Category: Money

When I say, I trade in equities , the first question I face is “where do you get tips from ” . Or it could be “give some tips , na” . No tips, No trading; so it sounds.

Tips can mean anything . Peter Lynch says in his book; When two fund managers run into each other, may be in an office corridor, the first conversation after hello would be “hey, what are you looking at ” and the response could be “there’s something happening at General Motors ” or “may be a buy back offer at abc company…..” . That’s what fund mangers do; keep tabs on the businesses”. Tips could also mean precise directions to trade; buy ABC at 683 for 5 months period; target 790 and stop loss 627.

It is the latter connotation one is more familiar with . Everyone wants someone else to hook the fish so that you can pose with catch proudly.

I just fail to understand how such tips can work in practice. Even if seven out of ten such trades work, anyone can become a millionaire just by following these directions, precisely. There would be minor losses and major gains as the losses incurred would be just 20-30 % of the gains accrued when the target is hit.

But does it really happen ? Obviously not. Even paid advisory services , which are dime a dozen do not have the kind of hit : miss ratio that can keep you in the positive zone, leave alone make you a millionaire.

Ironically , when people find  that the system does not work, they hardly blame the method , but just attribute the losses to  bad tips or poor implementation. So, the chase for the holy grail called ‘Good Tips’ resumes.

There are people who swear by fundamental analysis and there are others who take technical analysis as Gospel Truth . The Fundamental Analysts go through earnings, past present and future, the book value , and whole host of ratios to come out with one number that would be the price target in next 12 months. As a rule the targets given by the analysts vary from -20% to + 20% with all kinds of recommendations , buy, hold or sell. Here’s one after the recent Q2 results

As for technical analysts , they pour over charts and a dozen indicators and prophesy the future course of the price movements. Here, the variance is even more pronounced. On the TV Channels, if there are three technical analysts , there are six opinions. Why six ? After all each sentence is followed by , “if this, then that ” and “having said that ….” Most of the time the second part of the opinion totally negates the first part.

This is the research based on which TV Channels provide precise directions down to a rupee for buy price and target price. Some channels make it more interesting by going for fancy formats like 20-20 after the 20-20 Cricket.

In reality about 50% of the tips would be productive, which is also the probability of flipping a coin and calling  right .

So, the question is do traders need tips at all . One can easily find 10-20 tradable stocks from any of the web sites on stocks. They give real time inputs on prevailing trends. Here’s an example

Assuming that people need the name of a stock to start with and all are not net savvy, (Though all are TV Savvy) we come to the next question; how to use these tips. Some follow it to the letter; there are others who partially follow. Then there is another class of people who take a totally contrarian call on the view that the entire herd would go in the direction of the tips while they could runaway with the booty by taking the opposite direction!

Be that as it may, in my view, most tips are only as useful as a coin unless it is insider information which is illegal anyway.

So, what’s the way out ? There are many methods to make money in the market and probably even more ways to lose money . As I see, one has to find a way that works for himself or herself. A lot depends upon the time available, money available, risk appetite , loss aversion, mental discipline, ability to focus and the state of one’s nerves. Of course some principles may be applied almost universally.

Some principles that I can think of :-

1. Fundamental Analysts tell you what to buy and Technical Analysts tell you when to buy.
2. Technical analysts’ recommendations work only for short term trades and fundamental analysis would need to be done every quarter or on occurrence of fresh inputs on the business .
3. It is better to book a small loss when the trade does not go your way, rather than wait for the loss to go bigger by which time one becomes even more reluctant to book a loss. Will power does not work in the face of bad business or bad sentiments. Yes,  sentiments are as important as the business.
4. Averaging is bad . I am surprised by many experts on TV Channels advising traders to average. Your holding a particular stock should not influence your buying decisions. If you would buy a stock irrespective of whether you are holding it or not, then sure go ahead and buy. Averaging to mean, buying more of the same stock, is no method to reduce the loss you have already incurred . The loss can be recovered through any other trade. Of course, if you are not sure of the right price for a stock, you can buy it in small lots to average. The risk and reward , both are reduced.
5. Never ever convert your short term trade to long term one or vice versa, just because the trade is not going your way in the originally intended period. For long term or short term, the type of stock and size of positions would vary a lot.
6. Money management is often overlooked. Trading is a risky activity and only solid money management can cover the huge risks inherent to trading. As I view, one needs Solid Blue chips stocks to provide stability to a portfolio, then mid and small caps to provide growth and liquid cash to exploit the opportunities and to mitigate losses in case of a crash. For example a conservative trader could have 60% in blue chips 20% in mid caps and remaining 20% in cash at any given time.
7. Mental Discipline would be the single most important factor that separates successful traders from the not so successful. Good traders book their losses when they go wrong and let the profits run when they are right. Amateur traders who are too reluctant to book losses and too eager to take home the profits end up doing exactly the opposite. They let the losses run and cut short the profits.

