Bets

Small-cap funds help spread risk, yet make gains.

If you had invested Rs 1 lakh in Crompton Greaves on 1 January 2002, your money would have grown to Rs 65 lakh by now. Back then, Crompton Greaves was a small capital goods company with a market capitalisation, or market cap, of Rs 115 crore and a stock price of Rs 1.80.

It has been one of the biggest wealth creators in the Indian stock market and given 52 per cent annualised return over the last 10 years. The company had a market cap of Rs 8,300 crore on 28 November 2011 while its stock was trading at Rs 123.

On 2 January 2002, Sesa Goa had a market cap of Rs 99 crore and its stock was at Rs 1.28. On 28 November 2011, the stock was trading at Rs 174 and the company's market cap was Rs 16,000 crore.

Scores of once small companies have over the years grown big, giving investors a 30-50 per cent annual return over 10-15 years and creating fortunes for investors. However, more often than not, we find ourselves at the wrong side of the fence and regret our inability to spot such stocks on time.

The number of small-cap stocks is large and finding a quality stock that can give high returns over a long period is tough even for equity analysts. One reason is that such stocks usually have a short history and are not tracked by many analysts and brokerage houses. Then there are risks such as low liquidity, governance concerns and competition from larger players.

If these factors scare you but you still want to gain from the upside potential of such stocks, small-cap mutual fund schemes are an ideal choice for you.

A typical small-cap fund invests over 50 per cent money in stocks of small companies. However, the fund manager can lower the exposure depending on market conditions. Mid-cap stocks form 25-35 per cent of the portfolio. A small portion, usually less than 10 per cent, is invested in large-cap stocks. Mutual fund schemes that invest a large part of their money in small-cap stocks also carry a higher risk.

RISK-RETURN TRADEOFF
It's a challenge for the fund manager to build a portfolio of quality small-cap stocks as the number of such companies listed on exchanges is huge. Also, many of them are little-known.

"The number of small companies listed on Indian stock exchanges may run into a few hundred. Out of this, 30-50 companies can be selected for investment. The challenge is that many of them may be under-researched by research/brokerage houses. One may have to rely extensively on primary research," says Dhiraj Sachdev, senior vice president and fund manager, equities, HSBC Asset Management India.

Another risk is low volumes, which makes these stocks illiquid. This means the fund manager may not be able to sell the shares as and when he wants. Small-cap funds are thus prone to liquidity risk. For example, the average number of daily traded shares in the CNX Small Cap index was 75 million compared to CNX Nifty's 141 million during the year ended 30 November 2011. CNX Nifty comprises large-cap stocks. Anyone investing in small-cap funds, therefore, should have a long investment horizon.

Small-cap companies see sudden rise and fall in stock prices and this is reflected in the net asset values, or NAVs, of funds investing in such stocks. "Due to small size, such companies are more prone to volatility," says Vinay Paharia, fund manager, Religare Mutual Fund. Paharia manages Religare Mid and Small Cap Fund.

Therefore, only investors with appetite for high risk should go for such funds. Besides, small-cap funds should form a small part of your portfolio.

Mutual funds investing in small-cap stocks can minimise the risk by diversifying across companies and sectors. Since mutual funds are managed by professional managers supported by teams of analysts and researchers, they are in a better position to select the right stocks, diversify across sectors and companies and react swiftly to changes in equity market conditions.

HOW THEY PERFORMED
There are four mutual fund schemes-Sundaram Select Small Cap, Reliance Small Cap, HSBC Small Cap and DSPBR Micro-Cap-which invest primarily (50 per cent or above) in small-cap stocks. None of them have a track record of five or more years. Only Sundaram Select Small Cap and HSBC Small Cap have completed three years.

In the one-year period up to 9 January 2012, the NAV of these funds fell 25 per cent on an average compared to the 38 per cent drop in the BSE Small Cap index. HSBC Small Cap fund fared the worst as its NAV dropped 42 per cent.

Sundaram Select Small Cap was the best performer with a return of -16 per cent. Sundaram Select Small Cap is a close-ended fund and its units are on offer for a limited period. Mid- and small-cap funds performed slightly better on the downside with an average -19 per cent return in the one-year period compared to the -29 per cent return delivered by the BSE Mid Cap index.

The average three-year return by small-cap funds as on 9 January 2012 was 25.5 per cent compared to 24 per cent by mid- and small-cap funds. The average return of large-cap funds in the past one year has been -19 per cent. The average three-year return by large-cap funds was 17.518 per cent on 9 January 2012.

ARE YOU GAME?
Those who wish to invest in small-cap funds should do so only if they have a long investment horizon and tolerance for volatility. Small-cap stocks suffer the steepest falls in a bear market and rise the most in a bull market. An investor should stay put for at least three-five years to allow the fund to gain from at least one bull run.

A small-cap fund will generally witness more frequent changes in its portfolio than a large-cap fund. It's better to go for schemes with a low turnover ratio, which measures how much the portfolio has been churned. A higher ratio means a higher trading cost.

