What are Mutual Funds ?

 

The Definition

A mutual fund is nothing more than a collection of stocks and/or bonds. You can think of a mutual fund as a company that brings together a group of people and invests their money in stocks, bonds, and other securities. Each investor owns shares, which represent a portion of the holdings of the fund.

You can make money from a mutual fund in three ways:

1) Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all of the income it receives over the year to fund owners in the form of a distribution.

2) If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on these gains to investors in a distribution.

3) If fund holdings increase in price but are not sold by the fund manager, the fund's shares increase in price. You can then sell your mutual fund shares for a profit.

Funds will also usually give you a choice either to receive a check for distributions or to reinvest the earnings and get more shares.


Advantages of Mutual Funds

• Professional Management - The primary advantage of funds is the professional management of your money. Investors purchase funds because they do not have the time or the expertise to manage their own portfolios. A mutual fund is a relatively inexpensive way for a small investor to get a full-time manager to make and monitor investments.

• Diversification - By owning shares in a mutual fund instead of owning individual stocks or bonds, your risk is spread out. The idea behind diversification is to invest in a large number of assets so that a loss in any particular investment is minimized by gains in others. In other words, the more stocks and bonds you own, the less any one of them can hurt you (read about Enron scandal). Large mutual funds typically own hundreds of different stocks in many different industries. It wouldn't be possible for an investor to build this kind of a portfolio with a small amount of money.

• Economies of Scale - Because a mutual fund buys and sells large amounts of securities at a time, its transaction costs are lower than what an individual would pay for securities transactions.

• Liquidity - Just like an individual stock, a mutual fund allows you to request that your shares be converted into cash at any time. • Simplicity - Buying a mutual fund is easy! Pretty well any bank has its own line of mutual funds, and the minimum investment is small. Most companies also have automatic purchase plans whereby as little as $100 can be invested on a monthly basis.

 

Articles 

ARTICLE -7

Dividend or Growth        

Date: 15/05/2018 Index: 35544 No of Words: 1015

Many investors want clarity on selecting dividend or growth option while doing mutual fund investment. Due to lack of understanding and required information, wrong options are many times chosen.

Lot of investors, retail as well as HNI's, are investing money in balance funds and taking monthly dividend. In my opinion, investors are doing this for two main reasons.  

 

  1. Interest rates on bank fixed deposits have gone down from 9% p.a to 7%p.a. Even if banks increase their deposit rate to 9% p.a today, investors would go back to bank deposits while avoiding balance fund investments.
  2. They get "tax free" monthly dividends which is in between 8%p.a to 10% p.a on their principal. They further compare this dividend percentage with interest on bank fixed deposit. This is not at all an apple to apple comparison. Investor must remember that there is nothing free in this world. Most of the investors do not understand the risk associated with balance fund investments. In balance fund, at least short term which could be up to 3 years also , one can lose their money by way of current NAV becoming less than your purchase NAV and also dividends can stop if market goes bad and remember this will happen sooner than later. Investors have already lost money by becoming greedy just to earn 2-3% more interest in co-operative banks and corporate fixed deposits. Now after losing money in this way, they have become much wiser. Similarly if they don't understand the risk now in balance fund investment, they will become wise only after losing money. You cannot compare bank fixed deposits with mutual fund returns for getting income to meet your monthly expenses, when you are dependent on monthly dividend.

 

 

 

 

Investor must remember that, mutual fund investments are for capital appreciation. They are not for generating recurring income. The moment dividend is declared, NAV goes down by the dividend declared per unit. Effectively, it would be like removing money from one pocket and putting the same into another pocket and then getting happy over making a profit. Absolutely wrong.

I have seen investors, retail as well as HNI's, doing investments in Balance funds and taking monthly dividend payment option from the same month. According to me, this is due to lack of understanding and knowledge. This is completely wrong and must be avoided. In investments, you have to wait for at least one year, see that your investments have grown -if at all it has grown, then only you can depend on mutual funds to withdraw money for your monthly expenses. Otherwise, an investor is taking principally wrong action and is bound to suffer some day.

For Retail Investors- Reasons for choosing dividend option:

 1.Right now the flow is good. Market is going up like a straight line in recent past. Therefore the dividends are coming. However, investors forget that, at some point of time, market will go down or will become range bound. In this scenario if an investor still keeps getting dividend, he is doing nothing but eating his own capital or principal. Also if market falls, which will surely happen, they will stop getting dividend. This will leave a lot of retail investors who are dependent on monthly dividend to meet their day to day expenses in big trouble.

 2.Therefore asset allocation is very important. I have seen retired people investing more than 75% of their savings in balance fund. Retired people should never invest more than 30-40% of their savings in balance funds. Rest of the money must be invested in bank fixed deposits and low risk debt fund.