contd from http://sibha.online/wprandom/2019/01/03/trading-time/

As we have seen , people call themselves, long term investors, short term investors, intra-day traders, swing traders, position traders , momentum traders and what ever, depending on the positions they have on different stocks.

Except in a secular bull market, many of us are in the Red. There are people switching from quick losses to slow motion losses  (read short term term investing to long term investing ) and vice versa. Whatever be , hardly anyone calls himself an ‘universal donor’ kind of trader , though that could  be exactly what he achieves. It is  a kind of public service to provide liquidity to the market, unfortunately it is all done inadvertently and they get absolutely no credit for this Yeoman service. There are people who continue to keep trading in this mode. So, what is the motive ? Is ‘money making’ the only motive to be in the market ?

As I see there could be many other motives to deal in stocks quite unrelated to making money. Some that I can think of:-

Peer pressure . It is so cool to talk about stock market , particularly among men. Ladies are catching up fast in everything from cuss words and  drinking to gambling ! 

Intellectual Stimulus. Trading is very challenging. There is so much to understand , so much to conquer. Fundamental Analysis is full of ratios  to study and  numbers to digest and Technical analysis is a world of charts hiding in a few lines on the charts, the entire gamut of human emotions Fear and Greed. It is a fascinating world telling a different story every day, every hour. Some people just try to predict the markets ,just for the thrill of “I told you so” feeling. Just as hill folks love to predict weather , analysts love to predict the market moves.

Snob value . Surprisingly , the ability to lose big money has as much snob value as the ability to spend money. I lost a lakh today has more snob value than to say I made 500 bucks today.

Gambler’s thrill . When you risk something big and you are waiting for the outcome , there is that adrenaline rush which is so addictive. Stock market is some place where you can get the thrill by putting away just that amount you need to get that kick; too less makes it all too pedestrian and too much can destroy your Capital. 

One can think of many other motives. Once I heard a fellow officer saying with a rather dreamy look, “can’t wait to quit ….. post retirement, this is all I am going to do…” When asked , if it would be online, he was shocked.

“Why would I do that ? Look, a man can’t sit at home all day, running errands for the lady. The idea is to go to a brokerage , a trading place, join a gang of punters , talk crap, eat and drink junk food and just enjoy the bonding and go back home in the evening fully  refreshed.”

Those days, the trading stations were mostly ‘men only’ place .

As for me, I am more fascinated by the tools of the trade rather than the trade itself. The kind of software and database you have today is absolutely phenomenal. When you sit at a terminal, you have minute to minute data on your screen, even while you are listening to some great songs on you-tube and chatting with friends on social media. Once in a while I have a game of chess going on in one tab. At the end of the day , it is +1000 or -500, who cares ? It all evens out and the day is well spent and mostly pays for itself.  Mutual Funds and a few steady stocks along with some debt instruments beat the inflation comfortably.

Next is … Tips and Tricks !  

Time is a commodity available in plenty, post retirement. So, one looks for time-consuming activities rather than time saving gadgets or tricks.

Trading in stock , is indeed a time consuming activity. Starting from the time spent on learning about fundamental analysis and technical analysis , one needs to be always aware of the ever-changing macro and micro issues . Ashwini Gujral , a market guru calls trading a dance on moving dance floor. May be a guru can just let the floor do the dance for him, but others have to be constantly moving to keep from falling on their faces.

