Where to Invest for Retirement Planning?

What is the best retirement plan where we can invest? Alas, this simple question does not have a one line answer!

Moreover, if we really want to plan for our retirement >20 years from now, it's a good idea to spend an hour or so rather than come to a hasty decision. In fact when you are planning for retirement, you are also, in a single stroke, managing your personal finance. Because retirement investments takes into account your financial goals, income, spending and savings. So it is a good idea to spend some quality time on this.

So, let's start with figuring out your retirement funds, how much every month will you need after factoring inflation and how long will the funds keep going.
(you may like to spend time with this retirement planner, these sheets and calculators)

After you have an idea about your retirement needs, you also figure out how much to invest. And depending on what your income is, you make the decision for savings too. So, in a way, your retirement planning is a complete management of your money too!

Now it's time to weigh the various options available. The common investments options are:

1. Pension products from Insurance companies,
   
2. Mutual Funds and
   
3. Post Office investments.
4. PPF.
   

Before we proceed, it's important to consider three out of four parameters of investing. i.e. 1) Growth, 2) Security and 3) Expenses (leaving out liquidity, which has to come much later!)

The pension products from the Insurance companies have a high cost structure as they pay a decent amount to their Agents. The Insurance companies have to follow guidelines from IRDA to invest your money which is generally in safe investments (Other than ULIPS where investor bear the investment risk). This affects the returns and the average return can be pegged at around 6% as of now.

ULIP Pension products can give higher returns though the investor bears that risk. But the cost structure of ULIP pension funds is higher than Mutual Funds.

Mutual Funds offer better returns and again they are subject to market risks. But over a long time frame, the returns are really good.

Post Office monthly accounts offer interest @ 8% per annum, payable monthly.

Now, coming back to the question about the best retirement plan, the answer would be a combination of the following products:

Mutual Funds, Public Provident Fund, fixed deposit (FD) and fixed maturity plan (FMP), etc to build the retirement fund while you are young and can take risks.

As the fund grows, the investments can be deployed in avenues like FDs, senior citizens scheme, Post Office Monthly Income Scheme, MF investments with a systematic withdrawal option, FMPs in the dividend distribution mode and monthly income plans, etc to get periodic returns.

Essentially it's like bat like Sehwag first and then let Sachin take you to the winning post!

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CRISIL Analysis of Quality of FMP Portfolio

Fixed maturity plans (FMPs) constitute a quarter of the assets under management AUM) in the mutual fund industry. FMPs have also been the biggest contributor to the mutual fund industry’s growth so far in 2008. Recently there has been heightened apprehension about the quality of the FMPs’ investments and reports of investors seeking premature redemptions even by paying substantial exit loads. Against this background, CRISIL has carried out a quick analysis of the credit quality of FMP portfolios, even though it has outstanding credit quality ratings on less than 5 per cent of the 400 odd FMPs outstanding.

Says Roopa Kudva, Managing Director & Chief Executive Officer, CRISIL, “Portfolio data that is available with CRISIL for FMPs’ investments represents only 30 per cent of total AUM (50 per cent of the number of schemes) for this product. Here our analysis reveals that a high 85 per cent of these portfolios are invested in the highest safety AAA and P1+ rated instruments and government securities, which is indicative of strong credit quality. A full disclosure of investment portfolios of FMPs could, therefore enhance investor confidence in FMPs.”

CRISIL’s analysis further reveals that there are a number of FMPs whose portfolios are only invested in securities rated AAA and P1+. However, it is important to note that the sample size of this CRISIL study covered only 30 per cent of the AUM of all FMPs (50 per cent of the total number of schemes) because of the limited disclosure followed by a number of AMCs for this category of funds. While open ended funds in India typically follow a system of full portfolio disclosure on a monthly basis, this is not the case with FMPs. Says Krishnan Sitaraman, Head, CRISIL FundServices, “If the disclosure levels in FMPs were similar to those of open ended funds, investors would be fully aware of the credit ratings of the underlying investments. In this scenario, potentially redemptions could have been lower if the strong credit quality as seen above was maintained across FMPs. Monthly disclosure of portfolios in fact sheets could significantly increase transparency”

If the credit quality of FMPs’ investments is strong, then investors have much to gain by holding these investments to maturity. In this situation, it is actually premature redemptions which could lead to sub-optimal returns.
Fixed Maturity Plans (FMPs) have significantly gained in popularity in India as interest rates in India increased, and equity market returns diminished. With FMPs offering tax-adjusted returns that are higher than bank fixed deposits (FDs) of comparable maturity, AUMs under FMPs nearly quadrupled from levels two years ago. AUMs in FMPs at end September 2008 were about Rs.1.40 trillion1 (or
about US$ 28 billion). In 2008 thus far, over 800 schemes, aimed at both, the retail and institutional segments have mopped up Rs. 440 billion (or about US$10 billion) of investments.
Full portfolio disclosures with credit ratings of each investment or the credit quality rating of the FMP as a whole would help investors understand clearly which FMP portfolios have a higher risk profile. A higher risk profile could emanate either from taking exposure to instruments lower down in the ratings spectrum or through excessive exposures to sensitive sectors like real estate.

