Tuesday, January 26, 2016

How do you compare the risks in different equity funds

Equity funds are riskier than debt funds - that is well known. However, between two equity funds, how do you know which of the two is riskier? To know more, read the article here, published in Mid-day Gujarati edition today:

http://epaper.gujaratimidday.com//epaperpdf/gmd/25012016/25012016-md-gm-14.pdf


Read the English translation of the same here:

Most discussions about mutual funds are consistent in that equity funds are riskier than debt funds. What do we mean by this? What is this risk?
A lot of investors equate this risk with loss of capital. However, in investment theory, most often, the risk on a portfolio is represented by volatility in the market value of the portfolio. in case of a mutual fund (which is also a portfolio), the volatility in market value is equal to the fluctuation n the fund’s NAV.
So the meaning of the phrase “equity funds are riskier than debt funds” is that “the NAV of an equity fund would be more volatile than that of a debt fund”.
While looking at the portfolio risk, the theorists do not look at the risks that can be removed or reduced through diversification. The volatility in market prices is one risk that cannot be diversified away and hence the discussion is centered around only one risk. As mentioned earlier, it is well known and accepted that equity funds are more volatile than debt funds. Hence, we would only discuss the risk of price volatility of equity funds.
Then the question is: between two different equity funds, how do we know which one is more risky and which is less risky?
There are two important parameters one can look at, viz., standard deviation and portfolio Beta. Both are statistical terms to measure volatility of the scheme’s returns. In both cases, normally the monthly scheme returns are tabulated and then the variation in these monthly returns is measured.
Standard deviation is a measure of variation of various monthly returns round the average of all these monthly returns. Beta, on the other hand, measures the volatility of a scheme’s returns as compared to that of its benchmark.
Standard deviation is a number above zero – a positive number. Higher the standard deviation, higher the risk of volatility. If scheme A’s standard deviation is 25 and that of scheme B is 18, than scheme A is considered to be riskier than scheme B.
Beta would also be a positive number. However, it is always in reference to its own benchmark (in other terms, in relation to the market). A Beta of 1 means the scheme is as risky (or volatile) as the market itself. Beta lower than 1 indicates a scheme that is less risky (volatile) compared to the market and Beta higher than 1  indicates the scheme is riskier (more volatile) than the market.
Both these numbers are available in the fact sheet of most of the funds. If these are not available in the fact sheet, you may check with some of the popular websites, where such data would be available.
Caution: Both these numbers are calculated for the past, and hence they may change over time. Having said that, these still are good indicators to compare different schemes.
Investors, who are risk takers, may prefer schemes with higher standard deviation or schemes with Beta above 1. On the other hand, conservative investors may look for schemes with lower standard deviation or those with Beta less than 1.
Choose your schemes wisely.
-        Amit Trivedi
The author runs Karmayog Knowledge Academy. Recently, Amit has authored a book titled “Riding the Roller Coaster – Lessons from Financial Market Cycles We Repeatedly Forget”. The views expressed are his personal opinions.


Monday, January 18, 2016

Global turmoil - what should an investor do? - an article from the archives

China has grown phenomenally in the last few decades. It has emerged as one of the largest exporting nations. However, recent times have been not-so-easy for the second largest economy in the world. Does it mean that like many other products, even the problems of China be exported to the world? Will the "Made in China" problems swarm the world like the "Made in China" products?

I don't know. However, the question in most investors' minds is: "What would it do to my portfolio?"

A couple of years ago, we had a similar scare: US credit rating was downgraded. This is what we wrote then: Global Turmoil - What should Investors do?

Th lessons are as relevant today as they were then.

Sunday, January 17, 2016

Celebrate the spirit of Marathon

Standard Chartered Mumbai Marathon 2016 - 17th January 2016.

On this day, we salute the spirit of all marathoners.

We wrote an article in 2008 comparing "investing for life goals" with running a marathon. This was published on www.moneycontrol.com on January 25, 2008.


Here is the link to the article: Life is a marathon - here's how to plan for it

This article was written in 2008, hence some reference might have changed. However, the theme of the message remains the same.


