Thursday, January 18, 2018

‘C’ Is For Crypto-currency

What are cryptocurrencies and how have they become so valuable?Click on the link below to read ...

The article carries my quote, too.


‘C’ Is For Crypto-currency

Wednesday, January 17, 2018

Beware of framing, as it affects behavior



Is the glass half-full or is it half-empty? We have grown up with this question. It is said that an optimist sees the glass half-full, whereas a pessimist sees it otherwise.

However, look at the other way. Instead of just seeing the glass, what would happen if you have to explain about this point on optimism/pessimism to someone? Psychologists have done various experiments on questions similar to this and concluded that the way you present a message can change its interpretation.


Monday, January 15, 2018

Mutual funds to participate in commodities derivatives - will it help?

Some time back, SEBI issued a consultation paper inviting comments from the public on permitting mutual funds and portfolio managers to participate in commodity derivatives market. 

Click here to read further ... 

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The English translation is as under:


Some time back, SEBI issued a consultation paper inviting comments from the public on permitting mutual funds and portfolio managers to participate in commodity derivatives market.
Currently mutual funds are permitted to participate in equity and interest rate derivatives markets. Many funds have taken advantage of this provision by launching various products, e.g. arbitrage funds, dynamic funds and equity savings funds.
As per the present regulations, the only commodity that mutual funds can invest in is gold. Mutual funds have launched gold ETFs (Exchange Traded Funds). And gold savings funds.
The recent consultation paper issued by SEBI seeks to allow mutual funds to launch schemes not just investing in silver, but also many other commodities.
One of the highlights of the consultation paper is the positioning of commodities as an asset class that has low correlation with equity markets, as can be seen from the table below:
The above table is taken from point no. 4 of the consultation paper.
As can be seen, all the commodities mentioned here have a negative correlation with equity markets. Even among the commodities, the correlation is quite low, especially between gold and crude or between gold and copper. This provides for good diversification. This could be one of the most important uses of commodity derivatives markets for the mutual funds.
If the proposal goes through, we may soon see many mutual fund launching either pure play commodities funds or asset allocation schemes that can offer a diversified portfolio.
The second use of derivatives could well be in the form of arbitrage opportunities. Many of you must be familiar with the arbitrage mutual fund schemes, which take the advantage of arbitrage opportunities between cash equity markets and the equity derivatives markets.
These provisions may also mean a lot for the commodities derivatives markets, which do not have a large institutional presence so far. If these proposal go through, we may see a different commodities derivatives market, too.
It is important to note here is that this is just a consultation paper, seeking feedback from the investors as well as market participants, and not a regulation.
 

Monday, January 1, 2018

If you choose right, mutual funds sahi hai ...


In the last article, we saw that many investors are flocking to mutual funds since the interest rates on fixed deposits have come down. So often, the investors do not understand the risks and invest in equity related mutual fund schemes, while shifting money out of fixed deposits, where the risk levels are very different.
Someone wrote to us asking if the money may be shifted from fixed deposits to debt mutual funds. Good idea. Both debt mutual funds and fixed deposits may appear to have similar risk profile as both are debt assets. However, it would be important to understand whether such an assumption is safe enough. ...
Click on the link below to read my article on this subject
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The English translation is as under:

In the last article, we saw that many investors are flocking to mutual funds since the interest rates on fixed deposits have come down. So often, the investors do not understand the risks and invest in equity related mutual fund schemes, while shifting money out of fixed deposits, where the risk levels are very different.
Someone wrote to us asking if the money may be shifted from fixed deposits to debt mutual funds. Good idea. Both debt mutual funds and fixed deposits may appear to have similar risk profile as both are debt assets. However, it would be important to understand whether such an assumption is safe enough.
The big difference between debt mutual funds and bank fixed deposits is the flexibility of investing. In case of fixed deposits, the tenure is fixed, which means money is invested in a fixed deposit for a predefined time period. On the other hand, an open-ended fixed income fund (or debt fund) does not have a fixed term and hence money can be invested in a debt fund for any time horizon. In the same scheme of a debt fund, an investor may come in for one year, whereas another might have invested for two years. This has some major implications: each fixed deposit is treated as a unique product, whereas debt funds are pooled investment vehicles.
When investors can come in and get out of the scheme on any business day, there must be a mechanism to offer fair price to each. This price is linked to the NAV of the scheme, which is calculated on a daily basis. Since the NAV is dependent on the daily market prices of the securities in which the scheme has invested, the same may be subject to fluctuations as per the investments made.
This exposes a debt fund investor to daily fluctuations. Due to this, the investment returns are unpredictable for an investor in a debt fund. On certain occasions, some schemes may also see drop in the NAV for brief periods of time – yes, it is true even for debt funds. (We have written about this in some of our earlier articles and hence one should take care to choose a debt fund scheme that is appropriate for one’s situation).
An investor does not witness such uncertainties or fluctuations in a bank fixed deposits. An investor coming in a debt fund must understand this.
This is where it becomes crucial to understand that all mutual funds are not the same, and also that all debt funds are not the same. There are various types of debt fund schemes, suitable for different needs of investors. If you make a proper choice, there are reasonably good chances that you would get good results.
Knowledge is power – understand debt funds and then invest. After all, if you understand and choose well, mutual funds sahi hai.

Wednesday, December 27, 2017

Habits of successful financial advisors

Most financial advisors and mutual fund distributors recommend their clients to start investing once they identify their life’s goals. Why should it be any different for the financial advisors?...

Read my article entitled "Habits of successful financial advisors" on www.cafemutual.com 

Monday, December 18, 2017

Mutual funds sahi hai, but when?

The AMFI campaign "Mutual funds sahi hai" is making waves. Many investors are seriously looking at mutual funds. However, what is disturbing about this is that some investors may be coming in mutual funds with unreasonable expectations.
While mutual funds sahi hai, but it is important to understand when. Read my article published in Mid-day Gujarati edition today.

The English translation of the same is as under:



Interest rates have come down in the recent past. This has also impacted the fixed deposits in the banks. With such reduction in the interest rates, many are now looking for alternative investment avenues as their fixed deposits mature. In such a scenario, mutual fund has appealed to many such investors as the investment option of choice. As the industry advertisement goes, “Mutual funds sahi hai!”
However, what is disturbing about this is that some investors may be coming in mutual funds with unreasonable expectations.
There are still many out there, who do not understand what a mutual fund is. It just appears to be yet another investment option, and it can deliver high returns only because it has done so in the past. This is the problem. A lot of mutual fund schemes have, over the long term, delivered returns far in excess of what fixed deposits have done. It is important to understand the schemes before taking a decision solely based on historical returns.
As we have already mentioned earlier, mutual fund is a vehicle that helps you invest in various securities – these could be equity, fixed income, money market or even a commodity like gold. Mutual fund by itself is not an investment avenue, but it is an investment vehicle.
This background is important to understand as some of the investors mentioned earlier are unknowingly shifting their money from fixed deposits to equity mutual funds – thus taking risk they may not be in a position to handle.
Equity has the potential to deliver superior returns in comparison to fixed deposits. However, such returns have come with a lot of ups and downs along the way. Any investor must understand this. In case one needs money when the values are down, you may end up getting less than the amount invested. Even when you may not need money for a long period, seeing your investments losing value for extended periods of time could be hugely challenging.
While mutual funds are good investment vehicles, one must understand what one is getting into and only invest in schemes based on one’s own unique requirements. If you are unable to find the schemes suitable for you, take professional help.