New to Mutual Funds?

Tips for a beginner

First things first.. The first thing an aspiring unit holder must do is to establish what type of portfolio he wants to build. In other words, to decide the right asset allocation. Asset allocation is a method that determines how you invest your money in different investments with the proper mix of various asset classes. Remember, the type or class of security you own i.e. equity, debt or money market, is much more important than the particular security itself. The popular thumb rule for asset allocation says that whatever the investors age, he should keep that percentage of his portfolio in debt instruments. For example, if an investor is 25, he should have 25% of his investments in debt instruments and the rest in equity. However, in reality, different circumstances and financial position for each individual may require different allocation. Portfolio variable is another factor that one needs to understand to practice asset allocation. These are age, occupation, number of dependants in the family. Usually the younger you are, the more riskier the investments you can hold for getting superior returns. How to pick the right fund/s? Next, focus on selecting the right fund/s. The key is to select the fund/s based on their investment philosophy and consistency in terms of returns. To ensure you are selecting the right type of funds that are appropriate for your needs, consider following:

Determine what your financial goals are. Are you investing for retirement? A child s education? Or for current income? Consider your time frame. Do you need money in three months time or three years? The longer your time horizon, the more risk you may be able to take. How do you feel about risk? Are you in a position to tolerate the ups and downs of the stock market for the possibility of higher returns? It is necessary to know your own risk tolerance. It can be a guide for choosing the right schemes. Remember, regardless of the potential returns, if you are not comfortable with a particular asset class, you should consider other options.

Remember, all these factors will have a direct impact on the fund you choose and the return that you can expect to get. If you are a long-term investor with some appetite for risk and are looking for returns to beat inflation, equity funds are your best bet. MFs offer a variety of equity and equity-oriented schemes (See table Fund Candy). For a beginner, it makes sense to begin with a diversified fund and gradually have some exposure to sector and specialty funds. Investment Strategies that will help you make the best of your MF Investment and Traps that you should avoid. Keeping track.. Filling up an application form and writing out a cheque is not the end of the story. It is equally important to keep an eye on how your investments are performing. While having a qualified and professional advisor helps both in terms of making the right decision as well as measuring performance, it makes sense to know how to do yourself with a little help from these sources: Fact sheets and Newsletters: MFs publish monthly fact sheets and quarterly newsletters that contain portfolio information, a report from the fund manager and performance statistics on the schemes managed by it. Websites: MF web sites provide performance statistics, daily NAVs, fund fact sheets, quarterly newsletters and press clippings etc. Besides, the Association of Mutual funds in India, AMFI, website, contains daily and historical NAVs, and other scheme. Newspapers: Newspapers have pages reporting the net asset values and the sales and redemption prices of MF schemes besides other analysis and reports. Remember, it is very important for you to be well informed. To achieve this, you need to spend a little time to understand and analyze the information to enhance the chances of success. Even if you spend one percent of the time that you spend on earning money, it ll be a good beginning. Above all, take help of a professional advisor to select the right fund as well as the right mix of one time investment, SIP and the STP.

10 must-reads in an MF offer document

MF investments are subject to market risks. Please read the offer document carefully before investing." Ajay Bagga tells you what to read in the 100 page document.
You would have come across this line in all Mutual Fund advertisements, Mutual Fund investments are subject to market risks. Please read the offer document carefully before investing. Its an open secret that this 80 to 100 page bulky document is not simple to read and the legal information it contains is not easy to understand for most investors.

However, Sebi has made the investors job easier by evolving an abridged form, the Key Information Memorandum. Also, Sebi has served the cause of investors by stipulating standard sections and standard disclosures in all Offer Documents. Hence, the Offer Document can be the friend and guide of an enlightened investor. Here is a guide to what an Offer Document is, why it is important and what are the 10 Most Important Things to Read in an Offer Document for investors.

What is a Mutual Fund Offer Document?