 3.Retired people have financial as well as psychological trouble in renewing old bank fixed deposits carrying 9% p.a interest to 7 % p.a interest. Because of lower interest rate, they prefer investing money in balance fund but they do not understand that the risk which they take is very high.

For HNI's- Reasons for choosing dividend option:

 1.HNI's get the dividend even when they don't need it, it is accumulated for months in their savings account on which they earn 4% interest and also pay tax on it. Because of this, their investments earn them less and not optimum returns. Therefore HNI's should always go for growth option.

 2.Also many a times, Asset allocation is not followed and the accumulated balance in savings account is again invested in balance funds.

 3.Another logic which is completely wrong given by investors with less knowledge and confidence is that market will keep going up and then down. If we take dividends, at least some profits can be booked.

Let us conclude this subject with two real life examples:

 1.A client of mine told me that his friend has invested Rs. 2 crore in balance fund and he is happy getting monthly dividend of Rs.1.5 lakhs to Rs.2 lakhs. This amount is utilized for monthly expenses. I'm sure, after doing this, his principal is either same or has gone down. It has not grown at all.

 

Also he is not aware that, monthly dividend can reduce or stop at anytime if market goes down or becomes range bound. Thereafter, he may not get monthly dividend for many months altogether. Is he aware of this? If yes, prepare to handle the situation.

 1.A retired person, age 70, told me recently that he has invested all his life's savings of Rs.60 lakhs in balance funds. He is getting a dividend of Rs.50000 per month. On 18 December 2017, when the market went down by 1200 points he became worried and came to meet me. I advised him to immediately withdraw minimum 50% amount and put it in nationalized bank's fixed deposit. Asset allocation must be followed very strictly. Thereafter, this person did not meet me. I don't know what he has done with his portfolio. I don't know what advice has been given to him by his old advisor.

One thing I certainly know is that, if he doesn't follow asset allocation, he will suffer badly. That day is not far away.

ARTICLE - 6

Investment Strategy - Now ?

           Date: 06/05/2018  Index: 34915  No of words: 1136

In mutual fund investments, an investor must remember that the markets are cyclical and therefore the returns (profit / loss) are also cyclical. If investor expects or wants straight line returns then, this market is not for him. In our interaction with the investors, we find that whenever they see the CAGR (compounded annual growth rate) returns are less than bank fixed deposits, many investors are uncomfortable and get into double mind, become anxious & restless. They want to exit, park money in fixed deposits, earn fixed income and then re-enter the market at appropriate time. Appropriate time means, just when the market starts going up. This is impossible. In fact this is a myth.

Mutual fund investments include equity mutual funds as well as debt mutual funds. And therefore it also includes Hybrid funds of all types, Balance funds, MIP and Equity arbitrage funds. Over a long-term (more than 5 years) period, investors post tax returns are likely to beat post tax returns in bank fixed deposits. This probability is very high. Investor must remember that in mutual fund investment there is no certainty, there is only probability. But, the journey is never smooth. Investor will always see many downs in his investment valuations. Saying this is easy but, really accepting this and staying invested when the valuation is down, an investor requires understanding of the market, conviction and a lot of courage.

If we look at the history of equity mutual fund and debt mutual fund then we find out that the cycle or trend has three broad types:

1. Market will go up one-sided for certain period of time.

2. Market will go down one-sided for some period.

3. Market will be moving in a particular range (range bound or sideways).

Generally, during 2003-2008 market was going up one-sided i.e. Sensex went up from 3049 to 15644. 2008-2009 market was going down one-sided i.e. Sensex went down from 15644 to 9709. Thereafter during 2010-2014 market was range bound i.e. Sensex was range bound between 17400 to 22400. Again 2014-2018 market was going up one sided i.e. Sensex went up from 22386 to 32969. In all these cycles, market going down from its peak level or going up from its bottom level by 10% to 20% is normal market behavior. One has to live with it.

Now the question is what will be the trend of the market cycle over a period of next one to three years? Another question is what will be the trend of market cycle over a period of next five to seven years?

One must try and understand that this trend is decided by three main factors. They are growth in corporate earnings, market sentiments and liquidity. Other factors which decide the trend are Market valuation measured by sensex PE ratio and market cap to GDP ratio, local and international political happenings, international economic happenings, natural calamities and events, etc. To summarize, one has to agree that forecasting market trend or cycle and being correct every time is impossible for anybody. This leads to forecasting becoming frustrating. Therefore investor has to further reconcile that he has to live with this imperfect market and remain invested for some time (3 - 5 years also) even if his returns on investments are less than returns on bank fixed deposits or in bad case his investments are in loss.