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Equity funds out-perform bellwether indices in August: CRISIL

CRISIL reports that Diversified Equity funds, on an average, out-performed the S&P CNX Nifty and Sensex in the month of August led by the out-performance of midcap stocks vis-à-vis large caps. As most diversified equity funds have a fair exposure to midcap stocks, this has helped them boost their returns in August.

In addition, the out-performance is a result of auto, banking, IT and FMCG stocks doing well in the month. 237 schemes out of 335 schemes in the equity fund category, outperformed the S&P CNX Nifty in August. Top performers in the category belonged to ELSS schemes as well as general equity schemes. Franklin India Taxshield 99, Fidelity India Special Situations Fund and Lotus India Midcap Fund were the top three gainers.

All CRISIL indices posted positive returns in August. Equity based indices lead the charts when analyzed forthe month as a whole. The hybrid CRISIL Fund~bX (which tracks balanced funds) surged the most during the month by 2.83 per cent, benefiting from the good showing of both equities and debt. This was a classic case of benefits being derived from diversification into debt and equity as for some periods in the month positive movements on the debt side cushioned negative movements on the equity side, thus causing balanced funds to out-perform equity funds on an average for the month taken as a whole. The CRISIL Fund~eX (which tracks equity funds) closely followed it with 2.49 per cent returns while the CRISIL MIPEX, (benchmark for monthly income plans) which has a lower equity component, posted a return of 0.79 per cent. Among pure debt indices, CRISIL Fund~ Gilt Index (benchmark for Gilt Funds) rose over 1 per cent while CRISIL Fund~dX (which tracks Long-Term Bond Funds) ended up 0.75 per cent. The CRISIL STBEX (benchmark for Short-Term Bond Funds) rose 0.68 per cent and CRISIL~LX (which tracks liquid funds) gave a monthly return of 0.71 per cent

Auto and Banking Sector stocks provide a kicker in the equity funds category

“Among the key outperforming sectors were interest rate sensitive sectors such as auto and banking which topped the returns chart on hopes of softening interest rates as inflation showed signs of easing.” Availability of stocks at good valuations given the hammering these sectors have taken in the past also contributed to the uptick. Adds Mr. Sitaraman, “Easing of inflation worries also helped the FMCG stocks do well while the depreciating rupee helped ITstocks outperform during the month.”

JM Auto Sector Fund was the top performer in the equity category with 9 per cent return. Lotus India Banking Fund followed it with 7 per cent returns over the past month. Franklin Infotech Fund gained over 6 per cent while UTI-Software Fund returned 5 per cent during the month.

Reliance Industries Ltd. continued to be the most popular stock among fund managers of diversified equity schemes over a 3-month time frame followed by Bharti Televentures Ltd and Larsen & Toubro Ltd. Among industries, the banking sector continued to be the most sought after industry for yet another month followed by Computers - Software, Electrical Equipment and Pharmaceuticals..

Indian mutual fund industry’s average assets under management (AUM) rose by nearly 3 per cent in August, to Rs.5.45 trillion from Rs. 5.31 trillion in July 2008 (including fund of funds). The rise in average AUM can be attributed to the resurgent equity market as well as new fund offerings in Fixed Maturity Plans (FMPs). 25 out of 34 fund houses witnessed rise in their average AUM. Reliance Mutual Fund continued to dominate the asset charts with an average asset base of Rs 886 bn, up by almost 5 per cent from the previous month. HDFC Mutual Fund moved up by one notch to occupy the second spot. Its average assets under management rose by 6 per cent to Rs 539 bn.

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Mutual Funds Update from CRISIL India

All CRISIL Mutual Fund indices with the exception of the CRISIL MF~Gilt index posted positive returns in July 2008. The CRISIL Fund~eX (which tracks diversified equity funds) with returns of 5.40 per cent in July was in line with the benchmark S&P CNX Nifty which ended the month at 7.24 per cent over the earlier month.

The hybrid CRISIL Fund~bX (which tracks balanced funds) was up by 3.76 per cent, while the CRISIL MIPEX, (benchmark for monthly income plans) which has a lower equity component, posted returns of 0.97 per cent. Among pure debt indices, the CRISIL Fund~dX (which tracks Long-Term Bond Funds) ended 0.43 per cent up while the CRISIL STBEX (benchmark for Short-Term Bond Funds) gave monthly returns of 0.29 per cent while the CRISIL~LX Index ended up by 0.71 per cent. The CRISIL MF~Gilt Index however gave negative returns of 0.15 per cent.

