Tuesday, December 26, 2006

Guide to Investing by Warren Buffett

There was a one hour interview on CNBC with Warren Buffet, the second richest man who has donated $31 billion to charity. Here are some very interesting aspects of his life:

1) He bought his first share at age 11 and he now regrets that he started too late!

2) He bought a small farm at age 14 with savings from delivering newspapers.

3) He still lives in the same small 3 bedroom house in mid-town Omaha, that he bought after he got married 50 years ago. He says that he has everything he needs in that house. His house does not have a wall or a fence.

4) He drives his own car everywhere and does not have a driver or security people around him.

5) He never travels by private jet, although he owns the world's largest private jet company.

6) His company, Berkshire Hathaway, owns 63 companies. He writes only one letter each year to the CEOs of these companies, giving them goals for the year. He never holds meetings or calls them on a regular basis.

7) He has given his CEO's only two rules. Rule number 1: do not lose any of your share holder's money. Rule number 2: Do not forget rule number 1.

8) He does not socialize with the high society crowd. His past time after he gets home is to make himself some pop corn and watch television.

9) Bill Gates, the world's richest man met him for the first time only 5 years ago. Bill Gates did not think he had anything in common with Warren Buffet. So he had scheduled his meeting only for half hour. But when Gates met him, the meeting lasted for ten hours and Bill Gates became a devotee of Warren Buffet.

10) Warren Buffet does not carry a cell phone, nor has a computer on his desk.

11) His advice to young people: Stay away from credit cards and invest in yourself.

Amazing individual indeed!!

Monday, December 25, 2006

Merry Christmas and a Happy New Year

Merry X'mas and a very Happy and prosperous New Year to you.

Value of Money

This blog wants you to "Get Rich". Getting rich could mean different things to different people. And working hard/smart to earn more money is one way to get rich. Another way is to minimise your needs, so that you have more than you require!

Let's take a look at a Chinese proverb about money.

With Money you can buy a house, but not a home.

With money you can buy clock, but not time.

With money you can buy a bed, but not the sleep.

With money you can buy sex, but not love.
With money you can buy books,but not Knowledge.
With money you can buy a Doctor, but not good health
With money you can buy a position, but not respect.
With money you can buy blood, but not life.

Saturday, December 23, 2006

How to do nothing

This post by Amit has been an eye opener for me. It seems there are competitors who can match my "doing nothing" skills. And as Amit says, it ain't easy!

Want to try? Read the full " How to do nothing"

Five Common Investment Myths

To make informed investment decisions you have to shift through an overload of investment choices and advice. And this overload has led to the rise of a number of “investment myths”.

Investment advisors and agents use these myths to their advantage. As a result, the investor’s interest is often compromised with. Let us take a look at five common investment myths to enable investors to make well-informed investment decisions.

Rs 10 NAV makes a cheaper buy Thanks to the large number of new fund offers (NFOs) being launched by fund houses and the attractive commissions being offered thereon (vis-à-vis existing funds) to investment advisors/distributors, NFOs have emerged as the most frequently “recommended” investment avenues. Investment advisors often use the Rs 10 net asset value (NAV) as a factor in their sales pitch. In effect, they suggest that buying into the fund at Rs 10 makes it a cheaper buy. Nothing could be farther from the truth. The NAV is simply representative of the assets backed by each unit of the mutual fund (MF). Hence a Rs 10 NAV (offered by an NFO) is no cheaper than say a Rs 100 NAV (offered by an existing fund).

The long-term always pays off We are strong proponents of long-term investing in equities and equity-oriented avenues. However, along with the long-term investment comes a caveat - investors should be invested in the right avenue, i.e., in case of say, MFs, the right schemes. A bad investment stays unchanged even over the long-term.

Universally suitable investment avenues exist An investment can be termed as being ideal, if it is in line with the investor’s risk profile and can contribute towards achieving his investment goals. In effect, it’s right for the investor in question. Investing is a personalised activity and what could be right for one investor can be completely unsuitable for another. For example, a well-managed diversified equity fund with a fantastic performance history over a longer time frame and across market phases can make an apt fit in a risk-taking investor’s portfolio. But the same fund may not find a place in the portfolio of a 70-year- old gentleman who has no appetite for taking risk and accords importance to assured and regular income along with safety of capital invested.

