Wish you a Happy Diwali ...

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Diwali, the festival of light, is when Hindus perform a Laxmi pooja. What are we asking for when we pray to Goddess Laxmi? We ask for prosperity, not just money. There is a difference between the two. In order to understand the same, let us look at the photo of the goddess we use for the pooja.

One of my favourite Diwali posters is one that shows Goddesses Laxmi and Saraswati along with Lord Ganesh. It is not for no reason that these three are shown together.  
 

While we all need blessings of Goddess Laxmi to be successful in life and grow, she must come in our life flanked by Goddess Saraswati – the goddess of knowledge and Lord Ganesh – the god of wisdom. If Laxmi comes along with these two, it stays and brings bliss in life. And that is true wealth – not mere financial wealth.

Trying to earn more and more money without proper knowledge and wisdom can lead to ruins. Money may come but that would not bring bliss in life.

The difference between “knowledge” and “wisdom” also must be understood at this juncture. “Knowledge” is to know something – to be aware of something – to understand and being able to explain it. “Wisdom” is intelligence – it is about being able to judge – to use discretion – being able to separate the good from the bad – the right from the wrong.

First, let us address the knowledge part. It is critical to know what one is doing. “Look before you leap” is not just a proverb; it’s a great advice. Whether it is income, expenses, loans or investments, it is important to know.

Questions on income:

·       How sustainable is the income?

·       How stable is the source of income? This is especially critical for self-employed persons and small business owners. However, in the present times, even jobs are also not guaranteed.

·       Do you understand the taxes on the income?

Questions on expenses:

·       Know the monthly budget – the expenses you incur

·       How much of the monthly budget is spent on necessities and how much on luxuries? Which of the luxuries can you cut down?

·       Is it possible to reduce some expenses through finding alternatives?

·       Have you kept provision for these expenses in case there is an emergency, e.g. health issue or loss of job?

Questions on loan:

·       Have you understood the terms of the loan?

·       What is the interest rate on the loan? Is it too high or too low? If it is too low, is there a catch?

·       What are the various penalty clauses?

·       What are the flexibilities?

·       Can you terminate the loan earlier without any penalty, in case you get funds suddenly?

·       What is the security required by the lender?

Questions on investments:

·       Have you understood the terms of the investment?

·       What is the (expected) rate of return?

·       Is it too high or too low? If it is too high, is there a catch?

·       Is the risk too high? Understand the risk involved. If you do not understand the risk, please avoid the investment. Every investment carries some risk.

·       Is there a lock-in or is the investment liquid?

·       At what rate would the earning be taxed?

This is not an exhaustive list, but only an indicative one.

Discretion is required both while earning as well as spending. Is the money coming in through the right means or are you taking some actions, which may be incorrect ethically or morally? Are you spending too much money for luxuries than fulfilling your responsibilities?

Wisdom and discretion must be applied to the assets and liabilities, too. Are you borrowing wisely? Is it really required? Is it a good loan? Are you investing smart? Or are you acting on tips without understanding the risks? There have been many instances when one has asked “Is it safe?” or “I hope there are no risks” in stead of asking “Please tell me about the risks present. And how do we manage those”.

So, this Diwali, make sure to pray for Laxmi to arrive at your place – but the right type and through the correct means. Pray to Goddess Laxmi to stay in your life forever. Make sure your life is worth for her to stay forever.

-        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.

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Interest rates are coming down. What should one do?

This has been a common question in various forums these days. As we all know, in the calendar year 2017, the interest rates have come down by a good number. Bank deposits offer lower rates as compared to last year. Even there are discussions regarding reduction in the interest paid on the savings bank account...

Click on the link below to read the article:

Interest rates are coming down. What should one do?

Concentration v/s Diversification : What to choose? - from the archives

Whether to follow the adage "Do not put all your eggs in one basket" or "Put all your eggs in one basket and watch the basket carefully" depends on your strengths or the lack of the same in the respective areas and this is especially true in case of investments. Amit Trivedi explains why


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What is better - investing by oneself or with the help of mutual funds?

Read my article in Mid-day Gujarati edition today below:

            It is better to invest through mutual funds



Read the English translation below:

“Should I invest in mutual funds?” One keeps getting this question time and again. It is with a surprising regularity that the question keeps resurfacing. What should be the correct answer? Actually the question itself is not appropriate. One does not invest in a mutual fund. One invests through a mutual fund.

Let us understand what exactly a mutual fund is. Well, all of us need to invest our money from time to time. These investments can be made in various financial instruments ranging from Government sponsored schemes to bank fixed deposits to company debentures to shares of companies or real estate properties of even precious metals like gold or silver.

One option we have is to manage the investments ourselves. That would involve finding the right investments and carrying out the related research and administration work. The other option is to outsource the entire job to a professional or a company engaged in such a business.

Mutual fund is that second option – it is managed by a team of professionals, known as the asset management company. This is what really needs to be understood. By choosing to invest through mutual funds, one is not investing in alternative investment options, but only changing the way of investing money. The entire job of investing is outsourced to a professional firm.