Banking Sector Funds - the top performers in the equity mutual fund space. In the equity category, banking sector funds performed well with relief rallies in banking stocks driven by valuations becoming attractive after a prolonged southward movement." Reliance Banking Fund posted 13 per cent returns for the month ended July 2008 followed by the UTI Thematic - Banking Sector Fund with 11.50 per cent gains and JM Financial Services Sector Fund with 10.12 per cent returns.

There were six diversified equity oriented schemes which gave over 10 per cent returns during the 1-month ended July 31, 2008. Of these, the top four schemes belonged to LIC Mutual Fund, viz., LICMF Growth Fund (12.3 per cent returns), LICMF Equity Fund (11.47 per cent returns), LICMF Infrastructure Fund (11.29 per cent returns) and LICMF Opportunities Fund (10.8 per cent returns).

The Indian mutual fund industry's average assets under management (AUM) fell for the second consecutive month in July to Rs.5.31 trillion from Rs.5.66 trillion in June 2008 (including fund of funds). The decline by over 6 per cent in mutual fund assets can be attributed to redemptions due to volatile equity markets, tightness in money market, an unfavourable inflation outlook as well as on prospects of interest rates moving northwards after RBI hiked repo rates by a higher-than-expected 50 bps to 9 per cent and raised banks' CRR (cash reserve ratio) by 25 bps to 9 per cent in its latest quarterly monetary policy review.

UTI ULIP makes Valid Arguments

UTI makes valid arguments in comparison with Insurance ULIPs. But you need to compare it with other Mutual Funds independently.

Mutual Fund AUMs resilient to market crash in January: CRISIL

Indian mutual fund assets under management (AUM) reduced only marginally by Rs.22 billion (0.40 per cent) to Rs.5.52 trillion as on January 31, 2008, from Rs.5.54 trillion (including fund of funds) as on December 31, 2007, despite a sharp correction in the equity markets. The benchmark S&P CNX Nifty lost more than 16 per cent in January 2008 over the previous month.

Said Mr. Krishnan Sitaraman, Head - Fund Services & Fixed Income Research, CRISIL FundServices, "The mutual fund AUMs were, by and large, resilient to the stock market crash. New investors continued to enter at the low levels, and look out for buying opportunities, new fund offers and inflows into debt funds. Of the 32 fund houses, as many as 14 actually registered an increase in AUMs in January." Despite the market fall, mutual funds were net buyers in the secondary equity market, by Rs.77 billion in January 2008, up from Rs.30 billion in December 2007.

Sectoral indicators
Three of CRISIL's mutual fund indices (those with equity components) ended negative in January 2008, after four consecutive months of positive run. Debt market indices (save CRISIL MIPEX), on the other hand, not only ended positive in January 2008, but largely also exceeded the returns in December 2007.

The equity category, represented by CRISIL Fund~eX, posted gains of a negative 16.50 per cent, almost in line with the fall in S&P CNX Nifty. CRISIL Fund~bX, the index for balanced funds, posted negative returns of 11.71 per cent in January, while CRISIL MIPEX, the index used as a benchmark for monthly income plans, had returns of a negative 1.61 per cent.

Among debt funds, CRISIL MF~Gilt (the gilt funds index) again reported the highest returns (of 2.72 per cent), followed by CRISIL Fund~dX, the long-term bond funds index (of 1.31 per cent). CRISIL STBEX, the debt index serving as benchmark for short-term bond funds, posted returns of 0.73 per cent, while CRISIL~LX, the index for liquid funds, had returns of 0.66 per cent.

Activities on the regulatory front
Among key regulatory activities in the month, the Securities and Exchange Board of India (SEBI) board approved removal of charging and amortisation of initial issue expenses in close-ended mutual fund schemes. Henceforth, all mutual fund schemes will, therefore, meet expenses connected with sales and distribution of schemes from the entry load. Consequently, waiver of load for direct applicants will also be available in close ended schemes.

Infrastructure Focussed Mutual Funds Outperform in India

The CRISIL Composite Performance Rankings (CRISIL~CPR) that ranked 306 Mutual Fund schemes in India across 15 categories for the quarter ended December 31, 2007 have been announced

The total ranked schemes covered more than 65 per cent of the industry assets under management (AUM) under open-ended schemes. Speaking of the best-performing schemes, Mr. Krishnan Sitaraman, Head – Fund Services & Fixed Income Research, CRISIL FundServices, said, “The trend of infrastructure-focused schemes being out-performers among equity schemes, which was witnessed in the last quarter, continued in the most recent quarter ended December 2007.”

The mutual fund industry’s AUM crossed the Rs.5 trillion mark to reach an all-time high of Rs.5.60 trillion in October 2007, but closed slightly short of the record in December 2007 at Rs.5.54 trillion. The AUM increased by 15 per cent during the quarter and 71 per cent during the year, primarily due to a significant contribution from equity oriented funds. Over 60 per cent of the increase in AUM during the quarter was attributed to equity-oriented funds. Mutual funds were net buyers in the secondary equity market to the extent of Rs.35 billion in the quarter, as against Rs.24 billion in the previous quarter.