SIPs are always right We have maintained that investors should invest using the systematic investment plan (SIP) route. However, SIPs need not always succeed or deliver the expected results. For example starting off an SIP (in isolation) without any investment objective or an SIP in a poorly managed fund is unlikely to serve any purpose. Similarly, an SIP, which runs over shorter time frames (like six months) may not even help lower the cost of investment, if the same coincides with a bull run in the markets.

There is no such thing as too much diversification Diversification across asset classes and investment avenues is vital. By doing so, investors can ensure that investment portfolio is insulated from a downturn in a given asset class/investment avenue. However, it is also pertinent that an optimal level of diversification be maintained. At times, investors tend to stretch diversification to absurd levels, by investing in just about any fund that comes their way. Often no thought is paid to the value, which the fund can offer to the portfolio or even the fund’s aptness. Eventually, investors are left with a portfolio that is fragmented. There is a cost associated with MFs, both in terms of money (entry loads) and time (to regularly track the funds). Instead, the right approach would be to have a well-diversified portfolio constituted of not more than 6-7 funds, which have broad investment mandates.

Friday, December 22, 2006

It's not about being a genius, it's about getting started

It's not about being a genius, it's about getting started.

Getting rich is no big deal. You just have to earn more than you can spend or spend less than what you earn. A man/woman can be rich by maximising his earnings and/or minimising his/her needs. Simple, isn't it?

Moreover it can be proved that Money is inversely proportional to knowledge. Meaning as your knowledge increases, the money you have will decrease!!

Well, there's a formula in Physics that says that Power=Force/Time. Now Knowledge is Power and Time is Money! So if we substitute the figures, it comes out that Knowledge= Force/Money. That indicates the truth that Knowledge is inversely proportional to Money!!

Take responsibility for your finances, get rich or die trying!

Thursday, December 21, 2006

The alpha beta war against Mutual Funds

While the Mutual Funds are moving into top gear, the detractors are also arming themselves with new jargons. Here comes Alpha & Beta.

Beta is what the fund earns simply by being in the game, and can be measured using the market index that corresponds most closely to its style of investing. We can take the example of Sensex or Nifty50.

And the skills component of our fund managers ( some are consistently beating the market) is alpha.

The very model of an MF is outmoded, argues a large and growing group of financial researchers and professional money managers who are busy describing, building and proselytising for a different way of doing things.

The New Age thinker says there are better ways to get both alpha and beta. For the beta segment, any good index fund will do — and there is no need to pay any manager more than rock-bottom index-fund rates for that. In fact, there is no need for an index fund either. Futures contracts based on the index, or some similar item from Wall Street’s inventory of financial derivatives, will do the job. As to alpha, well, our poor managed mutual fund tries to achieve some sort of market-beating return by one simple means — owning, or in the parlance of the trade, “being long” stocks.

Thanks to DNA for the story.

Wednesday, December 20, 2006

Don't limit yourself

Here's a story about George Dantzig - the famed mathematician who's contributions to Operations Research and Systems Engineering have made him immortal.

As a college student, George studied very hard and often late into the night. So late, that he overslept one morning, arriving 20 minutes late for Prof. Neyman's class. He quickly copied the two maths problems on the board, assuming they were the homework assignment. It took him several days to work through the two problems, but finally he had a breakthrough and dropped the homework on Neyman's desk the next day.

Six weeks later, on a Sunday morning, George was awakened at 6 a.m. by his excited professor. Since George was late for class, he hadn't heard the professor announce that the two unsolvable equations on the board were mathematical mind-teasers that even Einstein hadn't been able to answer.

But George Dantzig, working without any thoughts of limitation, had solved not one, but two problems that had stumped mathematicians for thousands of years.

Simply put, George solved the problems because he didn't know he couldn't.

You are not limited to the life you now live. You have accepted it as the best you can do at this moment. Any time you're ready to go beyond the limitations currently in your life, you're capable of doing that by choosing different thoughts. All you must do is figure out how you can do it, not whether or not you can. And once you have made your mind up to do it, it's amazing how your mind begins to figure out how.

A person is limited only by the thoughts that he/she chooses.

5 things that you must not do with your money

Here's a story on things not to be done when your own money is concerned by Personal Fn people. Simple things, but more people do that mistake than those who avoid that. Read on.