Having said this, it still makes sense to try to forecast the market trend or cycle because small investors have various limitations and may need money and also want to protect their increased valuation of investments , by booking profits. Again, investor must remember that anyone trying to forecast the market cycle will go wrong many times. Here one must be prepared to accept "loss in profit" many times. Then only an investor can protect his high gains on investment. It is also ok to forgo one or more market rallies than to lose the principal.

To forecast the market trend or cycle, for small investors for short term period, let us look at the following factors:

1. Sensex PE ratio is approximately between 23 to 24. This is not at all cheap.

2. The market cap to GDP ratio is 1.20. This is also quite high.

3. Market has already discounted the earning growth in FY 18-19.

4. Market cycle was one-sided up in last four years.

5. Crude oil price has touched 75$ per barrel.

6. Result of trade war started by USA.

7. Impact of interest rate increase by USA.

8. Result of the forthcoming state & central elections in our country.

9. Small investors making a mistake of entering the market at top may get frustrated. If this happens, it will affect the liquidity.

10. Many investors making a mistake of investing in balance fund and opting for dividend from the same month (in our opinion due to mass wrong selling) may get frustrated which will again affect the liquidity. If market goes down, then dividend percentage will reduce or they may not get monthly dividend for many months.

11. Banks have started increasing the interest rates. Latest case of HDFC bank, increasing the interest rate by 1%.

 

In our opinion, these are some of the crucial factors which will decide the market trend or cycle over a period of next one to three years. If one tries to forecast the market cycle, considering the above factors, then the following conclusions are most probable.

1. In general, market going up and that to, too rapidly, is less likely to happen.

2. If any of the factor becomes negative, market may go down and that to, too rapidly, is more likely to happen.

3. Otherwise market may remain range bound for a long period of time.

To conclude , an investor can take following options:

1. Right now avoid making lump sum investments in equity and balance mutual funds.

2. Book profit in investments made prior to 2 to 3 years and before. Book at least partial profits.

3. If you are in double mind, then invest in equity and balance mutual fund through SIP & STP. If you avoid this, it is much better and safer.

4. Do not withdraw from existing debt funds having modified duration of 2 to 2.5 years. For fresh investments in this category, wait for few months.

5. If possible, withdraw previous long duration debt fund investments. Also don’t go for fresh investments in this category right now.

6. Right now park your money and stay invested in Arbitrage fund and Liquid fund.

 

Note:This article is written by CA Kirtikumar Chitre for the private circulation of investors of KVC Financial Services Private Limited. Other investors, please consult your advisor before investing.

Article No. 5

Brief Note on Equity & Debt market and few mutual fund products risk & return profile

Prepared on 22/04/2016 (Index 25838). This note is  Prepared  by KVC Financial Services Private  Ltd, here in after referred to as " The Company"

 A.    Preface

 1. This note is prepared for investment in equity mutual fund & debt mutual fund investors. Accordingly reference to the word debt & equity shall mean debt mutual fund or equity mutual fund.            

2. Our opinion is based on our prediction of certain economic events and valuation of market. Accordingly the expected returns may be more or less than what we have stated. 

3. Please remember that there is no guaranty of capital as well as returns, as mutual fund investments are subject to market risk.

4. This note is valid today. It may or may not be valid in some further date.

5.  In any case the company is not liable to investor for the loss, if any, that investor may suffer. Investor is free to act or not to act on advice of the company.

B. Product Returns & Risks

1. Liquid Fund:- At present the liquid fund returns are likely to be in the  range of 7% p.a. to 7.5% p.a. If the RBI further reduces the interest rate then the liquid fund returns  will also reduce proportionately.Generally the modified duration of liquid fund is less then 100 days. There are also liquid plus funds where the modified duration is 200 to 300 days. In liquid plus funds returns are more by 0.5% to 1% than liquid fund.

 2. D-2 Fund:- The returns of the D-2 fund are likely to be 9%p.a. When the RBI reduces interest rate, the returns in D-2 fund will increase further due to mark to market concept. Generally the modified duration of D-2 fund is approximately 2 years.

 3. MIP Fund:- The returns of the MIP fund are likely to be in the range of 12%p.a. to13% p.a. In MIP, approximately 75% to 80% is debt investment &  remaining 20% to 25 % is equity investment. Therefore if the equity market go down then MIP returns  will be lower and may show loss also. Generally the modified duration of  debt investment in MIP is approximately 4 years.

 4. Balance Fund:- The returns of the Balance fund are likely to be 18% p.a. In balance fund 65% to 70% is equity investment & remaining 25% to 35%  is debt investment.

 5. Equity Fund:- As the name suggests, 100% amount is invested in share market. In opinion of the company, these funds are likely to deliver returns of 25% p.a. to 27% p.a. over next 3 to 5 years.

 6. Product Risks:- The risk of loss or less returns, in case of market (Equity or Debt) going down, is in the ascending order as given below.