In the Large Cap-Oriented Equity schemes category, the CRISIL~CPR 1 list consisted of Sundaram BNP Paribas Select Focus which maintained its rank, DWS Alpha Equity Fund which moved a notch up, and new entrant to the cluster, Principal Large Cap Fund. Sundaram BNP Paribas Select Focus could retain its position on account of a higher Superior Return Score (SRS). The scheme gained from the 165 per cent and 143 per cent quarterly increases in the share values of Adlabs Films and Lanco Infratech, respectively.

In the Equity Diversified category, Kotak Opportunities moved up a notch to find a place with DSP Merrill Lynch India T.I.G.E.R. Fund, ICICI Prudential Infrastructure Fund, JM Basic Fund, Sundaram BNP Paribas CAPEX Opportunities Fund, and Tata Infrastructure Fund in the CRISIL~CPR 1 ranking cluster. Standard Chartered Premier Equity Fund was a new entrant to this category. Kotak Opportunities moved up because of a higher SRS. It gained from the 188 per cent and 196 per cent increase in the share prices of ABG Heavy Industries and Jindal Steel & Power, respectively.

In the Debt-Long category, the benchmark CRISIL Fund~dX gave higher returns of 2.63 per cent over the quarter compared with 2.57 per cent in the quarter ended September 2007. Birla Sun Life Income Fund continued to top the category for the fifth consecutive quarter; the fund retained its position due to a higher SRS (which has a 50 per cent weightage in the ranking) and good performance on the asset quality parameter. Birla Income Plus moved up a notch, on the back of a better SRS score, to share the top spot with Birla Sun Life Income Fund.

In the liquid retail segment, Standard Chartered Liquidity Manager Plus has been at the CRISIL~CPR 1 position since June 2007. ICICI Prudential Liquid Plan moved up a notch to claim the top spot while UTI Liquid Cash Plan moved up two notches to secure a position at CRISIL~CPR 1. ICICI Prudential Liquid Plan could join the top position due to more consistent returns (better ranking on the volatility parameter), better quality of portfolio, and lower maturity. UTI Liquid Cash Plan effected the two-notch upward movement due to improvements on all returns-based parameters, higher asset size, and better quality of portfolio.

Winners All (Schemes ranked CRISIL~CPR 1)
Large Cap – Oriented Equity Schemes	Equity Linked Savings Schemes (ELSS)
DWS Alpha Equity Fund	Principal Personal Tax Saver
Principal Large Cap Fund	Principal Tax Saving Fund
Sundaram BNP Paribas Select Focus	Income Schemes
Diversified Equity Schemes	Birla Income Plus
DSP Merrill Lynch India T.I.G.E.R. Fund	Birla Sun Life Income Fund
ICICI Prudential Infrastructure Fund	Liquid Institutional Schemes
JM Basic Fund	Tata Liquid Fund – SHIP
Kotak Opportunities	Liquid Super Institutional Schemes
Standard Chartered Premier Equity Fund	ICICI Prudential Liquid Plan - Super Institutional
Sundaram BNP Paribas CAPEX Opportunities Fund	Reliance Liquidity Fund
Tata Infrastructure Fund

Question on Entry Load in Direct MF Investments

Rakesh, a reader, sent me the following doubt on entry loads in direct Mutual Fund investments by email:

[I] had a question on the entry load. Recently SEBI(or RBI, i dont remember which) instructed all fund houses not to accept entry loads on direct investment in their mutual funds. While I am very happy with this decision, I am not sure if the investors have a choice in investing directly with the fund houses.
I am particularly looking at DSP ML, Franklin Templeton, Fidelity, Principal and HDFC and wanted to check with you if they have options for investing online. If not would investors get the benefit of no entry load even when we invest in these funds through their franchise outlets.

My response to him was :

• SEBI is the regulator of securities markets and RBI regulates the banks as well as looks after the national monetary policy. So in Mutual Funds, SEBI is the regulator involved.
• SEBI's circular on waiver of load for direct application is applicable from Januray 4, 2008 and you can see their circular here. http://www.sebi.gov.in/circulars/2007/mfdcir1007.html
• Ajay Shah has written about the practical implications in his blog and I quote him, " the practical implication of this effort has been greatly undermined by the requirement that the physical PAN card has to be verified before an online transaction takes place. In other words, the canonical online transaction - the ability for a stranger to be able to come up to the website of a financial firm and put in money - is infeasible. SEBI strongly needs to switch the sequencing around: Require the physical verification of the PAN card after the online transaction and not before." You can see the full post here.

To my knowledge, Quantum MF was the only AMC providing online load free applications even earlier. But now all AMC have to provide a link for online applications on their sites.

Webpage for buying from Franklin Templeton

Any information or experience to share? Do comment or write.

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What factors to look for in a Mutual Fund scheme?

There are more than 700 odd Mutual fund schemes in India. What should be the other factors to look for in a Mutual Fund scheme before you sign the cheque and hand over to your MF Advisor?