There are individuals who have some money and others who have more money. And then there are financial planners, investment advisors and agents offering advice on what one should do with his money. Investment avenues like equities, mutual funds and insurance products like ULIPs (Unit-linked Insurance Plans) and endowment plans among others vie for a share of the money available. It would be safe to say that we are spoilt for choices, thanks to the varied avenues available. Furthermore, we are in a situation wherein there is a sort of an information overload, in terms of what one should be doing with his money.

In this article, we highlight 5 things that you must “not do” with your money.

1.Don’t hoard your money in a savings bank account: The savings bank account often ends up becoming a default option for storing one’s money. This isn’t surprising considering that most of us receive our incomes i.e. salaries and fees through cheques. But the trouble with this arrangement is that the funds are squandered earning a measly return of 3.50% (or thereabouts).

The same money can be better utilised by gainfully investing it in an appropriate investment avenue. Sure, liquidity is important. So you should set aside a sufficient sum to meet your day-to-day expenses and to provide for contingencies as well. But the balance should be invested in avenues like fixed deposits (FDs), mutual funds in line with the investor’s risk profile and needs. Considering that even an AAA rated FD yields an annual return of 7.50%, the savings bank account should come across as an unattractive “investment” option to most.

2. Don’t invest your money based on hearsay: Never make investments based on hearsay. Your relatives, friends and neighbours need not be appropriate sources for availing investment advice. In any case, what’s right for them need not be right for you. The right way to invest is by engaging the services of a qualified and competent investment advisor.
Steer clear of agents and advisors, whose “core competence” is offering rebates against investment made. Similarly, don’t associate with an advisor who only approaches you when an NFO (new fund offer) is launched. Instead, what you need is an advisor, whose mainstay is his expertise and prompt service.

3. Don’t manage your money without a plan: No game can be won without a proper strategy; likewise investing without having predetermined objectives like planning for retirement or providing for children’s education, among others could spell disaster. It’s a bit like setting off on a journey without knowing what the destination is.
In fact, setting objectives should be the starting point of any investment activity. Having done that, the next step would be to draw out a proper plan. The investment advisor has an important role to play at this stage. Rigidly adhering to the plan at all times, should also be treated as vital.

4. Don’t invest all your money in the same avenue: Investors would do well not to disregard the importance of diversification and avoid investing all their money in the same avenue. The investment portfolio should be comprised of instruments and schemes from across asset categories. Over longer time frames, such portfolios are best equipped to deal with changing market conditions and deliver on the returns front.
For example, market-linked investment avenues like equities and mutual funds are likely to occupy a lion’s share in a risk-taking investor’s portfolio. However, assured return schemes like FDs and bonds should also feature in the portfolio (from a diversification perspective) since they can impart a degree of stability to the portfolio.

5. Don’t lose track of your money: Investors should never lose track of their finances. Whether the money is in a savings bank account or available in liquid form, it pays to be aware of how the finances are placed. By doing so, the investor is placed to make well-informed financial decisions. Similarly, it would also help to keep track of the investment portfolio. Changing market conditions, interest rate fluctuations and other factors could necessitate the need to make modifications to the portfolio.

Monday, December 18, 2006

Housing Finance in India: The Road ahead

Housing is a significant engine for growth and development of the economy. Housing constitutes an important component and a measure of the socio-economic status of people and it is a critical sector for the India growth story.

The disbursement figures available from NHB reflects a robust growth. From disbursement of Rs 23858.43 crore in 2001-02, the figures of disbursement was Rs 76819 crore in 2004-05. Figures for 2005-06 are expected to touch Rs 100000 crore!

The proportion of outstanding housing loans as percentage of GDP has increased from 3.4% in 2001 to 7.25% in 2005. However it also indicates the vast potential of growth when we compare the figures with that of USA ( 54%), UK (57%), European Union (40%), Thailand (17%), Malaysia (34%).

As per the Tenth Plan (2002-2007), the total number of houses that would be required was estimated at 22.44 million( 2.24 Crore)

Fiscal concessions provided to individuals under Section 80C (for principal repayment upto Rs 1 lac) and Section 24 B (interest repayment upto Rs 1.50 lac) continues to be a major attraction which reduces the effective rate of interest.