(1)   Liquid Fund

(2)   D-2 Fund

(3)   MIP Fund

(4)   Balance Fund

(5)   Equity Fund

In brief, liquid fund will not give loss but returns will be slightly less. D-2 returns may be less than liquid fund returns. MIP returns may be less thanD-2 or MIP may given loss also. Loss in balance fund will be more than MIP losses. Loss in equity will be more than loss in balance fund. The extent of loss that the investor may have to suffer will be determined by the extent of fall in market. But it is unpredictable.

 Please  keep it in mind that in mutual fund investment (Equity or Debt) there is no written guarantee of principal and also returns. As per SEBI (Securities and Exchange Board of India ) regulations, no mutual fund can give such guarantee or undertaking. However based on the method of investment and investment papers, in our opinion, we are giving below the risk for various  products.

1 Liquid fund :- This is as safe as bank fix deposit. After 3 years, due to indexation capital gain tax will be nil or negligible. Before 3 years, income will be taxable as per the tax slab of investor.

2 D-2 Fund :- As safe as bank fix deposit. If interest rate goes up then returns may be 6% p.a. to 7% p.a. instead of 9% p.a. Taxation same as liquid fund.

3 MIP Fund:- If share market goes down and interest rate also goes up then in 1 year it may give 10% loss also. Otherwise after 3 year returns may be 8% p.a. to 9% p.a. instead of 12% p.a. to 13% p.a. Taxation same as liquid fund.

4 Balance Fund:- If the share market goes down then this fund may be give loss which will be proportional to the market fall. For example market goes down by 10 %, loss is 7% to 10%. Market goes down by 20% loss is 13 % to 20% extra. After 1 year  no tax, before 1 year 15 % tax on profit.

5 Equity Fund:-  Risk & Returns directly proportional to share market fall or rise. If market goes down by 40 % loss may be 40%.

In any case, on all the open ended mutual fund, you can withdraw amount at any time whether it is at loss or profit. There is no way that the mutual fund is not traceable (absconding) and the principal is 100% lossed.

For liquid fund investment there is no exit load. You can withdraw at any time. For all other investment, for a period of 1 year or more there is a exit load of 1% or more depending  upon the scheme conditions.  

C.  Equity & Debt Market

Equity & debt market returns are cyclical. In opinion of the company, due to various reasons, market is likely to go up in next 3 to 5 years. For the purpose of this document the company do not wish to write  all these reasons. If  the company writes these reasons, the document will become lengthy & loose it's purpose.

Advice of the company  is to stay invested and also invest more money till BSE index crosses 27000.

This doesn't mean that market will go up tomorrow. The company is also not saying that market will not  go down form this level. The historical data shows that even in bull market, market will keep coming down by 10% to 20% form its recent top.

One must be prepared to face these ups & downs in the market.

When a person sees his present investment in loss after one year or two years also, he is reluctant to invest more money. When the investment is showing the profit of 20% p.a.  to 25% p.a. after 1 or 2 years, a person is vary happy to invest more money. This is human psychology.

Human psychology doesn't work in investment. It is opposite in the investment. If you are in loss, invest more money. If you are in profit, don't invest more money, it may be a proper time to book profit. However advice to either invest more money or book profit will be given to the investor depending  upon our assessment of the situation at that time in future.        

The company believes, those  who are comfortable with these ups & downs will make decent  profit  both in equity (Share) market & Debt (Bond) market.

When the index PE starts going above 22 to 23 then the company will advice to start booking partial profit & maintain liquidity. Do not immediately enter equity market after booking profit.

For Debt market, when the interest rate cycle reverses, the company  will advice you to start booking profit.

D.  Conclusion

Happy investing. Risk & rewards fully yours.

 

 


 

 

   Article - 4

  Invest Now?

Written on  26.01.2016                                                                                                           

BSE Index - 24486

The consensus opinion today says that stock market (BSE Sensex) may go down to 22,000. It is heard from some corners that market may even go down to 17,000. The same people were saying in March 2015(when index was 30000) that in Diwali (November 2015) market will go to 33,000.Now however the majority of  investors are saying wait for investment into equity market. Few of them even go to the extent and  say that " Sell equity at this level".

Now  in this situation what the investor should do ? Invest, wait or sell ? To answer the question this article is written. It is divided into three parts A, B & C as follows.

A) The main principles of investment & features of investment process.

 

1. Investment in equity market essentially involves predicting the future. Predicting the future is very very difficult and only people with insight can do that consistently. There are very few people in this world who can predict equity market correctly and consistently. Majority considers that extrapolating the past means predicting the future. Actually it is not.

2. Therefore in equity market investment there is no certainty but only probability. You may decide to invest at any index level but the probability of loss still remains. The question is whether the probability of loss is relatively more or less.

3. If you invest at very high valuation then the margin of error which means decision going wrong leading to loss is not in your favor and vise a versa.

