Happy Teachers' Day

History has been one of the finest teachers for mankind. We have learnt so much from what our earlier generations have done.

On this Teachers’ Day, I bow down to all the teachers – present and the past, who have helped me learn and grow in life. Your contribution has been immense in making this book (Riding The Roller Coaster - Lessons from financial market cycles we repeatedly forget) possible.

How to invest in mutual funds? Direct plan or through distributor?

The debate continues on whether a direct plan is better for investors or should one go through a distributor to invest in mutual funds? Read my views on the same below:

http://epaper.gujaratimidday.com//epaperpdf/gmd/05092016/05092016-md-gm-20.pdf

The English translation is as under:

Mutual fund companies have introduced direct plans some time ago. There have been many discussions around these plans and the advantage of low-cost that these offer. Let us understand these plans and see the benefits to investors. We would also look at the other side: Are there any pitfalls? Is there anything that an investor needs to understand?

First of all, what are direct plans? How do they differ from the regular plans? As you know, mutual funds are sold through a distribution channel comprising of various individual mutual fund distributors, banks and various companies in the business of mutual fund distribution. As per the SEBI regulations, these distributors are required to recommend mutual fund products to their clients based on the analysis of suitability of the schemes to the investor’s needs and situation. For this work and to service and advice the investor on a regular basis, the distributors earn a commission from the mutual fund companies.

A few years ago, SEBI introduced a “direct” plan that would allow investors to bypass the distributors, if they feel they do not need to advice and services of these distributors. Due to this, the expense ratio for the direct plan is lower than the regular plan. The gap between expenses for the direct plan and that for the regular plan may vary from scheme to scheme and from one fund type to another.

One may be tempted to calculate that this difference could make a huge difference over the years. However, prudence requires that one always look at the cost in the context of the value received. Cost for anything can never be high or low in isolation. Does one get value commensurate with the cost?

So what value does a mutual fund distributor provide, really? Many are under the impression that a mutual fund distributor’s greatest value is in selecting the best mutual fund schemes. This cannot be farther from the truth.

First of all, what exactly is “the best scheme”? Are we looking at a scheme that would offer the highest returns in the future? What is the basis of identifying this? Past performance? If that is the way to select schemes, you do not need any help. The data is easily available on many websites – for free.

The “best scheme” is the one that is most appropriate for you – given your unique situation. More often than not, it is not one scheme, but a combination of schemes that an investor needs. A good distributor can help decide on a good combination of schemes. You see, in our regular diet also, while one needs to have varieties to get proper nutrition, one still cannot mix milk and lemon.

A seasoned distributor, a veteran, and experienced one would also be able to put things in perspective better than most investors can do themselves. A veteran is supposed to have a balanced head on the shoulders. This allows one to focus on what matters and think clearly without getting swayed away by the external turbulences. This ability to stay focused helps the distributor to get the client also to focus on what matters most in life. Such a focus then allows the investor to comfortably achieve life’s financial goals.

There are many operational issues that take away a lot of time. In case of such issues, a distributor may know how to handle critical situation since one may have handled the same case for few other clients. For an investor, each issue may present a new challenge taking away too much of precious time. If one calculates the “money value of one’s time”, it may turn out to be much more than the gap between the expenses between direct plan and regular plan.

Think about it – do a rough calculation – you might be surprised.

Amit Trivedi

The author runs Karmayog Knowledge Academy. The views expressed are his personal opinions. He is the author of a book "Riding The Roller Coaster - Lessons from financial market cycles we repeatedly forget"

You enjoy your holidays and your money works for you, is it possible?