Trading in stock , is indeed a time consuming activity.

If that be so, how is it that you find so many people with busy schedules professing to be traders and that too successful ones? (Yours truly included in this group till a couple of years back; only now I realize what I had been doing)

I have always been calling myself a long term investor particularly after reading some great investor/authors like Warren Buffet,  Peter Lynch etc; it does not matter that this long term investor is yet to see a multi-bagger. In bullish times, when you are sitting on a profit of 50-60 % it is simply too tempting to book profits and thump your chest. The lurking fear is also present that a sudden crash could come anytime and wash away all profits in jiffy. Of course when you are sitting on loss , however small, for years together , it helps to remember the wisdom of Warren Buffet & Co and counsel yourself that long term investors are not easily deterred by short term losses on the book; it doesn’t matter that the short term may extend beyond five years.

All stock market ‘investors’ , including Warren Buffet  claim that they  were not speculators but investors in a business. Nothing can be far from truth. They are really not investors at all. Everyone in the stock market is a sheer speculator.  When TCS came out with a public offer to sell a share of face value Rs 1/- at a premium of Rs 899/- , we  investors bought it at such a huge premium hoping that the premium would rise much further in future. Noone bought it for the dividend of Rs 5 /- and Rs 10/- that the company gave every year.  So it is all about speculation on capital appreciation rather than for returns through dividends, which alone an investor should be looking for. It is a different matter that the capital appreciation could be dependent on the quality of business; wealth creation is through speculation as to how the market appreciates or discounts a business. very good businesses have given luke warm returns while ordinary companies have given great returns. 

Everyone in the stock market is a sheer speculator.  When TCS came out with a public offer to sell a share of face value Rs 1/- at a premium of Rs 899/- , we  investors bought it at such a huge premium hoping that the premium would rise much further in future. No one bought it for the dividend of Rs 5 /- and Rs 10/- that the company gave every year. 

The only time I was an investor was when I put some money in a cousin’s start up. Rs 5000/ in the eighties was large sum. For three years the company gave 20% dividend ie Rs 1000/ per year. The company was not listed in any exchange , so you could sell it to or buy it from only the company . For next 2-3 years there was reduced dividend pay out and one fine day the company folded up.

Fortunately, this long term investor had a short term requirement  for money and could sell the share back to the company without any buy back offer. No one who ever held the share saw any capital appreciation or depreciation till the day it just became zero.

Coming back to the world of traders /investors, in my opinion there is only one category Speculators. They may be divided into long term speculators or short term speculators. So wherever I use the word trader it could be read as a speculator.

An average trader buys a stock based on ‘tips’ from colleagues, friends, TV Channels and well just about any source. Many a time it is just a group of letters like ONGC rather than a company with real people and real operations. The normal question is “will it move up, when , how much “etc .Once the stock is bought then you watch the tickers everywhere; on TV and  mobile phone. The day you see green , the chest fills out and any red streak on the ticker prompts one to seek assurance from experts, in order to continue being long term investors. Who wants to book losses ? Losses are left unrealized and they keep growing . How else would you hear such queries on business channels, “bought xyz stock at 1020 three years back; should I continue holding it; I am a long term investor”. The stock would be trading around 250/-.

It is always the intellectual honesty that becomes the first casualty . It doesn’t matter what you tell others, but it certainly matters what you tell yourself.

It goes like this .

When booking profits, however small “let me book the profits now; At least I am getting something ;have been holding on for over a month; after all you can’t keep holding on to it for ever ;It might take a nose-dive again to below my purchase price. I am a position trader“

When holding on to a stock at a huge loss “I am a long term trader and I’ll not sell at a loss“

When booking a higher loss on the same stock “you know I need money to buy ABC stock which is sure to go up”

Then you can call yourself, day trader, swing trader, position trader and what have you , to justify the fear , greed, insecurity, need to brag,need to cry and loss aversion.

Fortunately or unfortunately, the very process of trading becomes so random that it becomes difficult to keep track of the profit and loss. Human mind is so smart, the profits remain on the surface while the losses are buried deep into sub-conscious mind ,as Freud calls it. 