4. Further the investor commits two types of mistakes. Mistake  of omission that is not buying when valuation is low and mistake of commission that is buying when valuation is high. When a investor follows consensus opinion, it invariably leads to both mistakes.

5. Any investment decision is dominated by two broad methods, psychological or fundamental. That is subjective or objective decision making . The question is which one would you choose for yourself ? Following the consensus or crowd at this juncture is obvious and easy. I would say doing this, ignoring fundamentals is psychological or subjective decision making . However following facts and figures , fundamental decision making, requires lot of adventure and bravery. Because you are alone and may feel left out.

6. One must understand that, in equity market you get average or market return by following the consensus opinion but you get superior(above average) returns by taking a stand. That is to say by following fundamentals and ignoring psychology.

7. Market has a tendency in the short term to become overvalued or undervalued due to sentiments. However in the long term rationality will prevail.

8. Very important to see your risk appetite & liquidity requirement in equity investment. If you don't have both. Strictly don't go for equity investment.

 

B) Psychologically most of us ( including me)  have already decided not to  invest now. Now let us look at certain fundamental facts and figures, given below, and see whether we take different decision.

1. Equity market are cyclical. Generally these are long cycles and cycle    continues for 3 years,5 years or even 10 years. What is our call on the  direction of the cycle. Whether the cycle is likely to go up or down from the present level. If we look at the data, which will do in few next paragraphs, then in my view we are currently at the beginning of a long cycle which is likely to go up only. 

2.In any cycle (up or down) , for unknown reason, the market will go down by 10 % to 20 %  from its recent top. Similarly the market will go up by 10 % to 20 % from its recent low. The historical data gives ample evidence of the same. In my opinion the present 20% market fall is due to this factor. And therefore no need for panic. 

3.Big  falls generally happens for the following reasons.
 

  • a) High valuation - PE ratio more then 25.
  • b) Poor macro conditions .
  • c) Extreme  natural or man made events.
  • d) Global economic conditions.

 

We have to decide whether one of the above has occurred at present. In my view it is not.

4. Majority is talking about China. In my view how many of us really have a strength to understand any economy whether it is strong or weak ?         Majority has a strong belief that China is in trouble and will collapse. Let    us look at different views as follows.

  • a) China is a strong economy, merely the growth has slowed down in short term. China as well as few other economies may have to face  bad period due to this in short term. However one doesn't no what does short term means. How much time it will take to reveres these economic conditions of China. But in long term the impact on India will not be felt. Whether the  worst for the market, due to china impact, is already over? 
  •  b) In fact India is net importer with China. Devaluation of Chinese currency will only benefit us. 
  •  c) India has various strengths, so bad impact on India will not be there sooner or than later.

 5. Now let us look at some fundamental facts & figures.

  •  a) Recently IMF has maintained India's GDP growth for F. Y 16-17 and 17-18 at 7.5 % whereas it has reduced global economic growth rate to 3.4 % and  3.6 % in the year 2016 and 2017.
  •  b) GDP to market cap ratio is in the range of 62 % . The same was 147 % in the year 2007 and was  near 100 % in March 2015 when BSE Index was 30000. 
  •  c) PE ratio of sensex is near 15 now which was 29 in January 2008.This suggests that market is at fare valuation or slightly undervalued. 
  •  d) Interest rates are reducing. Inflation is also reducing. 
  •  e) Fiscal Deficit is 3.9% of GDP which is in acceptable limits. 
  •  f) Current account Deficit as on December 2015 is approximately 1.5 % of the GDP. The same was approximately 4 % to 5 % in 2011-12.
  • g) Forex Reserves are near 350 billion US dollar.
  • h) Central Government in huge majority so reforms will happen. Government is not taking any short cuts, government is focusing on long term growth.
  • i) Commodity price down - India is the biggest beneficiary of this. We are net importers of commodity. Emerging markets are commodity exporters and therefore are in deep pain.

 

All these fundamental  facts & figures suggest that it is good time to invest now..

 

C) After reading A & B , What is your decision? Invest, Wait or Sell?

 

1.  Market is down by 20 % from its recent top therefore in my opinion it is good time to invest now . It  doesn't mean that it will go up tomorrow. Based on the  fundamentals given above can market further go down substantially ? If at all it does how long it will stay there ? What is the reason that the fundamental will change and become negative.

2. You all know that no one can buy at bottom and sell at top. If at all market goes down from this level, take a brave decision and invest further. Also do not repent for your earlier investment at higher index level. Simply because if you are repenting then you will not be investing.

3. In my opinion, the worst is over or likely to over soon .The data suggests that market is more likely to go up than not . The valuations are already down by 20 % from its recent peak. So the chances that mistake of commission will take place are much less at present.