Buy funds with lower volatility, which is measured by standard deviation (SD) and beta. The higher the SD and the beta, the more volatile the fund is. A better way to judge the performance of the fund is to check its Sharpe Ratio, which measures the risk-adjusted return. The higher the Sharpe Ratio, the better is the fund's performance. R-squared is the proportion of the fund's portfolio that moves in line with the benchmark index.

You can check these ratios in fund factsheets released by fund houses every month. These factsheets are also available on websites of mutual funds.

"Small-cap funds are good only for a portion of the portfolio. These funds are more volatile than large-cap funds. While there could be a possibility of higher returns from these funds, I think only a small percentage of wealth should be invested in such funds," says Raghvendra Nath, managing director, Ladder up Wealth Management.

There are many companies in the small-cap space that may become success stories in the future. Investing a small portion of your savings in the small-cap theme through mutual funds may give you a pleasant surprise.

Source: http://businesstoday.intoday.in/story/invest-small-cap-mutual-funds-companies-good-returns/1/21880.html

For old age, pick mutual funds over retirement schemes

It is imperative that one accounts for inflation while building a retirement corpus. And, there are various instruments — slightly riskier than debt — that need to be accomodated in it, to earn good returns.

There are various mutual fund schemes to choose from, such as equity-diversified funds, mid- or small-cap funds, debt funds and so on. Alternatively, you can pick retirement-specific funds that some fund houses offer. At the moment, only UTI Mutual Fund, Franklin Templeton and Tata Mutual Fund offer retirement schemes.

However, as far as returns go, the retirement-specific schemes have offered lower returns than pure-equity schemes. According to data by Value Research, over a 10-year period, the Templeton India pension scheme has given returns of 13.62 per cent annually. The category average returns of equity-diversified funds, on the other hand, have been 20.84 per cent. Multi-cap equity funds have returned 28.19 per cent.

Returns from debt-fund categories such as income and hybrid debt-oriented funds have gone up between six and nine per cent. One should, however, have a judicious mix of both equity and debt in a portfolio and keep rebalancing it with advancing age.

Suresh Sadagopan, principal financial planner at Ladder7 FA, says retirement funds have given lesser returns, as they predominantly invest in debt right from the start. "It is important to have a good mix of both equity and debt in your portfolio. With the right combination, one can beat inflation, which is necessary when building a retirement corpus." With mutual fund schemes, one has the flexibility to alter the ratio of debt and equity according to need, unlike in a retirement fund where it is done by the fund house. Financial advisors say an exposure of between 10 and 20 per cent in equity is a necessity, even when planning for retirement.

On the cost front, too, retirement funds are more expensive. While mutual funds charge an annual management fee, retirement schemes charge an exit load, which at UTI is three per cent (withdrawal before the age of 58). Franklin Templeton charges five per cent on withdrawal before one year, three per cent after one year and one per cent after three years. Tata Mutual Fund's Retirement Savings Fund wants to discourage a mid-way exit and has imposed an exit load of five per cent in the first year. Thereafter, it climbs down and becomes one per cent in the fifth.

On the tax front, if one invests in a mutual fund scheme, the accumulated amount is tax-free because of zero long-term capital gains tax on equities. Experts advise investing in an equity-diversified fund via a systematic investment plan. They ask investors to shift money to a monthly income plan or a debt fund as they approach retirement.

On the other hand, retirement funds get taxed like debt funds (10 per cent with indexation benefits and 20 per cent without). By the time one starts to withdraw after retiring, the investment would be mainly in debt instruments.

Rajesh Saluja, CEO and managing partner at ASK Wealth Advisors, says a good mix of equity and debt is enough to build the mutual fund part of one’s retirement corpus than going for a retirement fund. He says the latter is nothing but a marketing gimmick.

Source: http://www.business-standard.com/india/news/for-old-age-pick-mutual-funds-over-retirement-schemes/455594/

Decoding savings rate deregulation and how it impacts liquid funds

The Reserve Bank of India (RBI) in its second quarter monetary policy review deregulated savings bank rates with immediate effect.

A savings deposit is a hybrid product which combines the features of a current account and a term deposit account. A current account is mainly maintained by business houses whereas a savings account is used mostly by individuals.

The amount maintained under a current account normally does not provide any rate of interest whereas interest is paid for asavings account. The overall interest rate scenario has changed drastically in the last two decades, but the interest rate on saving accounts has been changed only thrice since 1978.Let’s take a look at the pros and cons of interest rates deregulation.
 

Advantages

To increase the share of savings account in total deposit: The savings rate was fixed at 3.50% from March 2003 to May 2011.

However, during the period, the RBI changed both repo and reverse repo rates many times but the same was not reflected in the interest rates that the normal household gets. There was a huge gap between savings and term depositrates and, hence, the ratio of savings deposit in total deposit fluctuated, mainly in rural areas. The deregulation would make such accounts more attractive in rural areas.

RBI policies would become more effective: As savings accounts constitute around 22% of the total bank deposits, it provides a source of low-cost fund to banks. Even when the reporate was hovering around 8.25%, the savings rate was fixed at 4% before deregulation.

After deregulation, it is expected that savings rate would move in tandem with the RBI monetary policy, thus, making the policy more effective.