Today, you have all kinds of reports generated by the web interface of your brokerage company . It is not just the overall profit and loss for the year, but the exact XIRR for each trade done. 

So, as I see it, the first requirement of successful trading is , absolute intellectual honesty to understand where you stand.

——will continue..

Human Mind is hardwired to lose money in Stock markets. There is a perpetual oscillation between greed and fear, that influences any buy/sell/hold decisions. (hold is also a decision , remember our late PM PV Narasimha Rao) I have attempted an illustration of the human mind while dealing with stocks. (pic 1)

Human Mind is hardwired to lose money in Stock markets.

If one is to succeed there is a need to detach human mind from our buy / sell decisions.

Another example of how an automated system is better suited to certain situations

You come back home tired , late at night and ask your Mom to wake you up early for an important meeting . Then you find in the morning you are late, having overslept. You ask your mom and she says sweetly, “you were sleeping so soundly that I didn’t have the heart to wake you up” … Ok , it would have been a different matter had you asked your wife. She would have taken it as a great opportunity to pour a bucket of cold water on your head ! Under the circumstances an alarm clock , set to multiple rings , would have solved the purpose wonderfully, sans emotions.

So we come to SIP or Systematic Investment Plan .

Many of us would have come across tables to illustrate how investing through a Systematic Investment plan is superior to investing a lump sum.

Two options are compared through the table; lump sum investment of Rs 12,000 at the beginning of a 12 month period and monthly investment of Rs 1000/- for 12 months. The SIP route has resulted in getting an addition unit of MF for the same cost price even though the amount invested is in installments.  You get more units when the market is down and less units when the market is up. It is also called Rupee Cost averaging.

A point to note is that this is not always the case.  In a bear market, SIP is more efficient and in a bull market SIP may actually result in getting less number of units. Ideally one should invest in a lump sum when the market has bottomed out. But the catch is that Nobody knows when the market has bottoms out. In 2008, No one knew , that the market was at its peak and in 2009 No one knew that it had bottomed out. If an investor had got out of the market in Jan 2008 and re-entered anytime between Oct 2008 and Mar 2009, he would be sitting on a huge fortune today. But that is hindsight. In reality most people sold out in mid 2008 at a loss after waiting for a reversal and were scared to re-enter till 2012 when the market was already up. Some are still keeping away and are just coming back in trickles in 2017-18 .

If an investor had got out of the market in Jan 2008 and re-entered anytime between Oct 2008 and Mar 2009, he would be sitting on a huge fortune today. But that is hindsight. In reality most people sold out in mid 2008 at a loss after a long painful wait for a reversal and were scared to re-enter till 2012 when the market was already up. Some are still keeping away and are just coming back in trickles in 2017-18 .

It’s like riding a roller-coaster ride blind-folded; you can’t brace yourself for the ups and downs.  For a deeper understanding  click here

More important than the arithmetic, it is the detachment of human mind that makes SIP great. When I first started regular investments in MF, it was during the bull run post 2004 elections. Then in 2006, there was a slump and every stock, every Mutual Fund started heading south. I had a tech heavy portfolio and these stocks lost wealth faster as dollar was depreciating against rupee. My first action was to redeem my MFs. Why should I actually pay someone to lose my money ?

More important than the arithmetic, it is the detachment of human mind that makes SIP great.

On hindsight , I had made two big mistakes. Firstly, I had compared the MF performance in absolute terms and not with its benchmark Index. These MFs were still losing money slower than their benchmark indices and so, were still performing great. The second mistake was that while I was prepared to invest at higher NAV while I was hesitating to do so at lower NAVs.

Stock market pundits would tell you that , 10 shares of Infosys bought at IPO at Rs 95/ per share (all of Rs 950/) in 1993 (it was under-subscribed) would now be worth over 50 lakhs. So is it with the wealth created by Wipro or Reliance. I wonder how many of us have met any person who have actually benefited from such an investment. On the contrary, prior to Harshad Mehta scam, the same shares Infosys and Wipro had reached astronomical prices with three figure PEs and many investors lost big-time as the bubble burst. I am sure we would have met some of these investors . In short, big losses are real while big profits are hypothetical and on hindsight.