Now FDI is allowed upto 100 % under the automatic route in townships, housing, infrastructure and construction development projects. SEZs, which is the current rage, also will include world class residential premises.

Looks like a promising highway ahead!

Contrary Proverbs

Every Action has an equal and an opposite reaction. Similarly, every proverb has an equal and an opposite proverb! There always exist two sides of the same coin! U be the judge.

All good things come to those who wait. BUT Time and tide wait for no man.

The pen is mightier than the sword. BUT Actions speak louder than words.

Wise men think alike. BUT Fools seldom differ.

The best things in life are free . BUT There's no such thing as a free lunch .

Slow and steady wins the race . BUT Time waits for no man .

Look before you leap . BUT Strike while the iron is hot .

Do it well, or not at all. BUT Half a loaf is better than none.

Birds of a feather flock together. BUT Opposites attract.

Don't cross your bri dg es before you come to them. BUT Forewarned is forearmed.

Doubt is the beginning of wisdom. BUT Faith will move mountains.

Great starts make great finishes. BUT It ain't over 'till it's over.

Practice makes perfect. BUT All work and no play makes Jack a dull boy.

Silence is golden. BUT The squeaky wheel gets the grease.

You're never too old to learn. BUT You can't teach an old dog new tricks

What's good for the goose is good for the gander. BUT One man's meat is another man's poison.

Absence makes the heart grow fonder. BUT Out of sight, out of mind.

Too many cooks spoil the broth. BUT Many hands make light work.

Hold fast to the words of your ancestors. BUT Wise men make proverbs and fools repeat them.

Sunday, December 17, 2006

Top personal finance websites in India

Net has an amazing load of information for anything and everything. But you have to know the right place to look at. Or else you'll be looking stupefied by the tons of search results thrown back at you. So even if you google for "personal+finance+website+India", you get more than 132000 search results.

Here are the top websites which has helped me in my journey of taking financial responsibility for myself.

1. PersonalFn: Money simplified It has a whole range of articles, guides, calculators on everything related to personal finance. Great web site.

2. ValueResearchOnline It is a great site for everything on Mutual Funds. The articles are lucid and the portal is independent.

3. NSE, India It has a very educative section on Financial Markets where you can download the material for certification in Financial markets.

4. Yahoo! Finance Yahoo! has a dedicated portal for finance in India. Though Google too has a portal on finance, it doesn't have an Indian finance portal.

5. Ramit Sethi"s blog Even though it's not on Indian financial scene, it is a great read for everything on personal finance and entrepreneurship.

I can list some others, but the five should be enough. After all there's my blog too, eh...

Saturday, December 16, 2006

Google gift for Christmas

Building a website is a daunting exercise for newbies like me who don't even know HTML. But Google Apps appears to be the "Angel" for people like us.

Now you've got one-stop shopping for all the services currently on the Google Apps for Your Domain platform -- just find a domain, buy it, and get started. Google will do all the behind-the-scenes configuration work for you. Presently, the features available are Home page, Gmail, Calender, Gtalk and Page creator.

As of now this is available for .com, .net,.org, .biz, and .info domains. Google is also constantly working to introduce more cool new features to this service, so be sure to check back for updates.

Wanna control the market?

Read this insight By Flexo: Rule for building wealth: Don't try to beat the market. Some excerpts:

If the professionals—people who spend hours each day studying the markets—can’t do it consistently, why do you think you can? Sure, there are success stories, but they are anecdotes, not true representations of what trading in the stock market is really like.

Survivorship bias also shows that we’ll hear about success stories much more often than we’ll hear about failures, leading towards more misunderstanding of the way markets work.

Matching the market does not mean you’ll receive average returns. Considering most fund managers don’t beat indexed mutual funds, matching the market will exceed the average.

Fortune says, “The most straightforward way to avoid this trap is to diversify your assets and then rebalance your portfolio at least once a year.”

Do you check your pulse everyday?

If you check your stocks every day, you're dumb. Think long-term.

Keep it simple: You need to set up a good investment portfolio with the kind of asset allocation you know about (stocks, mutual funds, real estate, whatever), and then make sure you're roughly on target with your investment goals.

You need to occasionally monitor your investments to see how they're doing. And you may want to set up automatic alerts through your broker/Google news to keep you informed on major news in the company. How often should you manually check on things? Probably every few months, with a major review every year. But not every day!!