Competition: Most banks would want to maximise their CASA ratio as it provides funds at low cost. Before deregulation there was hardly any competition in this segment. But after deregulation, it is expected that banks would try to lure customers by offering higher interest rates along with other innovations and flexibility to get as many accounts as possible.

Disadvantages
It might lead to asset-liability mismatches: As all banks offered similar rate of interest before deregulation, there was no incentive for customer to shift their savings from one bank to another and, hence, banks used such deposit to finance long-term loans. But, when the banks are free to set their own interest rates, it can wisely be assumed that banks with lower CASA ratio would offer attractive rate of interest to consumers, thus, leading to asset-liability mismatches.

Could impact small households: When interest rates are deregulated, it could be on the downside as well. Banks would not be in a position to compensate savers properly if there is enough liquidity in the system. This would impact small savers and pensioners who depend only on savings rate interest for their livelihood.

Unhealthy competition and systematic risk: Saving deposits offers low cost of funds and, hence, are very attractive for banks. To lure customers, each bank would try to offer higher rate of interest, thus, impacting their net interest margin. It would result in higher cost of funds for the bank which would ultimately be passed on to the borrower, leading to higher cost of borrowing. Deregulation of interest rates has its own pros and cons and it would be interesting to see what strategy banks adopt. It is expected that in a higher interest rate scenario they would be forced to provide much higher returns.

Impact on liquid funds
Liquid funds are mutual funds that primarily invest in debt securities and offer higher post-tax returns as compared to savings deposits. They normally invest in commercial papers, certificate of deposits and treasury bills of maturities less than 91 days. Their mandate is to optimise returns while preserving capital.

But with deregulation of interest rates in savings accounts, some investors might move their funds towards these as it offers higher liquidity and safety of the principal amount. The overall corpus might be impacted by reduced difference between yields of both options.

However, liquid funds yield better returns if we take tax rate into account. It also provides a dividend option where only dividend distribution taxis deducted by fund houses before distribution. With deregulation, this category of mutual fund will definitely offer more innovation. Thus, one must spread his savings across liquid funds and savings account to get the benefit of both
 

While savings deposits are easier to access and offer some degree ofprotection, higher yield combined with liquidity and taxation benefits make liquid funds attractive.

Source: http://www.dnaindia.com/money/report_decoding-savings-rate-deregulation-and-how-it-impacts-liquid-funds_1606196

Benefit from flexibility of multi-cap funds

When you put your money in an equity mutual fund, do you also tell the fund manager which stocks to buy? No, and yes. While investors don't give any instructions, a fund with a fixed investment mandate picks only those type of stocks.

For instance, a large-cap fund will invest only in index-based heavyweights and other blue chips. You won't find a small-cap company in its portfolio. This is why large-cap funds tend to move slowly and surely compared with other categories. Similarly, a small-cap fund will focus on smaller companies, forever hoping to zero in on the next Infosys that will turn it into a multibagger.

Multi-cap diversified equity funds have given higher returns

On the other hand, multi-cap funds invest across the entire spectrum of stocks, starting from large-caps all the way down to small-caps. They have a flexible mandate, which helps them pick winners from across market capitalisations.

"Wealth creation happens when the fund management process has flexibility. Multi-cap funds have an in-built mandate to capture the upside across the market spectrum," says Om Ahuja, head of private wealth management and strategy at Emkay Global Financial Services.

The performance of multi-cap diversified equity funds bears this out. In the past three and five years, this category has given higher returns than those from other categories of diversified funds.

Multi-cap funds are the best long term investment option for creating wealth

As companies belonging to different market segments demonstrate different levels of volatility and returns, it is best for investors to hold stocks of varying market capitalisations.

"Multi-cap funds provide the investors with the offer to build a diversified portfolio by giving them access to all kinds of equities," says KN Sivasubramanian, chief investment officer, Franklin Templeton Investments.

For instance, in the past one year, mid- and small-cap funds have done exceedingly well, but in the long-term, multi-cap funds have consistently outperformed the other categories. "Multi-cap funds are the best investment option for creating wealth in the long term," points out Ahuja.

Work in all market conditions

The flexible mandate of multi-cap funds gives them access to greener pastures in all market conditions. At the beginning of a bullish phase, it is usually the large-cap bellwether stocks that do well. Midway through the bull run, these large-cap stocks reach high valuations and the focus of the investing community shifts to mid-cap and then finally small-cap stocks.

"Retail investors cannot gauge which part of the market will perform well-large-caps, mid-cap or small caps. By investing in multi-cap funds, they can gain in all market conditions," says Saurabh Jain, associate vice-president, retail equities research, SMC Global Securities.

In financial crisis, a multi-cap fund will be able to bear redemption pressures The 'go anywhere' strategy works well during downturns as well. "While a given set of conditions may not benefit one part of the multi-cap fund portfolio, it could benefit the other, thereby creating a counter-balance effect that generates long-term results," says Maneesh Kumar, managing director, Burgeon Wealth Advisors. When the bears are on the prowl, small-cap and mid-cap stocks fall harder than large-caps. Multi-cap funds are able to cushion themselves better than funds which are focused only on these vulnerable segments.