It is a prospectus that details the investment objectives and strategies of a particular fund or group of funds, as well as the finer points of the fund's past performance, managers and financial information. You can obtain these documents from fund companies directly, through mail, e-mail or phone. You can also get them from a financial planner or advisor. All fund companies also provide copies of their ODs on their websites.

10 Most Important Things to Read in an Offer Document:

Date of issue First, verify that you have received an up-to-date edition of the OD. An OD must be updated at least annually.

Minimum investments Mutual funds differ both in the minimum initial investment required, and the minimum for subsequent investments. For example, equity funds may stipulate Rs 5000 while Institutional Premium Liquid Plans may stipulate Rs 10 crore as the minimum balance. (Also read - How to reduce risk while investing?)

Investment objectives The goal of each fund should be clearly defined from income, to long -term capital appreciation. The investors need to be sure the fund's objective matches their objective.

Investment policies An OD will outline the general strategies the fund managers will implement. You'll learn what types of investments will be included, such as government bonds or common stock. The prospectus may also include information on minimum bond ratings and types of companies considered appropriate for a fund. Be sure to consider whether the fund offers adequate diversification.

Risk factors Every investment involves some level of risk. In an OD, investors will find descriptions of the risks associated with investments in the fund. These help investors to refer to their own objectives and decide if the risk associated with the fund's investments matches their own risk appetite and tolerance. Since investors have varying degrees of risk tolerance, understanding the various types of risks in this section( eg credit risk, market risk, interest-rate risk etc.) is crucial. Investors must raw be familiar with what distinguishes the different kinds of risk, why they are associated with particular funds, and how they fit into the balance of risk in their overall portfolio. For example, a Post Office Monthly income plan assures an 8% monthly income payment for its 6 years tenure. A Mutual Fund MIP invests in a portfolio of 80% to 90% bonds and gilts and 10% to 20% of equities, to generate capital appreciation, which is passed on to customers as monthly income, subject to availability of distributable surplus. In 2004, a lot of mutual fund customers underestimated this market risk and were caught by surprise when the MIPs gave low/negative returns. (Also read - Fear interest rate risk? Here is the solution)

Past Performance data ODs contain selected per-share data, including net asset value and total return for different time periods since the fund's inception. Performance data listed in an OD are based on standard formulas established by Sebi and enable investors to make comparisons with other funds. Investors should keep in mind the common disclaimer, "past performance is not an indication of future performance". They must read the historical performance of the fund critically, looking at both the long and short-term performance. When evaluating performance, investors must look at the track record of a fund over a time period that matches their own investment goals.

They must check that the benchmark chosen by the fund to compare its relative performance is appropriate. Sebi is doing a fine job of ensuring this as well. In addition, investors should keep in mind that many of the returns presented in historical data don't account for tax. They must look at any fine print in these sections, as they should say whether or not taxes have been taken into account.

Fees and expenses Mutual funds have two goals: to make money for themselves and for you, usually in that order.- Quote from Fool.com. Entry loads, exit loads, switching charges, annual recurring expenses, management fees, investor servicing coststhese all add up over time. The OD lists the limits on these fees and also shows the impact these have had on the fund investment historically. (Also read - How to build your MF portfolio?)

Key Personnel esp Fund Managers This section details the education and work experience of the key management of the fund company, including the CEO and the Fund Managers. Investors get an idea of the pedigree and vintage of the management team. For example, investors need to watch out for the fund that has been in operation significantly longer than the fund manager has been managing it. The performance of such a fund can be credited not to the present manager, but to the previous ones. If the current manager has been managing the fund for only a short period of time, investors need to look into his or her past performance with other funds with similar investment goals and strategies. Only then can they get a better gauge of his or her talent and investment style.

Tax benefits information Mutual funds enjoy significant tax benefits under Sec 23 D and Sec 115 .For example, Equity funds enjoy nil long terms capital gains and nil dividend distribution tax benefits. A close reading

of the tax benefits available to the fund investors will enable them to plan their taxes better and to enhance their post tax returns. (Also read -How to ride the rising interest rate tide?)