This table could be a starting point

Top ten Mutual Funds on a 5 year return basis

Top Mutual Fund schemes in Equity Diversified category based on 5 year returns as on 20^th November, 2007

Scheme Name	Launch date	5 year return (%)
Reliance Growth	Oct 07, 1995	72.57
Magnum Contra	Jul 03, 1999	71.08
Magnum Global	Sep 22, 1994	69.66
Sundaram BNP Paribas Select Midcap	Jul 19, 2002	68.93
Magnum Multiplier Plus	Feb 20, 1993	64.97
Birla Sun Life Equity	Aug 27, 1998	64.63
Taurus Starshare	Jan 29, 1994	64.29
DSPML Equity Fund	Apr 15, 1997	63.60
Birla Sun Life Basic Industries	Jan 15, 2000	62.22
Reliance Vision	Oct 07, 1995	61.68
DSPML Opportunities	Apr 10, 2000	61.08

Source: ValueResearchOnline

The birth of the Mutual Fund with no distributors

Quantum Mutual Fund uses the internet and word of mouth to bring more business.

The story behind Quantum Mutual goes back to late 2005, when
after getting permission from Sebi to start his own AMC, Ajit Dayal met several distributors to create awareness about his funds. But he was shocked to see them put forth ‘a pricing sheet’. For 6% commission, you’ll get Rs 6,000 crore, for 5%, Rs 500 crore and so on, distributors told him.

“Without bothering to check whether a product is suitable for
investors, they came up with a sliding fee structure,” reminisces Mr Dayal, who is one of the first stock analysts and investment managers of the post 1991 era. “But who is going to pay for all this?” he asked them. The last straw came when Mr Dayal went to a senior broker and asked him to recommend his funds to investors, but refused to pay him the hefty commission that he demanded. “We make elephants in the industry dance to our tune, you are just an ant,” thundered the broker. The decision was made.

Read the full story on the ethical Mutual Fund in Economic Times

Take responsibility for your MF decisions and pay the commission to yourself

SEBI has mooted a proposal on waiver of load for direct applications in Mutual Fund schemes.

Interested people may send in their comments on this issue to ruchic@sebi.gov.in . Obviously distributors and agents will be up in arms against this proposal.

But I feel that such rules should be there for people who can/are ready to take responsibility for their investment decisions. Even for insurance! Is IRDA listening?

Financial Literacy for me, you and your friends

I need to go through a financial literacy programme and I am making that effort. So do you, dude.

I've hated finance. Maybe because I was not able to understand the jargons and the maths. But I guess ignoring personal finance worsens the situation. And the only way to get maximum out of your personal finance is to look it into its eye and grapple with it. You will come out stronger.

If you think it's too early for you to bother, let me tell you that the first principle of investing is to start early and see the magic of compounding. College grads, fresh MBAs and guys under 25, the smart thing to do is to start now.

Do you think that you have mastered the basics but are not able to use it to your advantage, it's time to put your thinking cap on and review your strategies. Learn from your failures. Often we tend to get stricken by some deadly internal enemies which Kartik Jhaveri details here.

Some of you guys would be rich enough not to be bothered about these mundane things. But have you ever given a thought that you are in a position to contribute to the nation's economy by being more efficient about your finances. Wealth has the unique ability to create more wealth. Are you using that power?

Before I move on, let me articulate the background to this financial literacy programme that I am so smitten about. The following facts and questions keep on humming in my mind:

1. Equities give the best returns and you are putting your money in a professionally managed corporate organisation. Compare this with your insurance products which give much lesser returns and your money is invested in the Government which is inefficient with your money, to say the least.
2. However the total AUM under Mutual Funds is about Rs 3.5 lakh crores while LIC alone manages funds worth more than Rs 6 lakh crore. Yes it's true that LIC has been there for over 50 years and has a huge distribution reach. But it has hardly tapped the huge insurance potential that India has.
3. Financial experts scoff at ULIP saying that it's very expensive compared to Mutual Funds. But LIC collected more than Rs 25000 crore in 2006-07 and it's total fund under ULIP is approx 40000 crore which is more than UTI's AUM of approx 39000 crore (since existence)

All this and more points to widespread financial illiteracy at all levels. Be it college grads, software geeks, MBAs, Engineers, even CFA/Economists( they are experts at business finance or government finance) and even Financial advisors (they rarely have a holistic view), everyone needs to be literate about his personal finances.

And there are over 700 mutual funds, 5000 stocks, 300 insurance policies and hundreds of other financial products to choose from!!

Interested! And the literacy programme that I have in mind will have the following details:

• Financial planning basics.
• Financial markets.
• Financial products like Mutual Funds, Stocks.
• Research reports, Financial analysis, technical analysis.
• Insurance : Basics, Company review, product review.
• ETF : Basics, Company review, product review.
• Bonds : Basics, Company review, product review.
• Tax Planning : Basics, product review.
• Retirement Planning : Basics, product review.
• Children's education. : Basics, Company review, product review.
• Calculators :Budgeting, Networth, Loan, Asset allocator, Risk analyser,etc.
  