Let us go back to the question we started with. The person asking “Should I invest in mutual funds?” actually wanted to know which of the two choices is better – investing myself or taking professional help to manage my investments?

This question should be broken down into three components:

1.     Can I do the job myself?

2.     Do I want to do it?

3.     Can I afford to outsource?

We will take each of the above questions separately and see.

Can I do the job myself?

This is the question about ability. In order to do a good job, there are a few requirements, viz., ability to do the job and the availability of time required for the same. There are tasks where one may not have the skills and knowledge, e.g. a history teacher may not be able to help her daughter to study Mathematics in the higher classes. At the same time, one may not have enough time required for the job.

In either case, one is unable to do manage money oneself and should consider outsourcing it.

Do I want to do it?

Let us now go one step further. Let us assume that one has the required skills and knowledge to manage one’s money. However, it is very likely that one may not enjoying money management – either the research and analysis or administration or both. At the same time, one may want to spend time on certain other activities, e.g. spending time with family and friends, pursuing hobbies.

That also means that one needs help.

Can I afford to outsource?

A lot has been discussed about the cost of investing in mutual funds. We also covered it in one of our articles. The agencies involved need to be paid their professional fees. These charges depend on the type of the scheme and the size of the fund. SEBI has issued guidelines on the maximum amount that can be charged to the fund.

Most people make the mistake of comparing these fees with zero cost of managing one’s own money oneself. By this comparison, the cost of mutual fund always looks higher between the two options.

What is missed out in this comparison is the hidden costs of doing the investment management job on one’s own. This hidden cost comes in the form of one’s time and the potential mistakes that an individual investor is likely to make.

First, let us look at the cost of one’s time. Let us assume that a person generates the same investment returns as what a fund manager would have generated before the costs. Let us also assume that the cost of fund management is 2% p.a. This means if one is able to generate 12% p.a. by investing oneself, the mutual fund scheme would return 10% p.a. net of the fund management charges. On a portfolio of Rs. 10 lakhs, this amounts to a saving of roughly Rs. 20,000 for the year. Is it worth spending the amount of time one is required to spend for this saving? Please consider the amount of research one has to put as well as the administration and accounting work. Someone may start thinking that this means investors with smaller portfolios should invest through mutual funds, but the bigger ones should not.

This is where the concept of value of time should be looked at. The value of time may be higher in case of people with more wealth.

Think about it. For most investors, mutual fund would turn out to be a better option than to build the portfolio oneself.

-        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.

Answers to questions about mutual funds and investing

Here is the transcript of the chat on www.moneycontrol.com

Equity investments simplified

Questions about mutual fund investments

Do you have any questions about mutual fund investments?

Chat with me today at 4 PM on www.moneycontrol.com

What do equity fund managers do to beat the index?

What strategies do equity fund managers use to outperform the benchmark indices? Read my article published in Gujarati Mid-day today ...

http://epaper.gujaratimidday.com//epaperpdf/gmd/07032016/07032016-md-gm-16.pdf


The English translation is as under:

How does an equity fund manager generate better returns than the index? This is a question many might have but few seem to ask. The first thing we need to understand, though obvious, is that the objective is to beat the index performance.

With this objective, the fund manager has to have a portfolio that is not exactly replicating the index portfolio. This means, the stocks in the fund portfolio may be different from the index. However, since the fund may be benchmarking against a particular index it tries to beat, the fund manager has to invest in stocks from a similar universe as the index.

A large-cap fund, benchmarking against Nifty must invest only in large-cap stocks. It cannot buy mid-cap (or small-cap) stocks only with an objective of beating the index.

There are two primary strategies that a fund manager may employ in order to outperform the index.

1.     Stock selection: This involves selecting stocks that are likely to perform better than the index over long term and / or avoiding stocks that are likely to underperform the index. The basis for such selection largely is the fundamental strengths of the company. As a variant of the same, the fund managers may employ sector rotation strategy. Mostly, the stocks are selected for long-term holding (though, not always).

2.     Market timing: The fund managers try to predict short-term price movements of the entire markets and accordingly increase / decrease their exposures into the market as a whole.

One such variation includes buying “value” stocks or “growth” stocks. A value stock is one whose market price is too low compared to the estimated value that the fund manager puts on it. The question is: how can such a thing be possible in a market that has access to all the relevant information? The reality is: It happens. However, the fund manager must be doubly sure as a stock trading at discount to its value means that either the fund manager knows something that the market does not or vice versa. The risk here being, “What if the market is right?” On the other hand, if the fund manager happens to be right, there could be lots of money to be made. Some of the legendary investors, e.g. Warren Buffett and Sir John Templeton are known to be value investors. A growth stock is one where the company is exhibiting a very high profit growth. Such companies are favourites of the markets. The market players love such stocks and want to own these. Such attraction means these stocks may be trading in the market at way above their intrinsic value. The risk here is (1) buying the stock too costly, or (2) slow down of the expected growth. However, some of the small and mid-sized companies become big when they continue to grow at high rates for long periods of time. There have been many examples of such stocks in our own markets. Many fund managers in India do not want to be bucketed in anyone of these two styles. They call themselves “style agnostic”. They claim that they would pick up a stock if their analysis suggests that it is a good buy, irrespective of whether it is growth stock or value stock. Academics term this style as “blend” – a mix of value or growth. A sub-style of value investing may be known as dividend yield strategy, in which the fund managers try to pick up stocks, with the main criteria being high and sustainable dividend yields. (Dividend yield is calculated as the dividend in Rupees divided by current market price).