A deft fund manager can realign the fund's portfolio rapidly and thus benefit from the changing market mood. "Besides, in a black swan kind of a scenario, such as the financial crisis that we experienced in 2008, a multi-cap fund will be able to bear redemption pressures better compared with a mid- and small-cap fund as it is likely to be more liquid," adds Kumar.

Consistent outperformers

We looked at the performance of the top 15 multi-cap funds during a bull phase and a bearish phase. Except for three instances out of the 30 observations, the multi-cap funds outperformed their benchmarks. Most of the funds outperformed their benchmarks in both the bear and bull phases.

"Multi-cap funds have delivered in all kinds of environments and market sentiments. It is true especially for the top performing ones in the category," says Vinod Sharma, head of private broking and wealth management at HDFC Securities. Apart from the freedom to invest in stocks of any market capitalisation, multi cap funds are also not shackled by any particular investing style.

Benefit from both value and growth investing

These funds can benefit from both value and growth investing, depending on their objectives. "This is because the fund manager can pick from a much larger population of stocks," says Sharma. For instance, Franklin India Flexi Cap Fund is a multi-cap fund and follows a bottom-up approach to stock selection.

The fund's investment objective is to provide investors with a blend of growth and value investment options. The focus is more on individual companies and their potential to create wealth over the long term.

Betting on the fund manager's ability

The fund manager's ability to select stocks is crucial to the success of a mutual fund. However, this becomes even more critical in case of a multi-cap fund. "Investing in a multi-cap fund is akin to investing on the fund manager's capabilities," says Jain.

This is because the risk levels of a multi-cap fund can rapidly change, which requires deft handling by the manager.

The multi-cap fund manager must also manage sectoral allocations

Not only does he have to monitor a larger universe of stocks, but the possibility of making the wrong choice widens due to the freedom granted to him.

If he fails to read the market conditions correctly or is not able to change the allocation of the fund's portfolio, the returns are likely to fall behind. The multi-cap fund manager must also manage his sectoral allocations well. Sectors tend to move in cycles and he should be able to change his allocations depending on the economic cycle. This is why multi-cap funds carry a higher risk than index funds or large-cap funds. Look up the fund manager's track record carefully before you invest in one.

Higher churn, higher costs

Since multi-cap funds have a larger universe of stocks to buy from, their churn also tends to be higher than that of other fund categories. The average portfolio turnover of the multi-cap funds is 79%, while that of large-cap and mid- and small-cap funds are 73% and 64%, respectively. Portfolio turnover is a measure of how frequently assets were bought and sold in a fund by the manager during the course of a year.

The higher the turnover rate, the higher will be the transaction or trading costs for the fund. Although these costs are not included in the fund's expense ratio, they are paid for by the investors' money, not the fund manager's salary. Thus, funds with higher portfolio turnover eat away into the returns. Over the long term, this can affect the returns from the fund significantly.

The churn does not seem to be so abnormal

However, experts don't see this as a significant drawback as long as the fund is able to generate the returns that justify the higher costs. "The churn does not seem to be so abnormal," says Sharma.

Besides, churning depends on the style of investing as well. Both the DSPBR Equity and the Templeton India Equity Income funds are multi-cap schemes. While the former has a portfolio turnover of 216%, the latter's measurement is only 3.49% as it functions on value investing.

"Churning depends on the style of investment. Also, a higher portfolio-turnover need not always lead to higher costs. If the individual bets work, the gains can easily more than cover the trading costs," says Sivasubramanian.

Not taking enough risks

Another drawback of multi-cap funds is that fund managers are somewhat reluctant to allocate a higher percentage of corpus to small- and mid-cap companies. Hence, they are not able to effectively capitalise on the USP of the category. "At the time of redemption pressure, it is difficult to exit mid- and small-cap stocks. Due to liquidity concerns, a multi-cap fund manager may exhibit a large-cap bias to be on the safe side," says Kumar. The non-availability of information could be another reason why the exposure to small-cap and mid-cap stocks is restricted.

However, die-hard fans of multi-cap funds defend the category. "Although one can contend that they could have been more aggressive, the superior returns generated by multi-cap funds belie these allegations. Besides, a rise in the ratio of small-caps in the overall allocation can augment the fund's inherent risk," says Sharma. Experts believe that it is too early to draw any inference about multi-cap funds. "Pure multi-cap funds are rather new in the Indian market. Hence, any evaluation would be unfair as the funds have essentially been around for one market cycle," says Sivasubramanian.

Should you invest?

Multi-cap funds are not of much utility for investors who understand asset allocation and base their investment decisions on it.

"It becomes difficult for investors who follow asset allocation principles to ascertain as to how these funds will fit in their portfolios as these virtually buy anything irrespective of capitalisation or sector," says Kumar. Asset allocation is the most important factor determining a portfolio's performance.

Multi-cap funds make an excellent investment option

Studies show that 94% of the portfolio's returns variance is determined by how funds are spread across asset classes. Only a small portion is determined by market timing and security selection.

Rakesh Rawal, head of private wealth management at Anand Rathi Financial Services, says that if you have a large portfolio, the asset allocation call is best taken between the investor and the financial adviser. In such cases, multi-cap funds lose their relevance. "However, if you have a small portfolio, then multi-cap funds make an excellent investment option," he adds.