If you’re reading in the press about the hottest investment technique or philosophy, stock, or mutual fund, chances are you already missed that particular boat. By the time everyone knows about it—whatever “it” is—its market has become efficient; no more spectacular gains to be had.

Happy investing!

Sensex at 30000

Sensex was on a roller coaster ride as always in the past week. A slight nudge by RBI increasing the CRR drew first blood with the Sensex going down by 400 points . And then the next day, the Industrial report about the growth for the month figures made Sensex shed another 400 points. Phew!!

And then as talks of the fundamentals being strong, Sensex gains by 300 points.

Looking at the ways of the Sensex makes me remember my ride on "Thunder" in the Essel World amusement park. Unless you have a strong heart, you should not attempt that. While in the "flight", you wonder why you ventured in! They hang you upside down and you pray that the "flight" stops asap! But when you come out, you are releived and happy. It's fun, you proudly say, prodding others to enjoy the hell you have been through!

As an asset class, equities has the largest growth prospects among all investments. But the ride is frought with jerks, upsurges and turn arounds. If you are brave enough to monitor your way within the roller coaster ride, you can reap the benefits too. And as always the "IF" is important and critical.

Normally, people like us have sleepless nights with the slightest tremors. But here's what I read in an article by an Economist I respect, Swaminathan S Anklesaria Aiyar.
" Six years from now, I would expect the Sensex touch atleast 30000! "

So if you can ignore the noise and pick up good companies and stay with your investments, share market may bring you good growth. Sounds inviting,eh!

Friday, December 8, 2006

Top five posts of the week

Here are the top five blog posts that I read in the past week.

1. Youth Curry: Insight on Indian youth

2. Google blog: Thoughts on healthcare

3. Free Money Finance: Thoughts on Financial advisors

4. All Financial Matters: 9 ways of managing money effectively

5. Digital Inspiration: How to cure a hangover

Read somewhere that bloggers are failed writers and half wits. Obviously the author did not find the above blogs. Power to the above bloggers

LIC:Way to go!

Here's a list of achievements by a Public sector Insurance company:

  • NDTV Profit Business Leadership Award 2006.
  • Asia Insurance Merit Award 2005 and 2006 in the area of ‘CORPORATE SOCIAL RESPONSIBILITY’
  • Awaaz Consumer Awards 2005 and 2006 given by CNBC-TV 18- ‘Best Life Insurance Brand in India’ –an award given on the basis of a market /consumer survey done in conjunction with AC Neilson ORG Marg.
  • Golden Peacock Global Award for Corporate Social Responsibility in emerging economies (Public sector) for the year 2005 by World Council for Corporate Governance.
  • LIC adjudged No.1 in Net Worth & Net profit and No.2 in Total Income among the TOP 500 companies of India by Dun & Bradstreet.
  • Adjudged Number One Service Brand in India by Economic Times and AC Neilsen Org Marg for the year 2005 for the third consecutive year.
  • GOLDEN PEACOCK AWARD for being the Winner of Special Commendation Certificate for Excellence in Corporate Governance (PSU sector). A
  • djudged No.1 Insurance Company at the ‘Businessworld Most Respected Company Awards 2005’.
  • Awarded Reader Digest’s Trusted Brand 2006 (voted by consumers).
  • LIC – Adjudged Superbrand India 2003/04 and 2004/05.
  • Second largest investor in Asia among insurers. (Source : Asian Investor)
  • Largest Financial Institutional Investor – both in equity market and term loans.
    LIC - An Institution Builder promoting many financial and insurance institutes like NSE, NCDEX, LIC Mutual Fund, Stock Holding Corporation of India, National Insurance Academy, Insurance Institute of India etc.
  • LIC is the second largest PC user in the country.
  • LIC is the number one insurer in the world in volume and has sold around 31.5 m policies in 2005-06 with historical growth of 31.77% over 2004-05.
  • LIC posted a growth rate of 48.56% in new premium income for the year 2005-06.
  • More than 1 crore policies sold under new plan ‘Bima Gold’ during a period of just 7 months. LIC settles 2 claims per second.
  • LIC’s e-portal (website) has won Webby’s Consumers’ voted best website award.
  • The Hindi version of the website has been launched.
  • More than 40 different plans catering to the changing needs of different segments of the society.