Any suggestions. And if you are interested why don't you subscribe to my RSS feed or by email. And tell your friends too. I'll cover them one at a time. [ I need to learn them and then only I can share it with you :) ]

Btw, if your eyebrows are tensed up and you are thinking why I am making so much effort working on this financial literacy programme, I'll tell you my secret. It's for the website I dream of every day and night!! The site launches in August'07.

Common Sense Investing Book by Bogle

The Little Book of Common Sense Investing is an amazing book by John Bogle. Read this about the book you can buy on Amazon

Investing is all about common sense. Owning a diversified portfolio of stocks and holding it for the long term is a winner’s game. Trying to beat the stock market is theoretically a zero-sum game (for every winner, there must be a loser), but after the substantial costs of investing are deducted, it becomes a loser’s game. Common sense tells us—and history confirms—that the simplest and most efficient investment strategy is to buy and hold all of the nation’s publicly held businesses at very low cost. The classic index fund that owns this market portfolio is the only investment that guarantees you with your fair share of stock market returns.

To learn how to make index investing work for you, there’s no better mentor than legendary mutual fund industry veteran John C। Bogle. Over the course of his long career, Bogle—founder of the Vanguard Group and creator of the world’s first index mutual fund—has relied primarily on index investing to help Vanguard’s clients build substantial wealth. Now, with The Little Book of Common Sense Investing, he wants to help you do the same.

Some excerpts from the book:

• Index funds eliminate the risks of individual stocks, market sectors, and manager selection. Only stock market risk remains.
• Don't allow a winners game to become a loser's game.
• Fund investors are confident they can easily select superior fund managers. They are wrong.
• The stock market is a giant distraction.
• If the data do not prove that indexing wins, well, the data are wrong.
• It's amazing how difficult it is for a man to understand something if he's paid a small fortune not to understand it.
• The miracle of compounding returns is overwhelmed by the tyranny of compounding costs.

Reviews, Tips, Calculators with an Indian perspective.

How to Add Value To Your Money

Some readers are asking me about where to invest. I have been guarded with my answers and try to evade with the observation that since everyone has different financial goals and risk appetite and so my recommendations may not work for him/her.

But when my elder brother asked me the question, I did not have an escape route. And a responsibility too. After all I can't vanish from him after a year or so!! ;)

Btw, it's also important to note that this elder brother is an IIT(D)/IIM(A) guy and can't be taken for a ride! And also that the IIT/IIM guys also need proper financial advice!!

Let's take a look at some of the popular options available which are Bonds, Stocks, Real Estate, Mutual Funds, Unit Linked Insurance Policy (ULIP) and Exchange Traded Funds (ETF). Now I'll try to rate them on four parameters of investing. i.e. 1. Growth, 2. Liquidity , 3. Security and 4. Expenses

1. Growth: Stocks MFs and ETFs top the rankings here. Over a period of over 5 years, the CAGR is above 15% in comparison to 8% in Bonds. ULIPs begin to give a good growth only after 5 years or so because initially they are very expensive. Real estate is on a fairy run these days too.
2. Liquidity: Again, Stocks, MFs and ETFs score heavily while Bonds and ULIPs have a lock in period or have substantial surrender charges. Real estate scores low here (u have to be lucky to get good buyers at the right time)
3. Security: I would rate all of them at par over a long term of over 5 years. But you may get into a bad stock or real estate which are totally unsecured. Otherwise too, stocks and real estate are very volatile and can affect your blood pressure too!!
4. Expenses: ETF is the least expensive with charges of around 0.5% compared to 2% from MFs and much more in ULIPs (especially in the initial years). Stocks too are the least expensive provided you get into the right stocks at the right time.

Based on this short analysis, I would recommend ETFs. Read more about ETFs here. But as I said earlier too, one man's meat could be another man's poison. Moreover the diversification rule says that one should not keep all your eggs/ apples (for the veggy!!) in one basket. So let us take a look at the investment options, one at a time.