Source: http://economictimes.indiatimes.com/quickiearticleshow/9258055.cms

Growth or dividend option? Let cash flow needs, tax outgo help you decide

While investing in mutual fund schemes, investors can choose from the dividend or growth option. When it comes to fixed income funds, both the options have certain advantages. But there are some factors to be considered before you make your choice.

CASH FLOW NEEDS

The primary criterion for choosing an option is cash flow requirements .

If there is no interim cash flow requirement, the growth option is better; in this option, the returns are reflected in the movement of the NAV. There are also no hassles in investing the interim cash flows. If there is requirement for interim cash flows from the investment , then the dividend option is better. The frequency of the dividends would be as per the requirements of the investor and the availability of the dividend frequency options (monthly, quarterly, etc) in the fund.

The asset management company (AMC) endeavours to maintain the stated dividend frequency, subject to availability of distributable surplus.

TAX TREATMENT

The other relevant parameter is the tax efficiency of the returns being taken home through the dividend and growth options. Dividends are tax-free in the hands of the investor, but there is a dividend distribution tax (DDT) that is deducted by the AMC on behalf of the investor and passed on to the government.

The rate of the DDT in case of liquid funds is 25% (plus surcharge/cess). For non-liquid fixed income funds, there are two rates of DDT: for individual /HUF investors, it is 12.5% (plus surcharge/cess) and for corporate investors, the rate is 20% (plus surcharge/cess). From June 1, the DDT rate for corporate investors has gone up to 30% for all categories of fixed income funds. In the growth option, the gains are taxable in the hands of the investor, ie, there is no distribution tax. As per the current tax laws, the growth option taxation depends on the holding period: returns from mutual fund units held for a period of less than a year are called short-term capital gains (STCG), and from holdings of more than a year are long-term capital gains (LTCG).

STCG is taxable at the slab rates for individuals; most investors nowadays are in the highest tax bracket of 30% (plus cess). In case of LTCG, the investor has the choice of paying the incometax either at 10% (plus cess) without taking the benefit of cost inflation index or at 20% (plus cess) after taking the benefit of cost indexation. As we see from the tax structure , as per the current tax laws, the choice of dividend/growth option should be based on the intended holding period.

For a horizon of less than a year, the dividend option is better as the individual DDT rate of 12.5% (plus surcharge/cess) is lower than the STCG rate of 30% (plus cess). The only exception to this would be an individual who is in the 10% tax slab, for whom the STCG tax rate would be lower, but that would be a rare case. For a horizon of more than a year, the growth option is preferable , as the 10% (without indexation ) rate is lower than the current DDT rates. The investor should opt for the 20% rate only if the net tax incidence (with indexation benefit) is lower than the 10% rate.

EFFECTS OF DTC

So far so good, in that the choice between dividend and growth options is based on cash flow requirements and tax efficiency.

The grey area comes with the proposed Direct Tax Code (DTC), scheduled to be implemented from April 1, 2012. It is a grey area because at this point of time, it is aproposalwhichisyettobemade into law and may undergo changes by the time it is implemented. As per the proposals, the returns from the dividend option will be clubbed with the income of the investor (ie, there would be no distribution tax) and would be taxable at the slab rates.

In the growth option, there would be no distinction between short-term and long-term holdings as such, but the benefit of indexation would be applicable for a holding period of one year from the end of the financial year in which the asset is acquired . The taxation on the growth option would be as per the slab rates, which means 30% for most investors. Since both dividend and growth options would be taxable at the hands of the investor, there would not be much of a difference in terms of taxation except where the intended holding period would be enough to be eligible for indexation benefit. In that case, the growth option would be more tax efficient.

Joydeep Sen

(CFP, Sr Vice-President – Advisory Desk BNP Paribas Wealth Management)

Source: http://articles.economictimes.indiatimes.com/2011-07-06/news/29743785_1_dividend-distribution-tax-dividend-option-growth-option/2

How to retire happy with Mutual funds

Nikhil Somani, a 25-year old engineer working for a reputed Indian company, is a firm believer in financial planning and is already making regular investments for his immediate goals that include buying a car (in the next two years) and a home (in the next five years). And he vows to follow these financial plans religiously in order to meet all the goals. Just like any other average Indian, Somani too wants to retire at 55 and lead a comfortable life thereafter.

More importantly, he has planned for it too and is investing Rs 10,000 p.m. towards it. However, Somani is an isolated case and most youngsters keep postponing their retirement planning. “Many a times, investors are tied down with meeting short-term goals like wedding, buying a house and keep postponing retirement planning,” says Anup Bhaiya, MD and CEO, Money Honey Financial Services. And the solution is to do the financial planning in a holistic way. Remember, retirement planning is a subset of your overall financial planning.

START EARLY

There is another advantage of starting early that is known as the power of compounding (i.e., the money you save in the initial years generates compounded returns for a very long time). For example, to reach a retirement corpus of `1 crore, at 12% rate of interest, you will have to invest Rs 43,471 per month if you have only 10 years in hand. But if you have 35 years in hand, you will reach the same target by investing just Rs 1,555 per month. In other words, the 20s and 30s are probably the best time to plan for retirement — of course, along with other financial and career goals.