Way to go LIC!

Tuesday, December 5, 2006

Buying gold from your bank? Beware!

Got mail from a friend which is an article by Personalfn.com. Read on.

Banks have hit upon a new idea to get a larger share of your wallet – retailing gold. While the banks claim that buying gold from them is a wise decision, we beg to differ.

In fact we would go so far as to say that if you want to buy gold, don’t go to your bank! Why Gold?There are various reasons for which you should own gold in your portfolio. The most important of these is that gold is a real asset whose value is driven by factors (such as the amount of gold mined) that are very different from those that impact the value of financial assets. Therefore, it brings in a much needed element of diversification in your portfolio. You can read our detailed note on the reasons for and against investing in gold. Suffice it is to say over here that you must have about 5% of your wealth in gold.

The next question that is often put to us is in which form should one hold gold? The one form which we all are familiar with of course is jewellery. However, from an investment perspective this is not the best option as the making charges for jewellery can be as high as 30% of the value of the gold i.e. if your jewellery has gold worth Rs 100, you are probably going to be buying it for Rs 130. So if you wish to sell your jewellery, all you will get is the value of the gold; the making charges will be a loss to you. Not to mention that sometimes jewellery that is promised to be made of 22K gold turns out to be of a poorer quality. ",1]

The best form to hold gold, from an investment perspective, is probably, gold bars (or like they say “biscuits”!). Gold bars are standardised products whose purity is assured by the hallmark (seal of the producer) that it carries. There are no making charges involved and as the purity and quantity is assured, on liquidation you do not have any surprises in store for you.

Where to buy Gold?In recent months, banks have become very aggressive in marketing gold bars. This pick up in tempo is not only due to the festive season; it is also due to the fact that banks have hit upon a new idea to make a “neat buck” off you.

Here’s an eye opener for you. The bank, which pushed you into buying standard gold at a premium, will not buy the gold back from you! So, if you bought gold from a bank today for Rs 100, and you needed to sell it the same day (to a jeweller as the Bank will not buy the gold back from you), all your will realise is Rs 86! Of course, you get to keep the certificate!
The jeweller on the other hand, will buy back gold from you any day at the prevailing price. Some jewellers also give you a certificate for the gold you buy, thus diluting a key selling point of the bank.

The answer to the question of where you should buy gold from is simple – give the banks a skip in case you are looking at buying gold. Opt instead for a credible jeweller (even in the case of jewellers, we found that there is a lot of price variation with branded stores charging a premium – do your homework well before you buy gold). And, of course always buy standard hallmarked gold.

If you do decide to go to a jeweller to buy gold in bulk, do negotiate. It is likely you will get a discount. In our conversations with a couple of brokers, we were offered a discount on bulk purchases.

Beware: Based on our interactions with thousands of individuals every month, we find that instances of mis-selling of investment-related services and products is growing at an alarming rate. As an individual with limited knowledge about such products and services you probably are not geared to ask your advisor the ‘right’ questions. The best way then to eliminate the risk of being ‘cheated’ is probably to spend time in selecting an honest financial planner for yourself.

And it's all about "taking responsibility for yourself"

ULIPs : is there a better way?

Unit linked insurance plans (ULIP) is a bestseller today. Life Insurance companies are falling over each other to introduce and market their ULIPs. Backed by aggressive selling by agents and the booming stock market, the sales figures they have notched up is mind blowing.

Traditionally, life insurance products have usually been considered as ‘safe’ investment options, which also offer a life cover. However, since unit linked insurance plans (ULIPs) burst onto the scene a few years ago, the rules and definitions of life insurance have undergone a sea change. The popularity of ULIPs can also be attributed partly to the scrapping of ‘assured return’ insurance schemes and falling interest rates which rendered conventional products like endowment plans unattractive.

And instead of taking insurance based on their economic value( human life value-HLV), people are going for ULIPs which is Mutual Funds plus term assurance rolled into one. To my mind, one should look at the following issues before writing the cheque to your persistent agent.

Transparency: The quality of data and its presentation need to improve significantly, if investors, both existing and potential, are to be able to study portfolios and make intelligent decisions. ULIP portfolios need to be disclosed regularly. Mutual funds are required to disclose all relevant information like portfolio, assets under management (AUM) and the benchmark indices to name a few.