4.  You were willing to invest when the market was 25000 in June 2014. Why afraid to invest in January 2016 when market is again at 25000. From that period(June2014) inflation has gone down, interest rate have gone down, CAD(current account deficit) is also gone down, sensex EPS has gone up. Are these not positive factors for investment?   

5. In order to achieve superior investment returns , investor has to keep aside consensus opinion and take individual call . What is your call ? Risk and reward fully yours.

 BSE Sensex) may go down to 22,000. It is heard from some corners that market may even go down to 17,000. The same people were saying in March 2015(when index was 30000) that in Diwali (November 2015) market will go to 33,000.Now however the majority of  investors are saying wait for investment into equity market. Few of them even go to the extent and  say that " Sell equity at this level".

Now  in this situation what the investor should do ? Invest, wait or sell ? To answer the question this article is written. It is divided into three parts A, B & C as follows.

A) The main principles of investment & features of investment process.

  1. Investment in equity market essentially involves predicting the future. Predicting the future is very very difficult and only people with insight can do that consistently. There are very few people in this world who can predict equity market correctly and consistently. Majority considers that extrapolating the past means predicting the future . Actually it is not.
  1. Therefore in equity market investment there is no certainty but only probability. You may decide to invest at any index level but the probability of loss still remains. The question is whether the probability of loss is relatively more or less.
  1. If you invest at very high valuation then the margin of error which means decision going wrong leading to loss is not in your favor and vise a versa.
  1. Further the investor commits two types of mistakes. Mistake  of omission that is not buying when valuation is low and mistake of commission that is buying when valuation is high. When a investor follows consensus opinion, it invariably leads to both mistakes.   
  1. Any investment decision is dominated by two broad methods, psychological or fundamental. That is subjective or objective decision making . The question is which one would you choose for yourself ? Following the consensus or crowd at this juncture is obvious and easy. I would say doing this, ignoring fundamentals is psychological or subjective decision making . However following facts and figures , fundamental decision making, requires lot of adventure and bravery. Because you are alone and may feel left out.
  1. One must understand that, in equity market you get average or market return by following the consensus opinion but you get superior(above average) returns by taking a stand. That is to say by following fundamentals and ignoring psychology .
  1. Market has a tendency in the short term to become overvalued or undervalued due to sentiments. However in the long term rationality will prevail .
  1. Very important to see your risk appetite & liquidity requirement in equity investment. If you don't have both. Strictly don't go for equity investment .   

B) Psychologically most of us ( including me)  have already decided not to invest now. Now let us look at certain fundamental facts and figures, given below, and see whether we take different decision .

  1. 1. Equity market are cyclical. Generally these are long cycles and cycle continues for 3 years,5 years or even 10 years. What is our call on the direction of the cycle. Whether the cycle is likely to go up or down from the present level. If we look at the data, which will do in few next paragraphs , then in my view we are currently at the beginning of a long cycle which is likely to go up only.
  2.  
  3. 2. In any cycle (up or down) , for unknown reason, the market will go down  by 10 % to 20 %  from its recent top. Similarly the market will go up by 10 % to 20 % from its recent low. The historical data gives ample evidence of the same. In my opinion the present 20% market fall is due to this factor. And therefore no need for panic.

3. Big  falls generally happens for the following reasons.

a) High valuation - PE ratio more then 25.

b) Poor macro conditions .

c) Extreme  natural or man made events.

d) Global economic conditions.

We have to decide whether one of the above has occurred at present. In my view it is not.

4. Majority is talking about China. In my view how many of us really have a strength to understand any economy whether it is strong or weak ? Majority has a strong belief that China is in trouble and will collapse. Let us look at different views as follows.                                    

a)  China is a strong economy, merely the growth has slowed down in short term. China as well as few other economies may have to face  bad period due to this in short term. However one doesn't no what does short term means. How much time it will take to reveres these economic conditions of China. But in long term the impact on India will not be felt. Whether the worst for the market, due to china impact,  is already over?

b)  In fact India is net importer with China .Devaluation of Chinese currency will only benefit us. 

c)  India has various strengths, so bad impact on India will not be there sooner or than   later. 

5.  Now let us look at some fundamental facts & figures.

a)    Recently IMF has maintained India's GDP growth for F. Y 16-17 and 17-18 at 7.5 % whereas it has reduced global economic growth rate to 3.4 % and  3.6 % in the year 2016 and 2017.

b)    GDP to market cap ratio is in the range of 62 % . The same was 147 % in the year 2007 and was  near 100 % in March 2015 when BSE Index was 30000.

c)     PE ratio of sensex is near 15 now which was 29 in January 2008.This suggests that market is at fare valuation or slightly undervalued.

d)    Interest rates are reducing .Inflation is also reducing.

e)    Fiscal Deficit is 3.9% of GDP which is in acceptable limits.

f)     Current account Deficit as on December 2015 is approximately 1.5 % of the GDP. The same was approximately 4 % to 5 % in 2011-12. 

g)    Forex Reserves are near 350 billion US dollar.

h)    Central Government in huge majority so reforms will happen. Government  is not taking any short cuts , government is focusing on long term growth.

i)      Commodity price down - India is the biggest beneficiary of this. We are net importers of commodity. Emerging markets are commodity exporters and therefore are in deep pain.

