Wednesday, December 27, 2017

Habits of successful financial advisors

Most financial advisors and mutual fund distributors recommend their clients to start investing once they identify their life’s goals. Why should it be any different for the financial advisors?...

Read my article entitled "Habits of successful financial advisors" on 

Monday, December 18, 2017

Mutual funds sahi hai, but when?

The AMFI campaign "Mutual funds sahi hai" is making waves. Many investors are seriously looking at mutual funds. However, what is disturbing about this is that some investors may be coming in mutual funds with unreasonable expectations.
While mutual funds sahi hai, but it is important to understand when. Read my article published in Mid-day Gujarati edition today.

The English translation of the same is as under:

Interest rates have come down in the recent past. This has also impacted the fixed deposits in the banks. With such reduction in the interest rates, many are now looking for alternative investment avenues as their fixed deposits mature. In such a scenario, mutual fund has appealed to many such investors as the investment option of choice. As the industry advertisement goes, “Mutual funds sahi hai!”
However, what is disturbing about this is that some investors may be coming in mutual funds with unreasonable expectations.
There are still many out there, who do not understand what a mutual fund is. It just appears to be yet another investment option, and it can deliver high returns only because it has done so in the past. This is the problem. A lot of mutual fund schemes have, over the long term, delivered returns far in excess of what fixed deposits have done. It is important to understand the schemes before taking a decision solely based on historical returns.
As we have already mentioned earlier, mutual fund is a vehicle that helps you invest in various securities – these could be equity, fixed income, money market or even a commodity like gold. Mutual fund by itself is not an investment avenue, but it is an investment vehicle.
This background is important to understand as some of the investors mentioned earlier are unknowingly shifting their money from fixed deposits to equity mutual funds – thus taking risk they may not be in a position to handle.
Equity has the potential to deliver superior returns in comparison to fixed deposits. However, such returns have come with a lot of ups and downs along the way. Any investor must understand this. In case one needs money when the values are down, you may end up getting less than the amount invested. Even when you may not need money for a long period, seeing your investments losing value for extended periods of time could be hugely challenging.
While mutual funds are good investment vehicles, one must understand what one is getting into and only invest in schemes based on one’s own unique requirements. If you are unable to find the schemes suitable for you, take professional help.

Monday, December 4, 2017

Diversification is not about investing in mutual fund schemes with different names

What exactly is diversification? Can I have a diversified portfolio by simply spreading my money across different mutual fund schemes?

Read my article on the above subject here ...

The English translation is as under:

“I diversify my investments across many mutual fund schemes. I have investments across different fund houses.” Mentioned an investor. Very often you come across investors, who use technical terms without understanding the real meaning of the term.
In this case, one needs to check whether the objective diversification was really achieved. For that purpose, let us look at what diversification means.
Diversification is a strategy to allocate the investments across investment options, which are inherently different from one another. This difference must be in the behavior of the investment option. Different investment options exhibit different behavior patterns due to the influence of various external factors. Let us understand this through some examples:
·      When the Indian Rupee appreciates against global currencies, import-oriented companies benefit, whereas export-oriented companies see reduction in their revenues per unit sold. When the Rupee depreciates, the export-oriented businesses do well, but costs of import-oriented businesses go up, thus reducing their margins.
·      When interest rates move up, short-maturity bonds lose less and start earning higher soon. During such a period, long-maturity bonds lose a lot of money. The long-maturity bonds gain a lot when interest rates move down.
·      When the economy is doing very well, stocks rise in price, whereas bonds suffer as interest rates start to move up. However, when the economy goes down, stocks plummet and the central banks get into action. They reduce interest rates, which push bond prices up.
As you can see in the above examples, there are different investment options that have opposing influence of the same external factors.
When you invest in such different alternatives, you are immune to changes in that particular factor. For example, if you invest in an import unit and an export unit, you are immune to changes in the exchange rate (assuming the foreign currency is same).
Since we are discussing investing through mutual funds, the investor need not get into the details of the business of each and every company; as that job is done by the fund management team. However, if one wishes to invest through mutual funds and ensure proper diversification, one may look at different types of mutual fund schemes, e.g. invest across market capitalization, viz. large-cap schemes, mid-cap schemes, etc. or invest across asset categories, viz. equity funds, debt funds, liquid funds, gold funds, or across geographies, viz. funds investing in Indian markets as well as fund investing in global markets, etc.
Simply diversifying across different schemes may not be a true diversification.