Investor services Shareholders may have access to certain services, such as automatic reinvestment of dividends and systematic investment/withdrawal plans. This section of the OD, usually near the back of the publication, will describe these services and how one can take advantage of them.

Conclusion

After reading the sections of the OD outlined above, investors will have a good idea of how the fund functions and what risks it may pose. Most importantly, they will be able to determine if it is right for their portfolio. If investors need more information beyond what the prospectus provides, they can consult the fund's annual report, which is available directly from the fund company or through a financial planner.

This investment of time and effort would prove very beneficial to investors.

- Ajay Bagga The writer is CEO, Lotus India AMC.

7 good reasons to invest in SIPs

Systematic Investing in a mutual fund makes good sense especially in volatile markets. Sanjay Matai tells you why.
Fact No. 1: Over a long term horizon, equity investments have given returns which far exceed those from the debt based instruments. They are probably the only investment option, which can build large wealth. Fact No. 2: In short term, equities

exhibit very sharp volatilities, which many of us find difficult to stomach.Fact No. 3: Equities carry lot of risk even to the extent of loosing ones entire corpus. Fact No. 4: Investment in equities require one to be in constant touch with the market. Fact No. 5: Equity investment requires a lot of research. Fact No. 6: Buying good scrips require one to invest fairly large amounts. Systematic Investing in a Mutual Fund is the answer to preventing the pitfalls of equity investment and still enjoying the high returns. And it makes all the more sense today when the stock markets are booming. (Also Read - 5 corners of a sound Investing
Strategy) 1. Its an experts field Lets leave it to them Management of the fund by the professionals or experts is one of the key advantages of investing through a mutual fund. They regularly carry out extensive research - on the company, the industry and the economy thus ensuring informed investment. Secondly, they regularly track the market. Thus for many of us who do not have the desired expertise and are too busy with our vocation to devote sufficient time and effort to investing in equity, mutual funds offer an attractive alternative. (Read more - The Investors biggest Dilemma) 2. Putting eggs in different baskets Another advantage of investing through mutual funds is that even with small amounts we are able to enjoy the benefits of diversification. Huge amounts would be required for an individual to achieve the desired diversification, which would not be possible for many of us. Diversification reduces the overall impact on the returns from a portfolio, on account of a loss in a particular company/sector. 3. Its all transparent & well regulated The Mutual Fund industry is well regulated both by SEBI and AMFI. They have, over the years, introduced regulations, which ensure smooth and transparent functioning of the mutual funds industry. This makes it safer and convenient for investors to invest through the mutual funds. (Check out - Foolproof strategies to maximize your profits) 4. Market timing becomes irrelevant One of the biggest difficulties in equity investing is WHEN to invest, apart from the other big question WHERE to invest. While, investing in a mutual fund solves the issue of where to invest, SIP helps us to overcome the problem of when. SIP is a disciplined investing irrespective of the state of the market. It thus makes the market timing totally irrelevant. And today when the markets are high, it may not be prudent to commit large sums at one go. With the next 2-3 years looking good from Indian Economy point of view, one can expect handsome returns thru regular investing. 5. Does not strain our day-to-day finances Mutual Funds allow us to invest very small amounts (Rs 500 Rs 1000) in SIP, as against larger

one-time investment required, if we were to buy directly from the market. This makes investing easier as it does not strain our monthly finances. It, therefore, becomes an ideal investment option for a small-time investor, who would otherwise not be able to enjoy the benefits of investing in the equity market. 6. Reduces the average cost In SIP we are investing a fixed amount regularly. Therefore, we end up buying more number of units when the markets are down and NAV is low and less number of units when the markets are up and the NAV is high. This is called rupee-cost averaging. Generally, we would stay away from buying when the markets are down. We generally tend to invest when the markets are rising. SIP works as a good discipline as it forces us to buy even when the markets are low, which actually is the best time to buy. (Read more - Invest wisely and get rich with equity MFs) 7. Helps to fulfill our dreams The investments we make are ultimately for some objectives such as to buy a house, children s education, marriage etc. And many of them require a huge one-time investment. As it would usually not be possible raise such large amounts at short notice, we need to build the corpus over a longer period of time, through small but regular investments. This is what SIP is all about. Small investments, over a period of time, result in large wealth and help fulfill our dreams & aspirations.