• Shares: Investing in the equity market directly is exciting and sexy. You are in the thick of things and learn many things in the process. Though the volatility and the information overload makes it a daunting task, investing in stocks is not rocket science. You can start with identifying a list of 10-15 companies out of 3-5 sectors which you know or which interests you. You can keep a tab on their management team, financials and future outlook and over a period of time, you will be able to take a call on them.
• Real Estate: I feel that one has to be plain lucky to get into a good deal and be able to get the right buyer at the right price and time. I can't think of any other factor other than luck. So if you feel , you are blessed and have the right tip, go for it. Otherwise, it's a no no.
• Mutual Funds: One should allocate time to investment decisions in proportion to our income generation goals. Also convenience and hassle free investing should be a major factor. Mutual Funds fit the bill where Fund Managers are into it full time. If you are able to identify fund managers who have consistently performed over last 3-5 years, nothing like it. The fund manager also has the muscle power of crores of Rupees and is able to take entry and exit decisions impartially. MFs continuously churn their portfolio. When MFs buy and sell stocks, they don't have to pay capital gains as you do when you churn. With Systematic Investment plans (SIP), you can start investing with as low as Rs 500 per month. But MFs have its own loading and administrative charges and the fund managers make merry on your hard earned money.
• Exchange Traded Funds: While the index fund has given a one-year return of 42%, diversified equity schemes (MF) could only come up with 34% returns. Diversified equity funds usually have large expense ratios compared to index funds. For example, the expense ratio of Banking BeES, an index fund, is only 0.45, while it is anywhere between 2-2.50% for diversified equity schemes. That's why I recommend ETFs.
• ULIPs: Unit linked insurance policies combine two products, i.e. Insurance and Mutual Funds. In the initial few years, ULIPs are damn expensive. But in case you don't want any hassles of investing, you have a tried and tested Insurance agent who is almost part of your family then ULIPs are for you.
• Bonds: For those of you who are risk averse.

U can also read more on Mutual Fund, Equities, ULIPs.

Your comments help me in arranging my thoughts in a better way. I would like to post more detailed analysis on each of these and also spell out the steps to be taken.

Interested? Why don't you subscribe to my posts by email or RSS feeds

Reviews, Tips, Calculators with an Indian perspective.

Insurance Companies Beat Mutual Funds in Their Own Game

ULIP is a bestseller today. Unit Linked Insurance policy is an insurance policy where the funds are invested in the Capital market and the policyholder bears all the investment risks.

Insurance companies are falling over each other to bring out ULIPs in new and attractive packages, thanks to it being accepted across India in huge numbers. More than 80% of the new premium income of Insurance companies come from ULIPs today.

But shouldn't this product be left to Mutual Funds who have been dealing with investments in the capital market with much more transparency and disclosures? Well, the Insurance companies have only added the insurance angle and are charging separately for that too.

Let's look at the charges for investing in a ULIP. Generally, a Mutual Fund charges 2.5% as entry load and 1-2% as Fund Management charges.

1. Premium allocation charges: Companies charge from 5% to 70% as premium allocation charges in the first year. Ofcourse it comes down in the second and third year but still is substantial. This means that only the balance percentage will be invested in funds and the charge goes into commission and other administrative charges.
2. The Mortality Charge of the Life Insurance Coverage: This is common for all the companies and depends on their mortality table.
3. Fund Management Charge ranges from 0% to 2% depending on the Insurance company.
4. Policy Administration Charges
5. Sum Assured charge
6. Surrender charges

Last but definitely not the least, the commission ranges from 10% to 32% for your friendly advisor. Companies also run schemes where they take high performing advisors to Singapore, Brazil et al.

And the investors will be taken to the cleaners!!

Reviews, Tips, Calculators with an Indian perspective.

MONKEY Mutual Funds

DNA has an interesting article on naming a MF: Naming funds is a monkey business. Some excerpts.....

Fifteen cigarettes into the morning and it was still eluding Ravi. He had to come up with a name for the new mutual fund scheme his asset management company (AMC) was about to launch.

The AMC planned to launch an equity scheme, which was similar to some of its existing ones. To make it look different, and comply with the regulatory requirement of a scheme being genuinely different, they had planned to make it closed-ended for three years and open-ended thereafter. But his boss now wanted another level of differentiation built in - an interesting name!

Ravi’s suggestion that they call it the Multiple Opportunities in a New Knowledge Economy Fund (M.O.N.K.E.Y.) had been rejected on the ground that it did not sound serious enough.

I guess the name is the only differentiator among the MFS rushing in. My views on MFs can be seen here



Reviews, Tips, Calculators with an Indian perspective.

More Disclosures Wanted from Mutual Funds in India

Open letter to SEBI by Personalfn.com, a financial planning initiative. It can be reached at info@personalfn.com. I have their permission to reproduce the article.

Dear Mr. Chairman:

The fact sheet of a mutual fund scheme that is released by its Asset Management Company (AMC) is a vital source of information for investors. However, in our view, the information provided by AMCs in these fact sheets is often inadequate and/or incoherent.

At Personalfn, we have always championed the cause of investors. To that end, we present a wish list for disclosure of information in mutual fund fact sheets.

1. Expense ratio The ratio represents the expenses charged by the AMC to the mutual fund for various purposes like investment fees, marketing and selling expenses including agents’ commission and transaction costs among others. These expenses eat into the returns clocked by the investor; expenses in fact have a very significant impact on long-term returns of the scheme. Given its importance, the expense ratio should be published in the fact sheet every month. At present only a handful of AMCs follow such a disclosure policy.

