How to earn better returns from your MF portfolio

Pick up any mutual fund portfolio of an active investor and you will usually find it beset with typical problems. These can affect the overall performance. If we can understand, identify and rectify these common blunders, we can make much better returns out of our money.
A bloated Portfolio
Many people have the habit of collecting funds. Over time, therefore, you will find such portfolios having 40-50 funds. Diversification is good, but over-diversification is not.
Firstly, a large portfolio would mean that some funds in the portfolio will always be below-average, thus dragging down your total returns. Secondly, even with all the support of the computers and specialized websites, it is not possible to effectively manage a large portfolio. This again is going to impact the performance on the whole.
One should, therefore, have a limited but power-packed portfolio. The idea is to extract maximum punch with minimum cost and effort.
Chasing the Top Performers
There is too much focus on the performance and that too usually the recent one say over 3 months to 1 year. That’s why you always find this fascination among people for fund rankings.
Of course, performance matters! But making performance (and that too short-term) as the sole selection criteria can prove counter productive.
Historical evidence shows that no fund can always remain the top performer. It also shows that a fund, which has been consistently amongst the top quartile say over 3-5 years, will usually continue with its’ good performance. Similarly, a consistently poor performing fund usually finds it difficult to make it to the top.
Besides this the markets, as we all know, are highly sentiment-based. Therefore, more often than not, you will find some theme or the other being market fancy. It could be infrastructure, mid-caps or technology and so-on. At any given time you will find that most of the top performers belong to the same category.
So if you chase top performers you will end with similar schemes in your portfolio. In the process, the portfolio becomes concentrated, defeating the very idea of using MFs to diversify one’s investment.
Your focus should not only be the past performance but also reputation & management of the AMC, fund’s investing style & focus, asset size, etc., besides of course, other key factors such as your investment horizon, risk appetite and other funds in your portfolio.
Mismatched and Unbalanced
It is but natural that the money you need in the short term should be in debt, while only the long term money should be in equity. Liquidity apart, your asset allocation between debt and equity should be in line with your risk appetite.
Some people of course do not do so. Some others start in planned manner. But, as equity and debt follow different paths, over time the portfolio will become mismatched and unbalanced.
As such you may either be over-exposed to equity thus increasing risk; or under-exposed thus losing out on the benefits of equity.
Or a liquidity mismatch may happen between the investment and your need. For example equity markets may be down when you need money, thus forcing you to sell at a loss.
Thus your portfolio needs timely review and correction in tune with your risk appetite & liquidity needs.
Infested with NFOs
Thousands of pages have been devoted to pointing out the myth of NAV. Yet the logic that NAV has absolutely no bearing on the future returns, simply does not register with a common investor.
Hence one can see thousands of crores flow into NFOs especially in a bull market, while the existing funds get practically nothing. In fact, it’s the opposite. People switch out of existing schemes to invest in NFOs under the false impression that Rs.10 NAV fund is cheaper.
As such a typical portfolio would be infested with NFOs. Higher costs in NFOs vis-à-vis existing funds will eat into the returns. Also as the so-called low NAV is why you invested in the NFO, it is quite likely that the fund’s style and focus does not fit with your needs. This also is going to hamper your returns.
Too Much Churning
Call it impatience or a false sense of being proactive or the instant-culture - we simply cannot wait and watch our portfolio grow. We always feel that we need to do something regularly.
Therefore, as soon as a fund shows good appreciation, we are quick to book profits. Or if a fund does not move for some time, we are equally prompt to dump it. This, for one, is adding to the costs in terms of capital gains taxes, entry loads, exit loads, STT, etc. But more importantly, we may be getting out too soon and thus missing out on future performance.
For example, I know investors who want to exit from some funds whose focus is on smaller or mid-sized companies. Now these are the funds, which usually will take time to show returns. It’s quite logical. A Bharti or a Suzlon or an Infosys did not become big in one day. Similarly, who knows how many such future stars are there in these funds? If we wait for 3-5 years, many such budding companies will blossom into beautiful flowers and give us super-normal returns. The question is – are we willing to wait for it?
Building and maintaining a well-diversified and balanced portfolio is no rocket science. All it needs is common sense and discipline to act prudently, promptly and purposefully.

Rajesh Nair

CEO RajRak Investment Advisors

TIME TO STICK WITH YOUR MUTUAL FIND SIP's

I read a very interesting article in the morning newspaper today SOS -SAVE OUR STOCKS".
There's an eerieness about October.'24, something that the children of the bull market can never sense. The crash of 1929 began on the same day that year & eventually led the the Great Depression. Almost 79 years later, the world is haunted by a similar spectre. Blows from stock losses are slowly giving way to a strange fear of job loses. The drop in markets across continents simply mirrors these concerns.
The Indian market has tanked & SENSEX was down 1070 points. The SENSEX & NIFTY fell somewhere between 11-12% on Friday, as signs of pain in the real economy become evident. The talks doing the rounds is no longer just about slowing corporate earnings in fact, the bigger fear now is corporate defaults, which will then hit the banks which have lent big to these corporates.
Investors who were invested in Mutual Fund schemes fearing the worst have pulled out their money & those who has not were thinking to do so now so save at whatever remains. The investors who know they can not lose anything from here are staying back & are infact increasing their Mutual Fund exposure but staying put in SIP's or increasing the SIP's that they had. In fact at the current market situation they will be buying at lower NAV's & getting more units for lesser NAV's. The markets are going to bounce back for sure, maybe not in in the immediate terms but in the near future. Those with high risk appetite will certainly stay invested & make money in turnaround. Digest the current & wait for the turnaround.
Happy investing
RAJESH NAIR
The author is CEO, RajRak Advisors. He can be reached at rajeshnair72@gmail.com