Another variation of the “stock selection” strategy could be to identify a sector of the economy or an industry or a group of industries and own stocks of companies within these sectors. While in the value or growth style, the fund manager starts identifying the companies based on their individual businesses, in this method, they start with identification of sectors and then they search for companies within these sectors. The purists avoid such strategies. The risk here is that not all companies in a sector may be good and one may end up buying low quality stocks simply because the sector is hot.

The market timing is a very different strategy. The market timers, as we mentioned earlier, increase or decrease their exposure to the entire market based on the expected short-term price movements. If the fund manager expects the prices to move up, he would load up the portfolio with stocks. However, if the view is negative, the stock exposure may be reduced and accordingly the portfolio would carry large amount of cash or debt securities. Their idea is to stay away from equity markets if a fall is expected and come back just before a rally starts. This sounds very nice in theory, but is extremely difficulty (almost impossible) to do practically.

While the fund managers may be using both strategies, they primarily use stock selection or it’s variations. Many actually claim that they cannot time the markets and that they employ stock selection strategy, by selecting good stocks and avoiding bad stocks.

Whatever their belief and strategy, the objective is to beat the benchmark index.

-        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.

Equity investments simplified

Equity investments simplified - Understand the pros and cons of investing through mutual funds

My monthly chat show on www.moneycontrol.com

Jan,11,2016, 16:00 hrs to 16:30 hrs

Join me on a live chat to know about mutual funds on 14th Dec

Equity investments simplified
Understand the pros and cons of investing through mutual funds

Log on to www.moneycontrol.com


On Dec,14,2015, 16:00 hrs

Questions on mutual funds, answered

Investors had queries on investing and mutual funds. Here is the link to the transcript of the chat:

Build wealth with mutual funds

Do you have questions about mutual funds?

If you have questions on mutual funds, or investing, please join me on the monthly chat session at www.moneycontrol.com on 12th October at 4 P.M.

Transcript of chat on www.moneycontrol.com on 14th Sept, 2015

http://www.moneycontrol.com/master_your_money/view_chat_transcript.php?cat=&chatid=2497

Chat session on www.moneycontrol.com

Chat session on www.moneycontrol.com on 14th Sept at 4:00 PM to 4:30 PM

Mutual fund is an ideal investment vehicle if your financial goals are clear

Click on the link below to read my article on Mid-day Mumbai edition (Gujarati)

http://epaper.gujaratimidday.com//epaperpdf/gmd/07092015/07092015-md-gm-15.pdf


The English translation is as under:

Mutual funds have been in India for a while now. Still, many misconceptions prevail about what exactly mutual funds are. One such misconception is that mutual funds are complex products and are suitable only for expert investors.

The reality is: Experts manage mutual funds for the benefit of novice investors. A mutual fund is not really an investment by itself, but a way to invest. Instead of managing our money ourselves, we can outsource the job to a team of experts.

As we have seen in one of the articles earlier, a mutual fund is a vehicle that allows investors to invest in a portfolio of securities. The portfolio is created with an investment objective and a fund management team manages the same on behalf of these investors. Each mutual fund scheme has a defined scheme objective and style. The investment universe is also stated upfront. An investor has to select the scheme that matches with one’s own investment objectives.

This is where the expertise of an investor and that of a professional differs. A professional manager decides why certain investments must be made. Most of the retail investors are not clear about their investment strategy and hence find it difficult to select appropriate mutual fund schemes. While selection of individual securities requires a detailed work, selection of a mutual fund portfolio is a relatively easy task. Simply by outsourcing the task of fund management to a professional team saves a lot of time and efforts.

Add to that various conveniences offered by mutual funds, e.g. SIP, STP, switches, investment of any amount, any time, etc. and you have a very flexible investment vehicle. You can suit any of your requirements through mutual funds.

Mutual funds are ideal if you know your financial goals. Planning to reach your goals can be very easily done using mutual funds. You can also periodically check your progress towards the goals.

In fact, investing through mutual funds is so easy that it is recommended investment strategy for all the beginners. One needs to follow these steps:

1.     Start with your risk profile and statement of goals. Based on that, arrive at an asset allocation plan.

2.     Implement the plan through buying proper funds in line with the asset allocation plan.

3.     The selection of funds is done through subjective and objective filtering. Some of the parameters the objective filtering looks at are:

a.     the past performance of the fund – but remember, it is not only about the returns generated by the fund in question;

b.     the general behavior of the fund’s NAV with respect to the broader market;

c.      the risk associated with the fund (as represented by the standard deviation), etc.;

4.     Some of the parameters the subjective filtering looks at are:

a.     the conduct of the fund house,

b.     services of the fund house,

c.      the adherence to or the deviation from the objectives of the scheme, if any, etc.

So go ahead, take the advantage of mutual funds.

-        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.