2. Portfolio turnover ratio The portfolio turnover ratio is a measure of how frequently stocks have been bought and sold by the fund manager. The same can offer investors an insight into the fund manager’s investment style. Of course, a higher ‘churn’ also has an implication on the expense ratio. There is a need to ensure that AMCs disclose portfolio turnover ratios in the monthly fact sheet. More importantly, the same needs to be computed in a standard manner. Among the AMCs that choose to reveal portfolio turnover ratios, some make use of a rolling 12-Mth period for the computation, while others consider the financial year as the starting point.

3. Average portfolio maturity It is common to find debt fund fact sheets mentioning the portfolio’s average maturity. As the name suggests, the figure denotes the time to maturity for all the debt instruments in the fund’s portfolio expressed as an average. Conversely, there are others which simply mention the duration (the unit for which is a time period i.e. days/months as well). However, duration (albeit vital) is a distinct measure from the average portfolio maturity. Duration is the tenure for which a portfolio of bonds or a bond must be held, for the investor to be immune to interest rate changes. There is a need to ensure that all debt funds disclose both their average maturities and durations in their fact sheets. Also a standard computation method must be followed so that investors can conduct a meaningful comparison between like schemes across fund houses.

4. Fund manager profile The fact sheets should unambiguously declare the fund manager responsible for every mutual fund scheme along with his profile. Similarly, the period for which he has been managing the given scheme should be mentioned as well. This will prove particularly relevant in situations wherein a successful fund manager, who was responsible for an impressive performance, has been replaced by another fund manager. Investors who are about to get invested in the scheme based on its track record, should be made aware that a new fund manager is now in charge.

5. Is the fund manager invested in the scheme? It is always comforting for consumers to know that the “cook eats his own cooking”. Similarly, a fund manager investing in a fund managed by him can be source of confidence for investors. The monthly fact sheet should have a disclosure in terms of whether or not the fund manager is invested in the scheme.

6. Unambiguous investment objectives Investment objectives like “to achieve log-term capital appreciation” are commonplace in the mutual funds segment. Such objectives are inconclusive and offer no aid to a prospective investor who is contemplating investing in the fund. An ideal investment objective must be unambiguous and comprehensive.
For example, the objective could read, “a growth-styled fund, the fund aims to achieve long-term capital appreciation by investing predominantly (at least 70% of assets) in stocks from the large cap segment. Long-term being defined as at least 5 years and companies with a market capitalisation of over Rs 50 bn (Rs 5,000 crores) at the time of investment qualifying as the large cap segment. The fund can also invest upto 30% of its assets in debt/money market instruments for defensive considerations”.

A rigidly defined investment objective ensures that the investor is decidedly aware of the investment proposition offered by the fund and can make an informed investment decision. The regulator should make this mandatory. Furthermore, the Board of Trustees can at preset time intervals (say semi-annually) offer their comments on the AMC’s adherence/success in achieving the stated investment objective.

7. Portfolio disclosure AMCs have increasingly stopped disclosing entire portfolios in their fact sheets (the printed versions, which are sent to investors). For example, in the case of equity funds most fact sheets simply reveal the top 10 stock holdings. So the fact sheet for an equity fund which holds say 50% of net assets in the top 10 stock holdings doesn’t reveal half the portfolio. Similarly there is also a case for more meaningful disclosure. Related sector holdings can be clubbed to reveal the true diversification levels in the fund’s portfolio. For example, holdings in related sectors like Auto and Auto Ancillaries can be clubbed and shown under a common heading i.e. Auto.

The regulator should make it mandatory for schemes to disclose their complete portfolios and also to follow a standardised classification of companies into sectors.

We believe that the inclusion of the aforementioned disclosure norms will go a long way in furthering the cause of investor empowerment.

Reviews, Tips, Calculators with an Indian perspective.

Discussion on Buying a Mutual Fund

This is a repost 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
Link: http://financexchange.blogspot.com/2006/10/nav-factor.html

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?




Reviews, Tips, Calculators with an Indian perspective.

Mutual Funds v/s Direct Stocks Investing

Investing in the equity market directly is exciting and sexy. You are in the thick of things and are able to take responsibility for yourself. Though the volatility and the information overload makes it a daunting task.

How about investing through Mutual finds? Doesn't it have its own loading and administrative charges and the fund managers making merry on your hard earned money? And can't we see the best performing mutual funds and follow their portfolio?

Here are some points to ponder:

• We should allocate our time to investment decisions in proportion to our income generation goals.
• Convenience and hassle free investing should be a major factor.
• Fund managers are into it full time. If we able to identify fund managers who have consistently performed over last 3-5 years, nothing like it.
• The fund manager also has the muscle power of crores of Rupees and is able to take entry and exit decisions impartially.
• MFs continuosly churn their portfolio. When MFs buy and sell stocks, they don't have to pay capital gains as you do when you churn.
• We are likely to panic over market crashes. MFs can take advantage of a crash!
• With Systematic Investment plans (SIP), you can start investing with as low as Rs 500 per month.

There is another financial product called ETF: Exchange Traded Funds. They are the least expensive and manage themselves on their own.

Take your call.