Why Lehman Bros. & Merrill Lynch fell

Why Lehman Bros. & Merrill Lynch fell

IT all began with the sub-prime issues
If you lost your money in the market crash of January 2008, here's the route to your loss, in chronological order.

2001-2005: House prices in the US begin to rise rapidly. Banks lend aggressively and create a sub prime industry.

Sub-prime lending refers to lending (at slightly higher interest rates) to people who may not be eligible for a loan under normal circumstances. Maybe they don’t have a regular job or income, or have defaulted in the past.

Banks traditionally did not lend to such people due to high risk of default. But since these loans were mortgaged against property and property prices were rising continuously, banks started doing so. If customers defaulted, they could sell the mortgaged property.

2005: The booming housing market halted abruptly in many parts of the US.

2006: Prices are flat, home sales fall.

February 2007: Sub-prime industry collapses in the US; more than 25 sub-prime lenders declare bankruptcy, announce significant losses, or put themselves up for sale.

While they were lending, banks did not factor in the possibility of a fall in property prices. When the Federal Bank (the US equivalent of RBI) started increasing interest rates, the sub-prime borrowers started defaulting and banks started selling off the mortgaged properties. As more and more properties came into the market for selling, the property prices fell.

August 2007: Many leading mortgage lenders in the US filed for bankruptcy

March 2008: Bear Sterns falls.

September 2008: Lehman Brothers file for bankruptcy. Merrill Lynch sells off to Bank of America.

Between 2001 and 2006, the US financial markets had developed a new product – a bond securitised against the mortgages.

In simple terms it means that the mortgage banks borrowed money against the mortgages on the condition that they would repay to lenders as soon as they recovered their mortgages. The lenders in this case were financial institutions (like Bear Sterns, Lehman and Merril Lynch) who in turn sold retail bonds to individuals.

Sadly, the repayment never happened. And institutions like Bear Sterns, Lehman, Merrill Lynch and AIG were the casualties. Since the mortgages were not honoured, the banks could not repay these financial institutions who in turn could not repay retail investors.

4 Golden Rules of Equity Investing

If you want to invest in equities, there are only four things you need to remember.

1. Choose the right company
Look for superior and profitable growth. The company should earn at least 20% return on its shareholders’ capital.

Ideally a long-term investment perspective (more than five years) allows you to participate in the company’s growth. At the short end (3-6 months), share performance is driven more by market sentiment and less by company fundamentals. In the long run, the relevance of the right price diminishes.

2. Be disciplined
Stock investing is a long, learning experience. You will make mistakes, but also learn from them. Here is what you can do to ensure a smooth ride.

• Diversify your investments. Do not put more than 10% of your corpus in one stock, even if it’s a gem. On the other hand, don’t have too many – they become difficult to monitor. For a passive long long-term investor, 15-20 is a healthy number. Use this asset allocation tools to find out if you need to invest beyond equities
• Research and analyse your company's performance through quarterly results, annual reports and news articles.
• Get a good broker and understand settlement systems
• Ignore hot tips. If hot tips really worked, we'd all be millionaires.
• Resist the temptation to buy more. Each purchase is a new investment decision. Buy only as many shares of one company, as fits your overall allocation plan.

3. Monitor and review
Regularly monitor and review your investments. Keep in touch with quarterly results announcements and update the prices on your portfolio worksheet at least once a week. This is more important during volatile times when there can be great opportunities for value picking! Find out how you can buy Re.1 coins at 50 paise

Also, review the reasons you earlier identified for buying a stock and check whether they are still valid or there have been significant changes in your earlier assumptions and expectations. And use an annual review process to review your exposure to equity shares within your overall asset allocation and rebalance, if necessary. Ideally, revisit the Risk Analyser at every such review because your risk capacity and risk profile could have undergone a change over a 12-month period.

4. Learn from your mistakes
When reviewing, do identify and learn from your mistakes. Nothing beats first-hand experience. Let these experiences register as `pearls of wisdom' and help you emerge a smarter equity investor.

Rajesh Nair

CEO -RajRak Investment Advisors

What is a Mutual Fund SIP

What type of a mutual fund is a SIP?"

I was taken aback by this question before I realised the person posing it thought a SIP was a type of mutual fund.

Unfortunately, many new investors seem to be under this misconception.

A Systematic Investment Plan is not a type of mutual fund. It is a method of investing in a mutual fund.

Here's to coming to terms with -How you can invest in a mutual fund

There are two ways in which you can invest in a mutual fund.