Read the full article below:

Life is a Marathon – Here’s how to plan for it
2008-01-25 11:56:19 Source : moneycontrol
While planning for your life's goals, it is important to remember, this is not a 100-meter race, it is a marathon. While 100-meter race is run for the speed, a marathon is all about endurance and stamina.
Come January and the Mumbai city is ready for one of the greatest races on the earth, the Standard Chartered Mumbai Marathon. This year is the 5th anniversary of the race. While a lot has been written about the fitness aspect of the race, let us look at the learning that an investor can take from the race.
While planning for your life’s goals, it is important to remember, this is not a 100-meter race, it is a marathon. While 100-meter race is run for the speed, a marathon is all about endurance and stamina. While one uses all the strength to acquire the speed to finish the 100-meter dash, one has to keep balance between how much energy one uses and how much one conserves.
Conserve your energy
If one starts running too fast in the beginning, one may take an early lead but may not have the energy to complete the distance. We all need money to live and enjoy our lives, but life does not end in days. One needs to have enough money to last beyond one’s life. And hence, while spending money is a need, saving for old age also is a very important need. It is the balance one needs to strike between enjoying life now and ensuring safer future. It is the balance one needs to strike between current expenses and future needs.
Extrapolation
Running 100 meters at a particular speed is a different matter, but maintaining the same speed for 42 kilometers is a different thing altogether. Let us say one can complete a 100 meter run in 12 seconds (while this is much slower than the world record, it is quite fast for an amateur runner).This does not mean that one would be able to complete a kilometer in 120 seconds (i.e. 2 minutes) or the 42 kilometer marathon in 84 minutes. For most amateurs, completing 42 kilometers is a huge challenge and that is why in the Mumbai marathon, those who are not professional marathon runners opt for 21 kilometers at the most.
Extrapolation is quite easy while one is on a calculator, but it is a totally different thing while on the ground. Same is the case with one’s investments. While one may have a good run for a year or two – or at times even longer like in the present scenario. It is foolhardy to expect such a run to continue for long stretches of time and hence while planning for one’s future, it is always better to assume more reasonable future returns from one’s investments.
Run light
Most professionals advise one to wear light cloths and light shoes. One is also advised not to carry any load in form of water bottles or any such thing. Any excess weight on the body affects one’s ability to sustain the strength required to complete the race. Back in the world of investments (or life goals), the excess weight is nothing but various liabilities; medical, social or financial. Your liabilities mean that you need to maintain liquidity in the portfolio to meet the obligations and that means the portfolio cannot run fast – one needs to give up some upside that can come through investment in high risk investment options.
One could be better off getting rid of most of the liabilities – especially those financial in nature. Investments in risky options to generate higher returns could become dangerous if one has outstanding financial liabilities (loans). Some of the medical liabilities could be covered through insurance.
One kilometer at a time
The thought of running the full distance of a marathon (or even a half-marathon) is quite intimidating for most amateurs. However, if the total distance is broken in small parts and small goals are set, the whole journey becomes a series of small challenges. Life’s goals also may seem intimidating at first, and the amount required for the long term goals may also look huge, but if one invests systematically and allows the investments to earn the benefits of “power of compounding” and “rupee cost averaging”, the goals become quite achievable.
Running up the slope
For those familiar with the geography of Mumbai can understand how difficult it would be to climb up the Pedder Road fly-over especially on the way back after running for over 14 kms in the half-marathon race. The beauty is in the perspective. Remember that the climb up the fly-over is followed by a climb down it. While you spend more energy running up the slope, coming down is a much easier part. It is the same in the world of investments also. Generally, an asset class, be it equity or real estate, that may go down substantially, has the potential to rise up also very fast. And that is where the old adage goes: higher the risk involved, higher the expected return.
Get into the rhythm
Everyone will have a different speed at which one can run – whatever the distance. It is the rhythm one needs to get into, that allows one to cover the long distances. In the world of investments, the rhythm could be akin to one’s ability to assume risks associated with various investment options. As long as one invests money in line with one’s ability to withstand the price volatility or the uncertainty, the journey becomes smoother. And as mentioned earlier, the rhythm will help one achieve the goals.
The investment plan needs to combine one’s risk taking ability along with the requirement to achieve the goal within the stipulated time. In the investment parlance, this is known as asset allocation, i.e. dividing one’s money across various investment options. Asset allocation is considered to be one of the best-known investment strategies to help an investor achieve the investment goals without giving unnecessary hiccups along the way.
Enjoy the journey
While one’s objective is to complete the race and to that extent the goal is at the end of the distance, it is the journey that one needs to enjoy. Any discomfort or unhappiness will make it difficult to achieve the goal. If the investment portfolio is giving one sleepless nights, it would be a better idea to change the components of the portfolio or redo the whole plan. Even if one believes that the end justifies the means, the investments are made to achieve life’s goals and hence life is more important than the investments.
Wish you all a very happy, healthy and wealthy 2008!
- Amit Trivedi
The author works with a leading mutual fund company. The views expressed are his personal views