7 common investment mistakes you should avoid

What are the important lessons for people wanting to create wealth through equities? The cardinal rule is to make as few big mistakes as possible.
The other day I got a call from a friend. He wanted to know my opinion on Stock A, which was proposed to him by an old hand in the stock market. He was told that the stock would double in a few months and the person who had recommended the stock also had bought some. I told him that this stock was crap and unless an operator was running the stock, I did not see strong reasons on why this stock would double. I said this not because I have the ability to spot stocks that will double in very short periods of time, but because I am yet to come across people or experts who can do this feat every time. So in a nutshell I told him to stay away from this stock. Nevertheless he went ahead and took some exposure in the stock, as the seduction of making quick bucks was very high. Exactly 3 days down the line this stock is 18% down with 10% being

knocked off in 1 day. He was now skeptical about making equity investments with the losses suffered in a couple of days. He blamed the stock markets as well as others for his misfortune, but at the same time wanted to participate in the growth of the Capital Markets and our economy. However, never ever did this friend ponder over the mistake he had committed. I bet there are plenty of people who are guilty of committing the same mistake or others, but never get down to really understand what went wrong and try to learn from their mistakes. So what are the important lessons for people wanting to create wealth through equities? The cardinal rule is to make as few big mistakes as possible. Though the list can be pretty long, here are seven common mistakes people make when investing in equities and that you should stay away from. Mistake No 1: The first and biggest mistake is not to admit making a mistake People stubbornly hold on to stocks where they are making sizeable losses in the belief that they can exit when the price reaches their buying price. Most of the minds are not trained to acknowledge the fact that they have made a mistake and probably the best thing is to move on. There was this gentleman who had bought a penny stock at Rs. 9 following a tip and hoping that it would double in a few months. The stock first rose by 20% and then declined by almost 40%. He was unwilling to let go of the position with the belief that he will do so only when the price reaches his buy price and it will happen sometime soon. The gentleman is still holding on to the stock and the stock has lost a further 40%. He could have exited the stock with a loss of just 28% initially (considering the appreciation of 20%). Now his losses are around 56% and he is still holding the stock. This happened in October 2005. Even several blue chip stocks have actually doubled or tripled since then. Mistake No 2: Buy on tips and khabars and wanting to make a quick buck Technology has made our lives much easier but at the same time has caused a lot of overload as well. We are subject to SMSes , emails and flyers with lucrative offers for buy and sell tips , commodities trading etc. that at the end of the day leave you confused. In this state only two things can happen, (a) One is that you procrastinate and not take any action with the fear of screwing it up and (b) Succumb to these offers for making you rich quickly.