In short, big losses are real while big profits are hypothetical and on hindsight.

Sundaram Finance undertook an exercise to identify the beneficiaries of one of its top performing MFs Sundaram Select Midcap Fund. The idea was to honour these people in their AGM to highlight the importance of long term view on investments. It had given 5400% returns in 15 years since launch. After a lot of digging into their databases they could physically identify only a handful of investors. Half of these were dead and the others were not aware that they were holding these valuable assets. They were the only people who created wealth through long term investment ; the dead and the duds. So, if you want to make money through stock markets, after investing, be dead to the market or just be unaware, forget about the market; easier said than done.

the only people who created wealth through long term investment ; the dead and the duds. So, if you want to make money through stock markets, after investing, be dead to the market or just be unaware, forget about the market; easier said than done.

More than anything, an SIP ensures that you are not affected by the swings in the stock market .  It goes like the steady tick-tick of a grandfather’s clock even though a storm may be raging all around. I’ll conclude with my personal experience on the effectiveness of SIP.

Most of us are used to the monthly subscription we make to some kind of provident fund , partly to avoid paying higher income tax. Provident Fund gives about 8 % returns and there is a tax rebate. After retirement in 2012, I started investing in ELSS (Equity Linked Saving Schemes) through SIP. Last year I had invested in Axis Long Term Equty Fund . I get the same tax rebate as someone who invests in PPF, and the returns given by the MFs are about 12-18% annualized. Since there is a lock-in period of three years , it is a forced long term investment. Pic

Note that there is no growth for the first year and a half but it is made up subsequently. Normally , a human mind is susceptible to intervene in such situations, often to a disastrous effect.

The only thing which is always true in a MF brochure is the mandatory disclaimer :  Mutual Funds are subject to market risks ; …. Past performance of a Fund is no guarantee for future returns.

We know from the historical data that Market rewards long term investors. We also know from anecdotal evidence that most people buy high and sell low.  It is not the people , but their emotions , greed and fear that make the buy / sell decisions.  Detach the emotions from investment decisions and you have SIP.

Next we see how individual MFs are evaluated.

Every brokerage firm wants to sell , sell and sell. So they just want you to buy ,buy and buy.  Advertisement for a financial product is just as for any other product in the market. However, there is one big difference; In a financial product, there is no tyre to kick; there is no hardware. Then there is the disclaimer “Mutual Funds are subject to market risks blah blah blah” . So, it is very easy to mis-sell Schemes with fancy names like Guaranteed Income Scheme. How can you expect any guarantee when “ Mutual Funds are subject to market risks …..” ?

In the MF industry , there are three main players; AMC, Distributors and investors. The Distributors are paid by the AMCs commission for every unit of a Scheme sold and the investors bear these costs irrespective of profit or loss they incur. Who bears the cost of running the AMCs ? It is investors again. How do the AMCs charge  after all Investors don’t write out a cheque, as fees? The charges are deducted from the NAV (Net asset value) of a unit in the name of expense ratio , the charges for running a MF . An innocuous looking 1.5 % expense ratio can make a significant dent in your returns. For example, Rs 1 lakh over 10 years at the rate of 15 per cent will grow to Rs 4.05 lakh. But if we consider an expense ratio of 1.5 per cent, your actual total returns would be Rs 3.55 lakh, nearly 14 per cent less than what would have been achieved without any expense charge.

  An innocuous looking 1.5 % expense ratio can make a significant dent in your returns. For example, Rs 1 lakh over 10 years at the rate of 15 per cent will grow to Rs 4.05 lakh. But if we consider an expense ratio of 1.5 per cent, your actual total returns would be Rs 3.55 lakh, nearly 14 per cent less than what would have been achieved without any expense charge.

An equity MF can charge upto 2.5 % and a debt fund can charge upto 2.25 %. In effect , once a product is sold, for a distributor an one time  return is guaranteed and for an AMC, an annual return is guaranteed and only the investors return is subject to market risks !!

With assured outgo of 1 – 2.5 % per annum from your investment, wouldn’t it be prudent to do some check before buying ?