1. A one-time outright payment

If you invest directly in the fund, you just hand over the cheque and you get your fund units depending on the value of the units on that particular day.

Let's say you want to invest Rs 10,000. All you have to do is approach the fund and buy units worth Rs 10,000. There will be two factors determining how many units you get.

Entry load

This is the fee you pay on the amount you invest. Let's say the entry load is 2%. Two percent on Rs 10,000* would Rs 200. Now, you have just Rs 9,800 to invest.

NAV

The Net Asset Value is the price of a unit of a fund. Let's say that the NAV on the day you invest is Rs 30.

So you will get 326.67 units (Rs 9800 / 30).

2. Periodic Investments

This is referred to as a SIP.

That means that, every month, you commit to investing, say, Rs 1,000 in your fund. At the end of a year, you would have invested Rs 12,000 in your fund.

Let's say the NAV on the day you invest in the first month is Rs 20; you will get 50 units.

The next month, the NAV is Rs 25. You will get 40 units.

The following month, the NAV is Rs 18. You will get 55.56 units.

So, after three months, you would have 145.56 units. On an average, you would have paid around Rs 21 per unit. This is because, when the NAV is high, you get fewer units per Rs 1,000. When the NAV falls, you get more units per Rs 1,000.

Here are some FAQs on the SIP

1. Is there a load?

An exit load is a fee you pay the fund when you sell the units, just like the entry load is a fee you pay when you buy the units.

Initially, funds never charged an entry load on SIPs. Now, however, a number of them do.

You will also have the check if there is an exit load. Generally, though, there is none. Also, if there is an entry load, an exit load will not be charged.

An exit load may be charged if you stop the SIP mid-way. Let's say you have a one-year SIP but discontinue after five months, then an exit load will be levied. These conditions will wary between mutual funds.

2. What is the minimum investment?

If you do a one time investment, the minimum amount that you have to invest is Rs 5,000.

If you invest via an SIP, the amount drops. Each fund has their own minimum amount. Some may keep it at least Rs 500 per month, others may keep it as Rs 1,000.

3. How often does one have to invest?

It would depend on the fund.

Some insist the SIP must be done every month. Others give you the option of investing once in three months or once in six months.

They also give fixed dates. So you will get the option of various dates and you will have to choose one. Let's say you are presented with these dates: 1, 10, 20 or 30. You can pick any one date.

If you pick the 10^th of the month, then on that day, the amount you have decided to invest in the fund has to be credited to your mutual fund.

4. How must the payment be made?

You can opt for the Electronic Clearance Service from your bank; this means the mutual fund will, as per your instructions, debit a certain amount from your account every month.

Let's say you have a SIP of Rs 1,000 every month and you have chosen to invest in it on the 10^th of every month. Under this option, you can instruct your mutual fund to directly debit your bank account of Rs 1,000 on the due date.

If you don't have the required money in your account, then for that month, no units will be allocated to you. But, if this continues periodically, the mutual fund will discontinue the SIP. You need to check with each mutual fund what their parameters are.

Alternately, you can give cheques to your mutual fund. In this case, they may ask for five Post Dated Cheques upfront with your first investment.

Since these cheques are dated ahead of time, they cannot be processed till the date indicated.

5. Must I state for how long I want the SIP?

Yes. You will have to state whether you want it for a year or two years, etc. If, during the course of this period, you realise you cannot continue with the SIP, all you have to do is inform the fund 15 days prior to the payout.

The SIP will be discontinued. You can continue to keep your money with the fund and withdraw it when you want.

6. Do all funds offer SIP?

No. Liquid funds, cash funds and floating rate debt funds do not offer an SIP. These are funds that invest in very short-term fixed-return investments. Floating rate debt funds invest in fixed return investments where the interest rate moves in tandem with interest rates in the economy (just like a floating rate home loan).

All types of equity funds (funds that invest in the shares of companies), debt funds (funds that invest in fixed-return investments) and balanced funds (funds that invest in both) offer a SIP.

7. Tax implications

Let's say you have invested in the SIP option of a diversified equity fund.

If you sell the units after a year of buying, you pay no capital gains tax. If you sell if before a year, you pay capital gains tax of 10%.

Let's say you invest through a SIP for 12 months: January to December 2005. Now, in February 2006, you want to sell some units.

Will you be charged capital gains tax?

The system of first-in, first-out applies here. So, the amount you invest in January 2005 and the units you bought with that money, will be regarded as the units you sell in February 2006.

For tax purposes, the units that you sell first will be considered as the first units bought.

8. How will an SIP help?

When you buy the units of a fund, you may do so when the NAV is really high. For instance, let's say you bought the units of a fund when the bull run was at its peak, leading to a high NAV.

If the market dips after that, the value of your investments falls and you may have to wait for a long while to make a return on your investment. But, if you invest via a SIP, you do not commit the error of buying units when the market is at its peak. Since you are buying small amounts continuously, your investment will average out over a period of time.

You will end up buying some units at a high cost and some units a lower price. Over time, your chances of making a profit are much higher when compared to an one-time investment.

Rajesh Nair

CEO RajRak Advisors

Pune