EQUITY ROUTE

The first thing that you need to decide is what corpus you would need at the time of retirement. “It is important to first quantify how much you will need to maintain your lifestyle at the time of retirement,” says Amar Pandit, CEO of My Financial Advisor. Quantify how much you need to spend to enjoy your current lifestyle. Assuming inflation in the 6-8% range in the long run, you can arrive at the amount you need at the time you retire.

Very high inflation on the one hand and the absence of a social security system on the other hand makes maintaining your lifestyle post retirement a big challenge. Therefore, it is imperative that the retirement corpus has to be invested in products that can generate maximum returns in long term. It is proved historically that equity generates maximum returns among all asset classes, so investors can use the equity funds/balanced funds to build their retirement corpus.

EQUITY FUNDS

Though you can invest directly in the stock market to generate your retirement corpus, the mutual fund route is more convenient. “The mutual fund route is more transparent and comes with the least costs. It also offers liquidity, making it a good candidate for long-term investment,” points out a wealth manager with a foreign bank.

BUILD A PORTFOLIO

“Depending on where you stand today and your risk-taking ability, you should construct a portfolio of funds with a long-term consistent track record,” explains Pandit. Most financial planners recommend diversified equity funds if you have more than 20 years to go for your retirement. Since Somani has full 30 years to retire, his retirement plan can be made of three equity mutual funds. “We recommended him to invest `10,000 per month through SIPs in three equity mutual funds namely, HDFC Equity Fund, Franklin Prima Fund and DSP Equity Fund,” says Bhaiya of Money Honey Financial Services.

The assumption here is simple. Assuming a 15% return from equities per annum for the next 30 years, `10,000 per month invested will give him a corpus of `6.92 crore. Assuming that Somani will shift his corpus entirely to debt at that age, and earn a 6% post-tax return, his interest income would be `3.46 lakh per month. Now, we come to the expense part. Somani’s current monthly expense is `30,000 per month. Assuming a 8% inflation, at the age of 55, his monthly ex-penses would be `3.02 lakh comfortably helping him retire peace-fully. Depending your risk-taking ability, you can either go for an ac-tively managed mid cap funds (i.e., for high risk takers) or go with a plain-vanilla index fund (ie for low risk takers).

BALANCED FUNDS

“Balanced funds also make good candidates for retirement planning since they offer good post-tax returns in the long term,” says Abhishek Gupta, a certified financial advisor with Mumbai-based Moat Wealth Advisors. This is because if the average equity component is kept above 65% (most of these balanced funds do it), there is no capital gains tax after a year of holding. He prefers HDFC Prudence Fund and Birla Sunlife 95 Fund amongst the balanced fund category.

ASSET ALLOCATION FUNDS

Asset allocation funds (where the fund managers move between equity and debt depending on the mar-ket conditions) are another option that can be considered. But not all financial planners prefer to go with these readymade tools. “Being fund of funds, the asset allocation funds are treated like debt funds and taxed accordingly,” points out Gupta. Instead, it makes sense to invest in the right combination of equity and debt funds and generate better post-tax returns than the fund of fund route.

MANAGE THE CORPUS

Building a retirement corpus is just one part of the game, managing the corpus post retirement is another ball game. The first part is to reduce the high-risk equity component slowly. “As you move closer to your retirement age, i.e., when you are 5-7 years away, shift the corpus gradually into hybrid products,” says Vishal Dhawan of Plan Ahead Wealth Advisors.

The next step is the use of systematic withdrawal plans (SWPs) offered by mutual funds to reduce your tax burden in the golden days. Please note that systematic withdrawal plan will ensure that the money in your hand is subject to capital gains tax whereas a pension income generated from other products is added to your income and taxed at the marginal rate.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/analysis/how-to-retire-happy-with-mutual-funds/articleshow/7490769.cms

Want investment advice? Ask for the menu card

Looking for advice on how and where to investin mutual funds?

First, order for the menu card.

Huh? Yes, it’s the result of new Securities and Exchange Board of India (Sebi) norms that require investors to pay up commission to agents directly, unlike earlier where a portion of the investment made used to be handed over to the distributor as commission directly.

It is learnt that a distributor incentral Mumbai is handing out pamphlets to people stating “Fee for mutual fund form — Rs 25, Investment only (cheque collection) — Rs 100, mutual fund advice — Rs 250 per investment. For monthly and yearly advice fees, contact us....”

Other independent financial advisors (IFAs) are forming groups and mulling a standard charge across the board. “Pursuant to the present Sebi regulatory issues and the need to charge

the clients for the advice and levels of services offered by us,

we are in the process of preparing a tariff card and notice to

investors based on Sebi notifications (on) the need/ practice to charge fee,” a mail sent to DNA Money by a group of IFAs said.

There are 63 IFAs who form this group.

Another network operating in Mumbai called MF Chain, which involves around 25-odd distributors in the city holding large chunks of assets under them too have decided on a fee structure.

“Location-wise the assets are segregated. So, a distributor servicing in Bandra will not service a client in Borivali as that area is serviced by another distributor,” said a source privy to the information.

“There is a price list that is formed. Because these distributors are operating all across the city it will not be possible for investors to negotiate,” said the source.