You enjoy your holidays and your money works for you, is it possible? Read my article on the subject in Mid-day Gujarati edition today. ________________________________________________________________________________ English translation is as under: How does it sound when your money works for you even when you are enjoying your holidays? August is the month of festivals and long weekends. Many of us go for mini-vacations – either on some excursions or to meet our families. During such periods, often the money lies idle in the bank accounts. There are no options where the money can be parked to earn some returns. Bank fixed deposits are available for a minimum period of 15 days if the amount is small. That means, the money remains idle in savings or current accounts. With most banks, the current accounts do not earn a single rupee and the interest on savings accounts is a low 4% p.a. In such cases, mutual funds offer an incredible opportunity in form of liquid funds. It is possible to invest amounts as small as Rs. 10,000 and even for weekends. Many large companies use this facility offered by mutual funds to park money for weekends. The liquid funds are open-ended mutual funds and hence the transaction can be done on any business day. Let us say, there is a holiday on a particular Monday, making it a long 3-day weekend – Saturday, Sunday and Monday. If you have surplus money in your bank account on Friday before these holidays, you can invest the same in a liquid fund and simultaneously file for redemption such that you get the money in your bank back on Monday. In case you do not need the money on Monday, you may continue to stay invested. Mutual funds offer a great flexibility in terms of not declaring the investment period in advance. You may invest your money in a liquid fund without mentioning the date of redemption in advance. You may stay invested till the time you do not need the money. As per the website of Value Research, a leading portal for mutual fund information, the liquid funds have delivered the following returns in the past: Table 1: Period Returns (p.a.) Last week 6.76% Last month 7.08% Last 3 months 7.36% Last year 7.83% (Disclaimer: Past performance may or may not be sustained in future) As you can see, the rates of return are around 7% p.a. However, you may also observe that the returns for the shorter periods are lower than the longer periods. This is not like a bank fixed deposits where they offer lower interest rates for shorter periods and higher for longer periods. This has happened in case of liquid funds since in the last some time, the interest rates have come down. Liquid fund is a product that responds to the changes in interest rates in the market very fast. If the interest rates in the economy start going down, the liquid fund returns would get adjusted and if the rates start going up, the liquid fund returns would improve. Let us do some Math with the above numbers. If you have a surplus of Rs. 5 lacs to be invested for a long weekend (3 days), how much do you earn? Table 2: Assumed rate of return Money earned 6.76% Rs. 277.81 7.08% Rs. 290.96 7.36% Rs. 302.47 7.83% Rs. 321.78 (The rates of return are taken from table 1) If you do not need money, as we mentioned earlier and you keep the money in a liquid fund for 10 days, the earnings would be as under: Table 3: Assumed rate of return Money earned 6.76% Rs. 926.03 7.08% Rs. 969.86 7.36% Rs. 1,008.22 7.83% Rs. 1,072.60 (The rates of return are taken from table 1) If in a year, you get four to five such opportunities, we are now talking about serious money. Liquid funds also offer facilities to transact through SMS, increasing the convenience. In fact, just before writing this article, I invested some money in a liquid fund just by sending an SMS. The redemption from the fund account also happens through an SMS. All you need to do is to get a one time mandate registered. So, what are you waiting for? Enjoy your holidays and let your money work for you. The earning would take care of part of the expenses. -        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.

Now, a marketplace for IFAs to buy and sell their advisory business

This marketplace will help IFAs to monetise the value of their business that they have built over the years.

A great initiative by iFAST. This is the first of its kind in India.

I am proud to be associated with this initiative. In the last two annual events of iFAST - Goa in 2015 and Jaipur in 2016, I did a session each on valuation of IFA practice. Thanks Rajesh Krishnamoorthy and Akash from iFAST. Thank you very much Anupam Saxena and Sudip Mandal of DSP BlackRock and not to forget dear friend Ajit Menon. My friend and colleague Harish Rao and I worked jointly to develop this program.

Five money lessons my son taught me

Managing money is not so difficult, after all. My son taught me some very important personal finance lessons. Click on the link below to read further:

http://www.moneycontrol.com/news/planning/five-money-lessons-my-son-taught-me_7287101.html

Chat transcript - 8th August 2016

Click on the link below to read the transcript of the live chat session today on www.moneycontrol.com

Equity investments simplified

Which is the best SIP? - The one you start early and continue for long ...

Many times, one gets a question from investors, "Which is the best SIP?" Here is the answer

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The English translation is as under:

“Which is the best SIP? Please recommend the best SIP. I want to start one.” After reading my article on SIP, one of the readers wrote to me. This was not the first time that I came across this question. Many investors have wondered about this and asked the experts.

The real question is not which is the best SIP, but it is what the investor expects from the “best” SIP. Whenever I have tried to get to the bottom of the question and understand the real concern, it has thrown some interesting insights.

Returning to this question the real concern for the investors is to find out a scheme where the SIP returns would turn out to be among the highest in future. This future timeline is also uncertain or undecided – it often is a time when the investor checks the performance of one’s investments in comparison to other avenues – similar or otherwise.

So the question is: how do you look at an SIP in a mutual fund scheme? Start with the purpose of an SIP. Why should one start an SIP in a mutual fund scheme?

For that, we need to go back to understanding what an SIP in a mutual fund is. SIP, or Systematic Investment Plan, is a facility offered by mutual funds to help an investor invest regularly in a mutual fund scheme. Signing up for an SIP requires an investor to fill up just one form for multiple transactions of a fixed amount and a fixed frequency. This instills discipline as the investments happen regularly without the investor’s intervention.

An investor can choose from among equity, debt, liquid, gold or hybrid funds based on one’s own unique requirements.

With the above points, an SIP should help an investor meet one’s requirements and not necessarily be the “best” – whatever that means. So often, investors seek an investment option or an investment strategy that can deliver the highest rate of return. However, as we all know, an investment is made in order to accumulate a sum of money for some future expense requirement. If the goal is to accumulate, the focus also should be on the amount accumulated and not on the rate of return.

Lower rate of return over longer term may help one accumulate much more than higher rate of return earned over short time horizon. Let us consider the following two options:

·       Investment of Rs. 1,00,000 per year invested at 8% p.a. for 10 years would help accumulate a sum of Rs. 14.50 lacs, approximately

·       Investment of Rs. 1,00,000 per year invested 1t 15% p.a. for 5 years would help accumulate a sum of Rs. 6.75 lacs, approximately

As can be seen from the above numbers, it is better to start as soon as possible and continue with the investment plan rather than chasing high returns.

By that logic, the best SIP is the one that you continue. So, start your SIP at the earliest and keep it on till your goals are reached.

Happy investing!

-        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.