The point that I am trying to make is that how people who are conservative or sane can take dangerous calls and sabotage their own well being. I remember having met this conservative gentleman who was targeting only 12% returns but still could not resist the stock market temptation when the broker called and showed him some tantalizing figures. Mistake No 3: Buying a loser on its way down thinking you are averaging your costs Mistake No 4: Ignoring Risk in the investment and looking only at the returns Risk is an integral part of every equity investment and some equity investments are more risky than others. People however look at the returns without giving due importance to risk. Stock Futures can give you great returns but at the same time they can wipe out your capital as well. In the mutual fund context, people look at returns when investing in the fund, but do not consider the kind of risks the fund manager has taken whether it be concentration in stocks or sectors etc. At the same time betting heavily in Futures & Options, Commodities without understanding the nuances of the same is fraught with risk. Understand the risk i.e the downside inherent in every investment and volatility associated with it. Mistake No 5: Buying penny stocks thinking they are cheaper and ignoring stocks, which are priced above a certain number like Rs. 1000 thinking, they are expensive. Mistake No 6: Exiting Winners early and sticking to Losers Ask yourself Suppose I have a choice of 2 boats. Boat A is strong, consistent and has traveled the sea through many rough weathers as well. Boat B is showing some cracks and leaks in certain places. Water seeped in through this boat sometime back. Which boat will I choose to safely get me from this shore to the next? I bet all would opt for Boat A and no person in his right mind would opt for Boat B. Yet when this same logic is applied to stocks, people will stick to losers (Boat B) but exit winning stocks (Boat A) to make a small profit. Mistake No 7: Just thinking but not doing anything Finally doing makes all the difference. There is no substitute for action. Just knowing that exercise is good will not keep you fit. In the same vein, just knowing this stock is good is of no use unless you buy it. I come across so many intelligent people who know many things but are simply unable to implement because of lack of time and busy schedules. I knew this stock would do well, wish I had put in money here or I missed a good time to enter this stock are some common responses you hear. Whatever the reason be, in the end

what matters is whether you did what you knew was right. A better option for people here is to put their investments on Autopilot (Automatically investing fixed amounts every month in stocks and mutual funds). To be a successful investor and create wealth through equities, you should shun the costly mistakes outlined. And yes if you have made any one of the above mistakes, admit it and correct it. More importantly Stop Hoping. At the end of the day Hope is not a Strategy in the Equities Market .

Demystifying NAV myths

The term NAV in mutual funds has been misunderstood by a large section of the investing community. Sanjay Matai clarifies.

he NAV of a mutual fund has not been correctly understood by a large section of

the investing community. This is quite evident from the fact that Mutual Funds had been recently collecting huge corpus in their New Fund Offers or NFOs, whereas the collections in the existing schemes were negligible. In fact, investors sold their existing investments and invested in NFOs. This switch makes no sense, unless the new fund has something different and better to offer.

Misconception about NAV This situation arises from the perception that a fund at Rs 10 is cheaper than say Rs 15 or Rs 100. However, this perception is totally wrong and investors would be much better off once they appreciate this fact. Two funds with same portfolio are same, no matter what their NAV is. NAV is immaterial. Why people carry this perception is because they assume that NAV of a MF is similar to the market price of an equity share. This, however, is not true. Definition of NAV

Net Asset Value or NAV is the sum total of the market value of all the shares held in the portfolio including cash less the liabilities, divided by the total number of units outstanding. Thus, NAV of a mutual fund unit is nothing but the book value. NAV vs Price of an equity share In case of companies, the price of its share is as quoted on the stock exchange, which apart from the fundamentals, is also dependent on the perception of the company s future performance and the demand-supply scenario. And hence the market price is generally different from its book value. There is no concept as market value for the MF unit. Therefore, when we buy MF units at NAV, we are buying at book value. And since we are buying at book value, we are paying the right price of the assets whether it be Rs 10 or Rs.100. There is no such thing as a higher or lower price. NAV & its impact on the returns We feel that a MF with lower NAV will give better returns. This again is due to the wrong perception about NAV. An example will make it clear that returns are independent of the NAV. Say you have Rs 10,000 to invest. You have two options, wherein the funds are same as far as the portfolio is concerned. But say one Fund X has an NAV of Rs 10 and another Fund Y has NAV of Rs 50. You will get 1000 units of Fund X or 200 units of Fund Y. After one year, both funds would have grown equally as their portfolio is same, say by 25%. Then NAV after one year would be Rs 12.50 for Fund X and Rs 62.50 for Fund Y. The value of your investment would be 1000*12.50 = Rs 12,500 for Fund X and 200*62.5 = Rs 12,500 for Fund Y. Thus your returns would be same irrespective of the NAV. It is quality of fund, which would make a difference to your returns. In fact for equity shares also broadly this logic would apply. An IT company share at say Rs 1000 may give a better return than say a jute company share at Rs 50, since IT sector would show a much higher growth rate than jute industry (of course Rs 1000 may fundamentally be over or under priced, which will not be the case with MF NAV).