He claimed the entire idea to is just like other associations that are run by barbers, laundry operators in Mumbai. “The rates are fixed,” he said.

“As an IFA he can knock out 30% of his competition by fixing rates across. The competition will not be from IFAs, it will be from banks and national distributors,” he added.

Delhi too has a broker syndicate called DFDA, where leading independent financial advisors unite to earn asset under management muscle. “Their agenda is sangathan mey shakti hai (there is strength where there is unity),” a head of a mutual fund house said.

Other distributors too have started asking for yearly fee from investors. Kirit Nagda, who runs Relationship Life & Services, told DNA Money on an earlier occasion, “We have started charging a yearly fee of Rs 2,000 per family.”

Many have realised that when they ask for per transaction fee, they are not sure whether the client will come back to them the next time. “A yearly fee ensures that the client will come to me for each transaction during the year,” said a distributor.

There is another Vadodra-based advisor Durgesh Pandya, has now initiated a life-time advisory fee of Rs 40,000. “Some of my customers have agreed to pay up,” he claims. But asked aren’t people wary of him not continuing in the industry forever, he replies, “People trust me as they have been investing through me for the past five years now. They also invest crores in each transaction, so if you see on a per transaction basis the advisory for life-time turns out to be cheap for them.”

This fixing of fee is against the idea of Sebi. C B Bhave, chairman of Sebi had said while addressing the mutual fund summit last month, “Don’t tell the investor how much he has to pay. Investors should be able to negotiate a fee for the value that the advisor is providing.”

Source: http://www.dnaindia.com/money/report_want-investment-advice-ask-for-the-menu-card_1417988

MFs: Where are the investors?

There are just 10 mn MF investors compared to 60 mn homes with life insurance.

For an industry boasting 38 active players spread across 150 cities, with over Rs 6.7 lakh crore of average assets under management (AAUM) in June, mutual funds in this country have barely 10 million investors. Perhaps, even less.

The data till June-end available on the website of the Association for Mutual Funds in India (Amfi) showed the MF industry had almost 48 million folios. Amfi started publishing data of the number of folios with fund houses in November last year.

One folio is equivalent to investing in a single scheme. Industry experts admit most MF investors have at least four-five schemes, which translates into four-five folios per person. In many cases, this number is much more. In fact, there are customers with 100-150 schemes.

“The MF industry, as a whole, has been unable to convey the message to investors about its attractiveness,” said Rajeev Deep Bajaj, vice-chairman and managing director, Bajaj Capital, adding that the number of investors has stayed static for almost six months. Between November 2009 and June-end, the industry added only 70,503 folios.

If one looks at numbers from the Centre for Monitoring Indian Economy (CMIE), the number of MF investors is even lower. As on December 2009, CMIE’s Consumer Pyramids estimated that out of 235 million households, only two million invested in MFs. CMIE assumes one household has five members, but it’s unrealistic to assume all five would have invested in MFs.

In comparison, 87.66 million households invest in gold. The life insurance industry has 59.7 million households covered by insurance policies. Close to 46.06 million households have fixed deposits. Only 0.39 per cent, or 920,000, households directly invest in equities, according to CMIE.

Though there are 17 million demat accounts with NSDL and CDSL, only a handful seem active. Among the top five fund houses, UTI Mutual Fund, which has been there for over four decades, had slightly over 10 million folios, the highest. The other four are Reliance MF with 7.40 million; HDFC MF with 4.04 million; ICICI Prudential MF with 2.94 million; and Birla SunLife MF with 2.47 million folios.

Both distributors and fund houses are fighting to attract the same customer.

The good part is that though a large part of the money – almost 75 per cent – is in the debt segment, a bulk of retail folios are for equities and balanced funds – 43.56 million. This implies that investors are willing to put money in equities.

Hemant Rustagi, CEO, Wiseinvest Advisors, said, “There have been limitations, in terms of operations, lack of advisors in numbers and quality and phases of extreme volatility in stock markets. Still, the highest growth has been there in equities.” The lack of penetration is mainly due to the fact that MFs need to be pushed, aggressively sometimes. “Many investors still find MFs complex. There should be an industry association platform to promote them,” added Bajaj.

Though new players have entered the market, they have been not been able to add many new investors. Look at one new player, Axis Mutual Fund. In November, it had 491 folios in income/debt schemes. At present, the number of folios is 158,694. At the same time, the total number of folios between November and May rose by only 70,000 (from 47.87 million to 47.94 million). And, many other players gained folios as well. For example, HDFC Mutual Fund’s folios rose by almost 400,000 in the same period. Clearly, the same investor has multiple folios.

Source: http://www.business-standard.com/india/news/mfsareinvestors/402204/

MFs now don't find it economical to service small retail investors

It’s now getting close to a year since the SEBI’s abolition of entry load on mutual fund loads. Over this year, much has been said and written about how an old business model will have to change and how people will transition to a new one and so on.

But looking at what has happened, one negative impact of SEBI’s directive is very clear. It is now utterly uneconomic for anyone in the mutual fund industry to serve smaller retail investors. Unless some unforeseen miracle happens, from now on, mutual fund investment is an activity that will be entirely limited to wealthy individuals.