 

All these fundamental  facts & figures suggest that it is good time to invest now..

C)  After reading A & B , What is your decision? Invest, Wait or Sell?

1.  Market is down by 20 % from its recent top therefore in my opinion it is good time to invest now . It  doesn't mean that it will go up tomorrow. Based on the  fundamentals given above can market further go down substantially ? If at all it does how long it will stay there ? What is the reason that the fundamental will change and become negative.

2.  You all know that no one can buy at bottom and sell at top. If at all market goes down  from this level, take a brave decision and invest further. Also do not repent for your  earlier investment at higher index level. Simply because if you are repenting then you  will not be investing.

3.  In my opinion, the worst is over or likely to over soon .The data suggests that market is more likely to go up than not . The valuations are already down by 20 % from its recent peak. So the chances that mistake of commission will take place are much less at present.

 4.  You were willing to invest when the market was 25000 in June 2014. Why afraid to invest in January 2016 when market is again at 25000.From that period(June2014) inflation has gone down, interest rate have gone down , CAD(current account deficit) is also gone down, sensex EPS has gone up. Are these not positive factors for investment?

5. In order to achieve superior investment returns , investor has to keep aside consensus opinion and take individual call . What is your call ? Risk and reward fully yours.

 


 

Article - 3

      Financial Goal-Our view and approach (Prepared  on 05/06/2015)

 

  1. Every investor must have financial goal. Investing your money on impulses, heard mentality, greed will always give you losses or less than desired returns.
  1. Taking investment decision based on capturing the market movement may sometime give you profit. However in majority of the cases it will give losses only .
  1. Financial goal is a very relative goal and it varies from person to person. We decide a financial goal of a person after considering the following factor:
  • Age
  • Family requirements
  • Liquidity requirements
  • Existing Investments made by the person
  • (If the person discloses same to us)
  • Risk profile of the person
  • Returns requirements of the person

We conduct periodic meetings with the investors for deciding the financial goal .

  1. Financial goal is never static .It changes with the changes in family dynamic and therefore periodically financial goal need to be changed.
  1. We monitor financial goal regularly and if required change the asset allocation.
  2.  
  3. Asset allocation is very important. It means deciding how much money to be invested in low risk instruments ( Broadly bond or Debt investments) and how much money to be invested in high risk instruments ( Shares or Equity related Investments).
  4.  
  5. We recommend the asset allocation and the changes in asset allocation based on the following factors :
  • We follow certain lead indicator and based on that we try to form our opinion about changes in broad market cycles.

 We believe that equity ( share market) as well as debt ( Bond  market ) both run in cycles and these cycles are broad cycles .

  • When  the financial goal is achieved .
  • When the market becomes very high and not supported by fundamental lead indicator .
  1. Financial goal is broadly required for two reasons as follows:
  • When we want to create corpus for spending or for acquiring some asset.
  • When you don't need financial goal for the above stated purpose, still you need financial goal for growing your investment at a decent rate for the following purpose:

a)     To earn 3 to 4 % more post tax returns than post tax return on bank fix deposit.

b)     To beat the inflation.

c)     To earn the return which you feel are necessary  & sufficient for you while taking the required risk . 

  1. Financial goal could be for short term and for long term.

 


 

Article - 2

 

Note on Liquid Fund 

 

1) Purpose : This  note  is  prepared  on 16/10/2014  for  the  people  who  are  first  time  Investors  in liquid  mutual fund.

2) Investment : Liquid  Funds  make  the  Investment  in  Treasury  bills , Certificate  of  Deposits   , Commercial  papers  and  other  money  market  Instruments . The  Investment  is  made  for  short  duration  and  generally  the  duration   is  less  than  90  to  100  days.

3) Types of Liquid fund : There  are  broadly  two  types  of  liquid  funds. First category  is  called  liquid  fund  whereas  the  second  category  is  called  Ultra  short  term  fund. The  Investment  duration  or modified  duration (MOD) as  it  is  generally  called ,  is  more  in  ultra  short  term  fund  than  in  liquid  fund.

4) Returns : The  returns  of  liquid  funds  are  higher  by  1% or  2%  than  the  Repo rate . Therefore  when  in  the  RBI policy  Repo  rates  are  increasing  , the  liquid  fund  returns  are  also  increasing  whereas  when  in  the  RBI  policy  Repo  rates  are  reducing ,  the  liquid  fund  returns  also  starts reducing . At  present , the  liquid  fund  returns  are  in  the  range  of  9% p.a.