Monday, January 11, 2016

Equity investments simplified - chat on Moneycontrol

Please find below the transcript of my chat on www.moneycontrol.com today

Equity investments simplified

Equity investments simplified - my chat on Moneycontrol

I would be doing a chat session on www.moneycontrol.com today at 4 PM, answering questions on investment in mutual funds and planning your investments

Can you get bank loan against your mutual fund units?

You need not upset your long term plans in case of a short term emergency requirement of funds. You can avail loan against your mutual fund investments. Amit Trivedi writes in Mid-day Gujarati edition today:

Click here to read further ...

The English translation is as under:


Most of the good quality investment advisors would advice an investor to focus on the long-term goals and not worry about short-term market movements. Incidentally, many of us have some goals to fund far in the future. For the purpose of the investment to deliver in line with expectations, the investment should be given time.
Now, two things are required for someone to hold onto the investments for long periods without worrying about short-term performance: (1) financial ability, and (2) psychological ability. We will not talk about the psychological ability here. However, the financial ability to stay invested can partly take care of the psychological ability.
The advisors and financial planners strongly recommend taking care of the short-term requirements through creation of a contingency fund. They also strongly recommend buying enough insurance cover that takes care of your family’s expenses in case an unfortunate event takes place.
Even after that, some emergencies may crop up – something unexpected and sudden. It could be a business loss or money required by a close friend or a family member. What happens when you have invested your money for meeting long-term goals, but there is an emergency requirement for a short while?
Well, this is where one may consider a facility offered by banks – loans against security. Banks allow one to borrow against various investments for a short period. This is an overdraft facility, where there are no EMIs to be paid and one may pay the entire sum (or part of it) back to the bank as per one’s convenience. The interest is charged only to the extent of amount borrowed (or outstanding, if part of the loan is repaid) and only for the period for which the same is borrowed. You may get a limit sanctioned from the bank, but use only what is required.
Mutual fund units are approved securities to borrow against, under this scheme. Banks lend money against the collateral of MF units. The process is simple: one needs to get the units pledged in favour of the bank. This can be done through filling up some forms and getting confirmation from the respective mutual fund companies. Debt and equity funds may be treated differently. You may check with your bank.
The benefit of such a facility is: you are able to tide over the temporary cash crunch without selling your long-term holdings. the cost of such a loan is also low as it is limited to the period of borrowing and to the extent of the amount used.
We have often seen that the cash crunch and market crash come together. In such a situation, if one has to liquidate the holdings (especially the equity funds), one may not get a chance to participate in the upside that follows. Consider this facility available from banks.
At the same time, please be careful. This is a type of loan; hence use your discretion. Do not make a habit of borrowing or using this limit for trivial reasons. Use it only when it is absolutely necessary and you have run out of other options.
Wish you all a very happy, healthy and wealthy 2016.
-        Amit Trivedi
The author runs Karmayog Knowledge Academy. Recently, Amit has authored a book titled “Riding the Roller Coaster – Lessons from Financial Market Cycles We Repeatedly Forget”. The views expressed are his personal opinions.


Sunday, January 3, 2016

Beware of market reports! - from the archives

This one is from the archives. I wrote this in March 2010.


Do you consider market reports as advice or do you treat them just as a piece of reporting? Investment expert Amit Trivedi guides you.

Click here to read further

Friday, January 1, 2016