Let’s see why this is so. Consider an investor who is a typical starting small saver in my experience. He would probably invest something in the range of Rs 10,000. If he’s figured things out a bit better, he would also start an SIP (systematic investment plan), probably about Rs 2,000 a month for a period of one year, to begin with. As things stand now, the advisor who has done the job of convincing this investor to invest stands to get about remunerated with about Rs 75, to begin with. Later, after a year, he starts getting a continuous commission of about Rs 25 a month, likely paid quarterly.

This is the trail commission for the total accumulated investment of Rs 34,000 as well as an estimated gain of 10% a year. Eventually, the customer might invest more and the money will accumulate. However, that requires a certain period of customer support and hand-holding and contact. The question is, is there money in the system to pay for these services?

If you multiply the above numbers by five or ten, then there is. A rich investor — the word rich is now taboo, so, we now use the awkward euphemism high net worth individual — who puts in Rs 1 lakh and then Rs 10,000 or 20,000 a month would be a customer who would not find any problem in being serviced well. However, at the basic level, there isn’t.

Is there no way that a customer can be serviced at lower investment levels? There is, but only if that customer already has some other financial connection with the service provider and the cost of customer contact and acquisition can be amortised over a larger business. In practice, this means banks. It’s only your bank that could find it economic to sell you a mutual fund for a small amount. Unfortunately, that’s not a great solution for the customer. Of all the various kinds of entities that distribute mutual funds, banks have the worst track record of systematic mis-selling. In any case, banks are far more interested in guiding all possible customers towards products with the highest possible commissions.

In effect, that’s the situation now. Simple business economics, combined with the way mutual fund regulations have evolved, has ensured that the small investor is unlikely to become a mutual fund customer.

Mind you, this is not an argument for creating upfront incentives. No matter what today’s problems are, it must not be forgotten that the root of all mis-selling in all financial products is distorted incentives.

Therefore, higher upfront commissions — or any upfront commissions at all — are certainly not a solution. From the investor’s point of view, the best outcome is a long period of good returns and the only solution is a compensation system that rewards the intermediary for that.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/analysis/MFs-now-dont-find-it-economical-to-service-small-retail-investors/articleshow/6157209.cms

SEBI chief calls MF industry's bluff as members pour out grievances

A forum by an industry body on mutual funds on Wednesday, where fund houses intended to pour out their woes to the Securities and Exchange Board of India or Sebi, hardly had any effect on the market regulator. On the contrary, Sebi chairman CB Bhave launched a scathing attack on the practices of the mutual fund industry.

Mr Bhave was critical of the way fund houses do business and reiterated the need for them to focus on investors to grow.

“If you (mutual funds) are producing better returns than what an average investor investing himself in the stock market gets, then why is it that you are unable to convince investors that you are giving them better returns,” said Mr Bhave, at a mutual fund summit organised by the Confederation of Indian Industry (CII). “I mean, are investors so dumb as not to understand that they are getting better returns here (mutual funds) and yet would invest somewhere they would get lesser returns,” he said.

Sales of equity schemes of mutual funds have been hit, after Sebi banned mutual funds from charging investors to pay fees to distributors.

Mr Bhave said that mutual funds needed to look at how investors benefit from investing in their products, rather than create an incentive structure that suits them.

“Somehow the focus goes to short-term incentives and that ultimately results in a great loss for investors. And finally, when investors lose money, the whole industry also comes tumbling down. I think, this lesson needs to be internalised by all of us,” he said.

The Sebi chief said that mutual funds have to streamline their 3,000-odd product offerings to make it more investor-friendly.

“Even if you put before me 3,000 investment products, I won’t know how to choose from those products. I’ll have no idea of which scheme is good for me,” Mr Bhave said. “If you really want to reach to the so-called small investors in whose name you do everything, does he need 3,000 options? Is there really so much of innovation that is going on? Are these schemes really so different from each other or were there incentives operating in the market that made us generate these 3,000 options?” he said.

In an earlier speech during the conference, UTI AMC chief UK Sinha remarked that about 60% of the schemes are sub-optimal and the investments in them will not be able to help mutual funds justify their claims that they are giving investors the benefits of aggregation of savings.

Mr Bhave slammed the mutual fund industry for relying more on short-term money to boost their assets under management. “You are becoming a shock absorber because you are taking short-term money ... now who asked you to take short-term money ... because you see that the neighbour (rival fund house) is taking short-term money and his AUM has gone up, so I need to compete,” he said.

Soon after the conference, Mr Bhave spoke to reporters about his take on the recent verdict over the regulation of unit-linked insurance plans (Ulips). Last week, the government had said that IRDA would continue to be the regulator for ULIPs, quashing Sebi’s order that the investment component in the product should get its approval. “I don’t agree with the description of war — between IRDA and Sebi. We must remember that we all operate under the law as it exists. So, the law has changed now, there is no question of happiness or anything like that,” Mr Bhave said.

Source: http://economictimes.indiatimes.com/Personal-Finance/Mutual-Funds/Analysis/SEBI-chief-calls-MF-industrys-bluff-as-members-pour-out-grievances/articleshow/6084287.cms?curpg=2