Expense: The annual expenses incurred on the ULIP are 3.50% (2.00% recurring and 1.50% fund management charges) apart from insurance charges, In contrast, mutual funds are managed at an annual expense of 2.50% (maximum) of net assets.

Past performance: While the Mutual funds have a history of past performance, the ULIPs have a short history and the current bull run to boot. Performance of a fund manager will be tested when the going gets tough. ULIPs have not been tested apart from the May crash.

Isn't it more worthwhile to go for term assurance from an Insurance company and a trusted and performing equity fund from a Mutual Fund/AMC?

Monday, December 4, 2006

Fund of Funds on their way

Here's a story in Hindu Business Line by Nilanjan Dey. Feedback may be sent to nilanjan@thehindu.co.in .

One question that I have in mind is how do they compare with ETFs. I guess ETFs are less expensive and is a much larger diversification. Any way read this story by Nilanjan Dey

If there is one class of products that is not fully appreciated by MF investors, it is the FoF (Fund of Funds). Opinion now may be divided as to the FoF's real worth - it is probably much too early to examine that - but there is no denying that this category is here to stay. And actually prosper, if you listen closely to those who are championing its case.

Ask Mr Sumeet Vaid, one of its most resolute defenders. As Chief Marketing Officer at OptiMix, the multi-manager arm of ING Investment Management, he knows all about the common investor's penchant for stand-alone, single-manager funds. He has to constantly talk to clients about the merits of creating a portfolio of equity and debt funds, choosing from an assortment range of funds, each with an investment style of its own.

Selecting the best fund managers is not easy, as anyone faced with this diversity in the country's MF space will realise. And diverse it has truly become. Just check out the numerous competing products and you will know.

An FoF, in this backdrop, can combine a number of single managers, each of whom may be acting differently, guided as they are by different investment mandates. That, says Mr Vaid, is the core of an FoF's unique selling proposition. The process, he adds, paves the way for sensible asset allocation.

Talking of selling propositions, investors must be told about the risks as well. For this, let's check out OptiMix's latest offer, a three-year product that will be benchmarked against the Crisil balanced fund index. To begin with, an investor needs to be aware that such an FoF will be as good as the funds it invests in. In other words, its performance will be shaped by whatever is done by these underlying schemes. Also, investments in the underlying assets will have to face such factors as performance of their portfolio, exposure to derivatives and security lending.

It is important to realize that if the AMC levies an entry or exit load and the underlying funds do not waive the load charged on investments/redemptions, the investor concerned will incur load charges on two occasions.

As the offer document indicates quite clearly, the first will be on investments/redemptions/switches in the options under the scheme. The second will be on the scheme's investments/redemptions/switches in the options under the underlying schemes.

The offer document also underscores the fact that investors are incurring expenditure at both the FoF level and the schemes in which it invests. Their returns may, therefore, be impacted by this; such returns may on occasions be lower than what may be secured if investors directly invest in those schemes.

It may be pointed out that an FoF may normally provide a limited quantum of information on the underlying funds. It may not always be possible for a lay investor to access specific data, especially exact details of their portfolios.

Having said all this, there is little doubt in our minds that FoFs will do better in the days ahead. One, there will be more products. Two, the performers among the current crop of FoFs will begin to attract more assets. Granted, these are still microscopic, particularly when compared to some of our giant stand-alone funds. How soon the situation will change is not for us to predict. But that change seems inevitable.

Sunday, December 3, 2006

Open ended Mutual funds v/s NFOs

I was part of an interesting discussion between a group of people(unknown to each other) who got the same mail from a mutual fund advisor regarding a closed ended new fund offer(NFO)

Nirmala Mani started the discussion by saying, " I am trying to get an idea of how many people in this mailing list were interested in investing in the fund" He wanted to know, "I am taking advantage of this mailing list to find out how many of you were going for the fund"

Sridhar responded by saying, "
I am going for it purely on raghu’s recommendation"

I had the following to say on the issue, "
My own small research on the issue says that Mutual Funds have their own hidden agenda today. With SEBI allowing them to charge upto 6% as entry load in closed ended funds and the facility to amortise the expenses over the period of the fund, NFOs have become fashionable. They come backed by a huge ad spend and collect thousands of crores from unsuspecting consumers who don't know the difference between open ended and closed ended fund. They are blasted with financial jargon and a well researched advertisement on the print and visual media backed by the persistent agent into succumbing into signing the cheque"