The Net is a boon as well as a bane.

The Net is teeming with analysts and advisors on Mutual Funds. I am wary of clichés like “There’s no free lunch”. Actually in the digital world , there is free lunch with dessert included provided one is careful about his surfing habits and sources. I don’t mean piracy, but legitimate sources of information and data. Generally there is no dearth of places for Gyaan starting from the American “Investopaedia” to our own start up from Bengaluru zerodha . They are excellent free sources if only one is prepared to read. But who wants to read. ? We often hear “yeh sab chhod , batao kaunsa fund thik hai” . People just want the proceeds rather than the process. Just give me a list of stocks or funds to invest in.  That’s understandable; perfectly okay. There are places to get such lists also.

Though most of the brokerages publish their general recommendations and bring out free newsletters, the specific recommendations are restricted to paid subscribers. So, to begin with one should study the website of your own brokerage company thoroughly.

Here , I am giving some screen-shots from ICICI Direct Brokerage . I hope it is not an infringement on IP  rights. Most of it is in public domain anyway.

Then there is outlook money magazine which brings out a list of Funds every year as OLM 50. Here’s a snap shot .

After investing , unlike Stocks, there is no need to monitor on daily basis as that is what the Fund manager and his team are paid for. However, at-least every quarter one should have a look at the portfolio to decide on ” buy , hold or sell”. If due diligence  is done before buying, there would be no need to churn the portfolio too often.

The least one should do is the have a look at the last column of portfolio details on the web site . You won’t be very wrong even if you just follow the recommendations in the remarks columns.

To summarize, firstly, one should avoid falling prey to mis-selling by distributors . Secondly, a little bit of study will help to build a balanced portfolio for growth and stability.

SIP will require a separate post by itself.

A list of links to study for Mutual Funds Pick

Traditionally , Indians invest in real estate , gold and fixed deposits and it is only in the recent years that Equities and Mutual Funds have attracted the investors’ attention. Our pension funds have just started investing in the Stock Market. Still there is a long way to go before every investor has a stake in some mutual fund or the other, directly or indirectly.

Year after year MF AUM (Asset Under Management) is increasing 20-30 percent. I am not an expert on Investments or Mutual Funds but I am trying to learn the ropes as I go along , over the past 10-12 years. This just an attempt to share my experiences for investors starting out now; a primer in Mutual Fund Investing.

Why Mutual Funds

Everybody hears stories of people having got excellent returns from investment in the share markets. But unfortunately they also hear stories of the big crashes in the stock markets and crores of rupees being wiped out in a day. There are people whose life times savings have shrunk to one fifth or one sixth of the original capital. Is it worth the risk ? Investing in mutual funds helps to mitigate the risks involved in direct investment in equities.

If you need to cross a lake, you may just  put on a life jacket , pack something to eat and drink , and set about to “row row , row the boat ,gently down the lake” . But if you need to go into a sea , where there are too many unknowns and too many risks like winds and waves, hurricanes and Icebergs , it is better to look for a ship equipped to negotiate through all kinds of obstacles. Also you need an astute Skipper and a navigator.

While an investor can easily understand financial instruments like fixed deposits and bonds to invest on their own , Equity is a different kettle of fish. If one is not careful, a financial tsunami can wipe out the entire capital. So you need a qualified fund manager backed up by a battery of research assistants with all technical and tactical tools they can muster.

So, if you want to undertake a voyage you need to find a good ship and a good skipper. The Mutual Fund Scheme is the Ship and the Fund manager is the captain of that ship and there is a qualified and experienced crew to assist him.

Next question is how do you select one or two out of the myriad number of schemes in the market. Every day there are new schemes and offers announced to attract investors. Here, we need to understand the idea of risk reward chart.

Higher the risk, higher the reward. Debt funds are like open ended fixed deposits . They give a low return but always a positive one. The Debt / Liquid MFs invest in Govt bonds and such instruments which give fixed returns.

The next in order is Hybrid Funds that invest in Equities and Bonds in a fixed ratio. Depending on the ratio they could be equity heavy or Bonds heavy. Suffice to say that equity oriented Hybrid funds carry higher risks and they also offer higher rewards.