5) Entry / Exit  load : Liquid  funds  do  not  have  any  Entry or Exit  load.

6) Period  of holding  : There  is  no  period  of  holding  for  liquid  fund . You  can  Invest  in  liquid  fund   even  for  one  day . There  is  no  upper limit  for  number  of  days  for  which you  can  stay  Invested in  liquid  fund .

 7) Risk : Technically  liquid  fund  has  got  two  types  of  risk. One  credit  risk  and  two  Interest  rate  risk. However  in  practice  both  are  either  not  there  or  if  at  all  they  are  there , the  scale is absolutely  minimum .

As  the  duration  is  less  than  90  or  100 days , the  Interest  rate  risk  is  absolutely minimum .

As  the  Investment  is  made  in  AA  or  AAA  rated  instruments generally , the  credit  risk  is  also   practically  not  there .

In  fact  there  is  no  evidence  that  liquid  fund  investments  have  given  loss  if  stayed  invested  for  more  than  one  month . For  a  period  shorter  than  one  month , due  to  interest  rate  changes ,  the  return  can  be  slightly  less  or  in  very  exceptional  situation  can  be  negative  also  by  approximately   0.50% in  absolute  terms .

8) Taxation : Being  a  debt  mutual  fund ,the  holding  period  for  Long  term capital  gain  is  three  years. Therefore  if  the  money  is  withdrawn  before  three  years  the  taxation  is  as  per  the  normal  slab  rate  of  the  Investor . However  after  three  years,  the  Investor  has  to  pay  20%  capital  gain  tax  after  doing  Indexation . In  this  method  Long  term  capital gain  practically   becomes  Zero .

9) General : All  the  AMC'S ( Asset  Management  companies ) i.e.  Mutual  fund  companies  have   liquid  funds.  One  has  to  select  the  AMC's  based  on  the  AUM ( Asset  under  management  ) , quality  of  the  management  , proven  track  record  , ease  of  operations  and  servicing .

10) Use  of  Liquid  fund : Instead  of  keeping  the  short  term  money  in  current account  or  saving  account  it  is  better  to  park  them  in  liquid  fund  for earning  slightly  higher  and  safer  returns .

Practical  experience  shows  that  Rs.one  crore  invested  in  liquid  fund  earns pre  tax returns of  Rs. 75000/-  per  month  whereas  in  saving  account  the  earning  is  Rs.35000/-  per  month  and  in  current  account  the  earning  is  zero.

 


 

Article - 1

 

 

Note on debt mutual fund  (Prepared  on 27/11/2013)

   

A] Categories

Broad categories of the Debt Mutual Funds are as follows.

1] Liquid fund

2] Debt fund

3] MIP fund

4] Income fund

5] Gilt fund

B] Investment

 

Generally the investments of the debt fund are made in the following debt instrument.

 

1] Treasury bill

2] Cash management bill

3] Commercial paper

4] Certificate of deposit (CD)

5] Non convertible debenture / bonds (Corporate bonds)

6] Government securities

7] Zero Copan bonds

8] Bill discounting

9] Floating rate notes

10] PTC

11] BRDS

12] CBLO (Collateralized borrowing and lending obligation)

13] Term deposit

14] Reserve repo

15] PSU/PFI Bonds (Public sector undertakings/Public Financial institution)

 

C] Duration

The duration of the instrument stated at para B are different & range from 7 days for treasury bill to 10 years for government securities.

The duration of Mutual fund categories in para A is also different. In liquid fund, sr. no. 1 the duration is lowest, it goes on increasing from sr. no. 2,3,4 & it is highest for sr. no. 5.

D] Returns

The returns of debt mutual funds are depends on 3 main factors :

1] Rate declared by RBI that is repo rate, MFS rate etc.

2] The instrument in which investment is made by the debt nutual fund & also the duration of the instrument.

3] Changes in interest rate is mark to market concept.

E] Mark to Market Concept

Even in debt mutual fund the returns keep changeing on daily basis, based on demand & supply. Further the returns keep changing due to change in interest rate as per RBI policy. The effect of change in interest rate on the debt mutual fund returns is given below.

1] Interest rate goes down - if interest rate goes down then the debt mutual earn profit & the simple formula is as follows.

[ Change Interest Rate x Modified Duration ]

2] Interest rate goes up - if interest rate goes up then the debt mutual fund makes a loss & the simple formula is as follows.

[ Change Interest Rate x Modified Duration ]

F] Risk in debt mutual fund

It must be understood & remembered that there will be variation in the return of debt mutual fund & verry important, debt mutual fund can give loss also.