Nirmala responded by saying, "
I have simple calculations.
Let us take SBI Magnum Global ... I can now get it in the market @ Rs43+ ... Say in a year it goes to Rs.55 +,
With all the hidden agenda that Reliance Long Term Equity Fund has ... I will get it at par @ Rs 10 ... Say in a year it goes to Rs. 20 in a year. Would I not have doubled the money in a year (tentatively) if I had put my money on RLTEF versus SBI Magnum (since it is already at premium).
You see where I am going ? What would you say in that case.

I again responded with the following:
What I've learned from experts in Mutual Funds (and one of those also happen to be my brother in law and officials working with MFs ) is that we must understand that in case of mutual funds schemes, lower or higher NAVs of similar type schemes of different mutual funds have no relevance.
Investors should choose a scheme based on its merit considering performance track record of the mutual fund , service standards, professional management, etc
Moreover as you must have read in my blogs that these closed ended NFOs are allowed to have upto 6% entry load amortised over the no. of years. This expense of yours goes into marketing, advertising and commission to agents....
In open ended funds u can measure the past performance of the fund managers. In NFOs, u don't know that.

To be fair enough, past performance is not guaranteed in future.

What is your take?

Saturday, December 2, 2006

World AIDS Day

From the Google Blog:

December 1st is World AIDS Day. We want to remember all those who have suffered from HIV/AIDS in the 25 years since it was first identified, and we want to support everyone working to eradicate this scourge: Today, there are about 40 million people living with HIV worldwide, and it is increasing in every region in the world. In Africa, it is the leading cause of death -- 5,500 Africans die each day from this insidious disease.

One effort that is making a difference is (RED), a company founded this year by Bono and Bobby Shriver. A percentage of the profits from each (RED) product sold is given to The Global Fund. We are supporting the (RED) effort by offering promotional support to (RED) and (RED) products on Google properties throughout the holiday season.

We hope you choose to support them with your purchases. Companies offering (RED) products have committed to contribute a portion of profits from the sales of that product into Global Fund-financed AIDS programmes in Africa.

Together, let's make a big difference. Read more at JoinRED.com or visit the (RED) blog.

I will teach you to be rich

Here's an interview, I would have liked to do on my favorite blogger, Ramit

Ramit's interview

Just one of the excerpts to show the depth of the interview: "When I was in high school I got so frustrated because so many people would say, "Oh I'm not going to apply to Stanford, because even if I got in, I couldn't afford it." This is exactly the wrong way to think about it. The right way to think about it is "I'm going to apply everywhere. I'm going to do a great application, and if I get in, then I'll think about the money." And usually what happens is if you're good enough to get in, then they'll take care of you. I saw a lot of kids doing this and it made me sad. My parents were very middle class and there were four kids in the family. They told us, "You guys have got to get scholarships, otherwise you can't go to college." So we did! And there's no secret, it's the same things I talk about: take the initiative, be patient, learn from your mistakes, that sort of stuff".........

Cody McKibben's blog is a nice read too.

Friday, December 1, 2006

Journey of a thousand miles !

The journey of a thousand miles start with a single step. I mean I was very happy at my 25th post on my blog and now that I'm approaching 125, it's time to reorganise the blog.

The blog looks a bit cluttered with too many things at one place. So now I have decided to build a web site for my blog and I've called it Investing Gyaan: Taking responsibility for yourself.

The website will take its final shape in another month or so but do visit them and send suggestions.

The underlying philosophy of the site will be that it is vital to "take responsibility for yourself". And the first step to do that is to be well informed. We are not selling any financial product and do not represnt any financial product company. So we'll be independent and unbiased.

We are surrounded by persistent agents and financial advisors, aggressive financial product companies and our own ignorance of the knowledge required (and maybe the inertia?) to manage our money!! And it is said that Money is a bad master but a good servant. In any case, you have to manage it properly so that it may serve you properly.

We welcome your feedback and suggestions to improve this site. If you want to contribute by writing articles on a relevant subject, you are more than welcome. Please write to financeforu@gmail.com or ranjanvarma@gmail.com

Check them out!