Next we have diversified , large caps followed by diversified mid cap funds. There are also multicap mutual funds which fall somewhere in between. Lastly, we have the sector specific mutual funds. There are times when investors are bullish on a particular sector like technology, pharma or say banking , AMCs(Asset management Companies) launch sector specific schemes to take advantage. But when the tide turns, these happen to be the most affected schemes. To give an example, in 2005-6 bull run, IT funds gave more than 100 % returns in a year and in the crash of 2008, it is the power and infrastructure MFs which saw a huge downturn. You can see the chart of reliance power and infrastructure MF. The scheme was sold with a lot of promise in 2008 and crashed with every dip in the market. An investor who had entered in 2008 would have hardly seen any gain till 2016. This may be compared to the performance of a typical diversified equity MF. HDFC top 100. It can be seen from the chart that from Rs 10/ in 1998, it has steadily rose to Rs 540 in 2018; a return of 50 times in 20 years.

It doesn’t mean that sector funds are to be avoided altogether. The risk must be understood correctly and a small percentage of the total capital , say 10% can be invested in such schemes.

How is MF Scheme judged ?

Primarily , a scheme is nothing but the composition of underlying equity assets. A  scheme buying risky equities is risky and one buying stocks of a solid company like blue chips are safer.  The performance of a Scheme is judged against its bench mark index . It could be Nifty 50 or BSE 100 or banking Index etc. That’s why a Scheme is said to be performing well even when it gives negative returns. It may have given a return of -5 % when its bench mark index , say Nifty 50 has given -10%. So if you are buying  a Pharma  MF, you should compare it with the NSE Pharma Index to track it’s performance.

New Fund Offers (NFOs)

Earlier the new schemes were called IPOs. People went for these “IPOs” as they cost only rs 10/ per unit compared to older schemes which cost anything like 500-600 rs per unit. The irony is that people never seem to understand that 10 X 500 and 500 X 10 gives the same result. If anything, the Rs 500 per unit scheme just shows that it has multiplied 50 times since inception. Now they are called NFOs as per directions of SEBI.

Why do AMCs come up with NFOs ? There may be a genuine reason or a necessity to exploit some opportunity in the stock market like arbitrage Fund. But mostly NFOs are ploys to attract more investors. Sometimes an AMC has to float a scheme just to match the competitors who have launched a new thematic fund. Theoretically, there are enough schemes in the market to cater for all kinds of investors. Before going for an NFO, one should be aware that the company is planning to start building his “ship” only with the money collected from the investors like you. Then it takes time to deploy the money. So, initially the Rs 10/ will dip to 9.xx before any gains. It is always better to wait for a Scheme to deploy the money and see how the underlying stocks perform.

Steps to Invest in MF.

How to identifies the schemes most suitable to you. Here I make an assumption that the money set aside for investment should be locked in for atleast three years if not more. Unlike premature withdrwal of Fds, premature selling of MFs can prove very costly.

Top Down Approach

Supposing we have 10 L for investment, it would be a good idea to decide how the risk / reard is to be spread. It would depend on your own temperament and appetite for risk. Normally midcaps and sector funds provide growth to the portfolio while balanced MFs and bluechip MFs provide stability. The debt/liquid funds are equally important. Liquid funds are used for temporary parking of money and also as a reserve to be deployed during market downturns. The ratio could be as under :

Sector Funds – 10%

Midcap Funds – 30%

Largecap diversified funds – 30%

balanced funds – 15 %

Liquid funds – 15%

Bottom up Approach

There are a number of organizations that evaluates the MFs and rate them as three star, five star etc. The details are also available on their web sites. Some of these sites are valueresearch org , mutual funds of india etc. They  can be accessed at my web site  under the menu Money —> Investments.

Of course , one gets lots of tips from people dealing in MFs.  But one has to be aware of the fact that there is more mis-selling than genuine ,free, financial advice. So, it is worth checking back from a second source.

Whichever way , first individual Schemes can be  picked and a portfolio be built , keeping in mind the aspect of Risk – Reward.

In the next part , we’ll go about on-line platforms and SIP mode for investments.