Monday, September 29, 2014

Don't break down after a mid-career break

Taking a break or thinking of taking a break?

Differentiate between asset and liquidity: 'I have a house and a couple of properties as back-up' is a very common comfort for people who want to take a break. But, as Trivedi puts it, it is important to differentiate between asset and liquidity. If there is a problem, the should not be to sell a property or jewellery to continue with the venture. Importantly, selling a property isn't quite easy. A property deal will take its own sweet time to go through. Also, if the buyers/brokers realise that the property is being sold by someone in desperation, you may not get the right price. It is important to ensure that you have money in the bank or liquid funds or other safe instruments that will provide you with liquidity during the emergency period.

Monday, September 22, 2014

Understanding close-ended mutual funds

My article published in Mid-day Gujarati, Mumbai edition today.

The English translation is as under:

“Should I invest in this new mutual fund scheme?” Someone asked me the other day. This person was referring to the launch of a New Fund Offer (NFO) of a close-ended mutual fund scheme. This is not unusual. So many investors worry about investment decisions and tend to check on the schemes being heavily advertised. This may result into them missing out on some good schemes only since these are not advertised enough and information may not be easily available.
Let us come back to the NFO of this scheme. We have dealt with NFOs in one of our earlier articles. However, this time we are looking at NFO of a particular category of mutual funds, the close-ended funds.
To make it simple to understand, let us start with the difference between the terms (tenure) of these two categories of funds – open-ended funds and close-ended funds. The open-ended funds do not have a specific date of maturity, whereas the close-ended funds have. This means, these funds are wound up after a particular date (the maturity date) and the money is returned to the fund’s investors. On the other hand, the open-ended funds continue to operate perpetually.
Close-ended funds differ from the open-ended funds in offering liquidity to the investor. In case of open-ended funds, an investor has the facility to get out of the scheme on any business day. This can be done through submission of a redemption request with the fund house. Close-ended fund do not offer such a redemption facility. However, SEBI has made it mandatory to offer an exit route for the investors through the stock exchanges. This means, the units of close-ended funds have to be compulsorily listed on a recognized stock exchange. At this stage, it must be clarified that listing on a stock exchange does not mean liquidity, which is a function of the trading activity in the units of a specific fund on the stock exchange. Experience suggests that there is hardly any liquidity in the units of close-ended funds.
Where do these funds invest? Well, the mutual fund companies have launched various kinds of close-ended funds – equity funds, debt funds and hybrid funds (those that invest in both equity and debt).
The close-ended funds investing in debt are popularly known as FMPs or Fixed Maturity Plans. These funds are often used in lieu of fixed deposits simply as the mutual fund schemes have a slight advantage over fixed deposits – the returns are more tax-efficient. Though the last budget reduced some of the tax advantages to these schemes, these are still better if the investment is for more than 3 years.
The hybrid funds come in mainly in the “capital protection oriented” structure. In such funds, the primary objective is to protect the investor’s capital over the term of the fund. The second objective is to generate returns higher than traditional fixed income products. However, since these are close-ended funds, the equity component must generate superior returns exactly matching the term of the scheme for the secondary objective to be fulfilled.
The equity funds need more attention. Many investors prefer to invest in these schemes with certain assumptions: (1) this is an NFO, and (2) a close-ended fund offers better flexibility to the fund manager since there would be no redemptions. Distributors prefer to sell these schemes due to high commission income. All these reasons may not be correct. An NFO does not mean better investment performance. History does not support the argument that close-ended funds are able to outperform their open-ended counter-parts.
On the whole, it is always advisable to avoid these schemes considering the lack of liquidity. The funds with equity exposure – equity funds or hybrid funds – suffer from the fact that one does not know exactly over what period the equity would generate good returns. Equity, as an asset class, is always unpredictable – this must never be forgotten.
- Amit Trivedi
The author runs Karmayog Knowledge Academy. The views expressed are his personal opinions. He can be reached at

Monday, September 8, 2014

What is the greatest safety feature in an investment?

Below is the link to my article in Mid-day Gujarati, Mumbai edition today:

The English translate is as under:

What is the greatest safety feature in an investment?
One of the most important safety features for any investor would be to be able to get timely information and the ability to out of the investment, if required. A mutual fund offers these two benefits – transparency and liquidity.
Let us look at some incidents to understand the point.
One fine morning in 2001, people of a particular city opened the newspaper to read about problems at a particular co-operative bank. Those who had deposits with this bank, immediately rushed to the nearest branch. The branch never opened. Here the information was available, but just a little late and the investors could not take any action.
Then, in the year 2009, a certain company reported to the stock exchanges that a large sum of money was missing in their bank accounts and the management had misrepresented the company’s accounts. The information was immediately flashed across the stock exchange terminals and the media. People rushed to sell the stocks they held, but the price went down by 90% in one trading session. The information was available in time, and people could act, too. But what did they get? The impact on the price was too much for the investor to feel any good about the transparency and liquidity.
What is the point in getting such information? Well, this is where mutual fund scores over all the other avenues.
The transparency that you get from mutual fund allows you to take a decision to invest in a particular scheme, monitor the progress of your investment, and periodically check if your investments are aligned to what you understand the scheme would do.
The question is, what happened to the share price of the company mentioned above – can that not happen in case of mutual funds? The good news is, “no, such a thing cannot happen to mutual funds.” Why? This is because an investor in a company is directly participating in the fortunes of the company. Hence, if the company performs well, the shareholder gains, but if the company fails, the shareholder loses. However, in case of a mutual fund, the investor hires the services of a professional fund manager. The failure of a fund manager would result in poor portfolio performance. However, the impact may not be as much as that of a poor manager can have on a company’s stock, since a mutual fund portfolio is diversified into many unrelated securities.
While bad judgment of the management may lead to collapse of the company, bad judgment of the fund manager would result into underperformance. Collapse of a company may mean total loss of investment, but scheme underperformance still allows the investor to get out of the scheme and get into something else. Since the scheme holds various investments, the exit of the investor would not impact the prices of the fund’s investments. And hence the 90% drop we discussed earlier will not happen in case of mutual fund scheme.
Consider this combination of transparency (availability of relevant information in time) and liquidity (ability to act on this information) before choosing your investments. You will find that no investment avenue comes anywhere close to mutual funds on this count.
-        Amit Trivedi
The author runs Karmayog Knowledge Academy. Views expressed here are his personal views.


Thursday, September 4, 2014

Should you book profit when market hits record high?

One has to be careful not to sound like predicting the downfall of the market or a further rise, since one does not know the future. Experience suggests that many times, the listener does not listen to what you say and interpret the way you intended it, but they listen and interpret statements from their frame of reference.

Read more at:

Tuesday, September 2, 2014

The importance of focussing on your own goals

Which character in Mahabharata could have a peaceful financial life (I mean, apart from Lord Krishna)? Let us answer this question through a very popular story.

Read on ... The importance of focussing on your own goals