Monday, June 22, 2015

Avoid unforced errors: winning mantra in amateur investing

While a professional investor makes money basis his superior investment skills, amateur investors can earn by avoiding mistakes.

Click here to read the article

An affordable and convenient investment option for investors

Mutual funds offer an affordable and convenient way to invest in a diversified portfolio.

To read my article in Mid-day Gujarati edition, click here

The English translation of the article is as follows:

Among the many benefits of mutual funds, we often hear about affordability. The argument in favour of affordability is that a small investor can start investing even small amounts of money. This was a big advantage when we had physical share certificates and one could not put small amounts of money into buying a “market lot” of shares. A market lot in shares was a certain minimum number of shares that an investor had to buy in order to trade in the normal markets. These lots, in most cases, consisted of 100 shares. Anything other than this market lot was known as “odd lot” and the same traded at a discount to the market lot, generally. At the same time, investing money in fixed income instruments was much easier with banks accepting small amounts of deposits and the Government promoted small savings schemes.
However, in the mid-1990s, the investment world changed with the advent of information technology and with that technology enabled solutions like electronic trading and dematerialization of securities. This allowed investors to buy even one share of a company rather than buying a market lot. Thus, investing became affordable, if one were to consider a single stock.
It is ok to keep buying single stocks if one has only limited resources. This could be a good accumulation strategy. However, this suffers from three drawbacks or limitations.
First, one may not be able to properly diversify the portfolio. Buying one share every time one has money will take a long to build a portfolio that is properly diversified. This process of building a portfolio will require a lot of planning to arrive at a proper diversification and the steps to buy the identified stocks. On top of that, one would also be required to know which stocks to buy or avoid.
Second, it requires immense amount of discipline to follow this strategy in order to accumulate a sufficiently diversified portfolio. If you need to buy 30 stocks to diversify your portfolio, it will take roughly 30 months (assuming you get a monthly salary and hence monthly savings) to do those 30 transactions. If the market prices go up and down during this period, it becomes very difficult for most to stay focused on the plan to continue buying.
Third, the weightage of each stock in the portfolio would not be a function of what one wants, but that would depend on the price of each share. While the savings over the period may be constant, the prices of different shares may not be the same. So, if you save Rs. 1,000 monthly, you can buy a share that is priced at Rs. 900. However, what do you do if the share you want to buy is priced at Rs. 3,000?
Considering that it is inconvenient to pursue such an investment strategy, which takes away precious time away from your family life and your hobbies, we must try to find a solution that is easier, convenient, effective and consumes less time.
This is where mutual funds enter. You can buy a portfolio consisting of 30 or 50 well-researched stocks (regular monitoring of the portfolio, included in the deal) for as little as Rs. 1,000 per month. Now, the only thing you need is to continue your SIP (Systematic Investment Plan).
So, go ahead and enjoy life. Leave the task of money management to a mutual fund company.
Amit Trivedi
The author runs Karmayog Knowledge Academy. The views expressed are his personal opinions.
Disclaimer: This article should not be construed as investment advice.

Tuesday, June 9, 2015

Debt mutual funds help you invest in debt securities

Understanding debt funds. My article in Mid-day Mumbai edition of 8th June, 2015

The English translation is as under:

When we talk to investors about mutual funds, they assume the discussion to be about equity mutual funds. Somehow, mutual funds have been very strongly associated with equity.
What is the reality? Well, the reality is that a mutual fund is just a vehicle that invests in various securities. These can be equity or debt.
Fixed income mutual funds, popularly known as income funds or debt funds, invest in debt securities issued by either the Government or companies, including banks. These debt securities are also known as debentures or bonds if the term is longer than one year, and treasury bills, commercial papers or certificates of deposit if the term is less than one year. The debt securities are obligations on part of the issuer to pay the principal and interest thereon as per an agreed time schedule.
This concept of debt investments is familiar to most investors. Majority of the Indians have invested in these investment options, either through bank deposits, or small saving schemes, etc. All the fixed deposits or other such fixed income investments have a face value on which interest is calculated. Investors are mostly concerned with face value, interest rate, frequency of interest payment, the time period, safety of the investment option and maturity value. Most often these investments are held till maturity.
As compared to that, debt mutual funds are not investments by themselves, but a vehicle that invests in the debt instruments.
These debt instruments pay periodic interest and there can be some trading gains generated by actively buying and selling the debt instruments by the portfolio manager. Both the interest and trading gains form the income for the debt funds.
These gains (or losses) are reflected in the NAV, which incorporates daily changes in prices or interest income. Thus, if a bond has to receive interest of Rs. 365 in a year, the daily component of interest, i.e. Rs. 1 would be added in daily NAV. At the same time, the price of the bond may go up or down in the secondary market, which will also be factored in the NAV calculation.
Most of us are unfamiliar with the changes in market prices of bonds, since almost all of our debt investments are held till the maturity date. Hence, let us spend some time on understanding why the prices of debt securities change.
First of all, as we know all debt securities carry interest rate payable to the investors. While the interest rate on a particular debenture remains constant from issue till maturity, those in the economy may undergo a change during the same period. Thus, if the interest rates in the economy increase, all the existing debentures become less attractive and hence see a drop in the prices. On the other hand, if the interest rates in the economy go down, the prices of existing bonds go up. This is known as interest rate sensitivity. This is the major reason why the prices of bonds move up and down in the market. This has an impact on the NAVs of debt funds.
Debentures with long maturity are more sensitive to interest rate changes compared to those with short maturities. This is understandable since the debentures with longer maturity will pay the original rate for a longer period, whereas those with short maturity would mature early and the investors would get a chance to invest at the new rate.
The interest rate payable by a bond also depends on the creditworthiness of the debenture issuer. If the issuer is considered to be of high quality, one may accept a low rate. If the issuer’s creditworthiness is not so good, the investors would not invest for low returns and the issuer may have to issue the debentures at high rates.
Any change in the perception of the creditworthiness would result into a change in the bond’s price. If the market perceives improvement in creditworthiness, the bond’s price would go up and vice versa.
All these changes would make the NAV go up or down. It is important to understand this before investing in fixed income funds.
You may check some information from the fact sheet in order to understand the above points: (1) average maturity of the portfolio, and (2) credit profile of the portfolio.
The former indicates the sensitivity to interest rate changes while the latter indicates the credit risk taken by the fund.
Debt funds are good investment vehicles. Use them to your advantage.
Amit Trivedi
The author runs Karmayog Knowledge Academy. The views expressed are his personal opinions.
Disclaimer: This article should not be construed as investment advice.