New Fund Offer: Things to note before you invest

As an investor, you often confront this dilemma as to where to invest. The dilemma gets confounded by the fact that there are a slew of offerings from different mutual fund houses. So what to do? Amar Pandit tells some dos and donts to follow while taking your important investment decisions.

ost of us like to try out new things whether its dining at restaurants, buying

mobile phones and cars to name a few. Some go to the extent of changing mobile phones every 1 year and a car every 3 years. Well this is a matter of personal preference and lifestyle and might give you some kind of emotional happiness which is good in some sense. But when it comes to most new funds, there is hardly anything different, unique or really NEW about it. It's just that the name gets more exotic, dressing gets much better or a new marketing ploy such as Invest in India's Growth potential as if other options available are not investing in India's growth potential. (Also read - Have a
Dravid and a Dhoni in your portfolio) To put it simply most of the new fund offers are Old Wine in a New Bottle. They are packaged very smartly with fancy marketing ideas to entice the client to buy. There was a deluge of New Fund Offers in 2005 and early part of 2006. SEBI on its part took a series of steps. Firstly, SEBI objected against the use of the word IPO and instead had every fund house use NFO (New Fund Offer), to confuse with Stock IPOs, to curb rampant mis-selling of new funds. Secondly, SEBI had Mutual Funds launching open-ended New Funds charge the initial issue expenses within the entry load itself whereas close ended funds could still charge 6% initial issue expense. (Also read - Invest, but choose the right mutual fund) This is precisely one of the reasons why most of the mutual funds have been launching closed ended New Fund Offers so they could pay a higher brokerage of around 5 to 6% to distributors. Thirdly, SEBI has taken note of this deluge of similar funds being launched and made it mandatory for the trustees of Mutual Funds to personally certify that their new schemes are different from the old ones. Despite this some of the fund houses have been launching me too schemes. Some fund houses such as DSP Merrill Lynch have not launched any new offering in the last 1215 months, except for the Super SIP (which was a genuine attempt to offer something new that

was relevant), whereas others such as Tata Mutual Fund and SBI Mutual Fund have been strong contenders for the Top Slot in the New Fund Euphoria. So the question boils down to How does then one decide if the New Fund Offer of the so many being launched every other month is suitable for me . Before answering this question, first 3 Common Mistakes all investor should be aware of: (a) Too less or Too many arent good enough I have seen many investors having anywhere between 16-85 funds or some who have just one or two. Having too many in the name of diversification is no good and in fact defeats the very purpose of diversification. After all the one of the reasons you opt for a mutual fund is to diversify your investments but having all large cap funds in your portfolio is unlikely to do any good. At best based on the size of your portfolio, spread your investments across in 4-9 different funds spread across different Mutual Funds, fund managers, investing styles, expense ratios, portfolio turnover, market capitalization and whether its an all equity, balanced, or tax planning fund. Give Sectoral funds a complete miss unless you are very bullish on the sector and understand the risks well. (b) Rs. 10 NAV is not cheaper than Rs.100 NAV What you should be concerned about is the% fall or% rise. A Re. 1 fall in a NAV 10 fund is the equivalent of Rs.10 fall in a NAV 100 fund. In fact Rs.100 means proven competence and a long track record of capital appreciation. (Also read - Demystifying NAV myths) (c) Dont fall for fancy terms Dont fall for fancy and general terms such as Investing in India s growth potential, Options and Derivatives to diversify your portfolio. See if there are any existing funds with longer track records with similar investment objectives & strategies. If there are, opt for the tried and tested ones rather than going from newer exotic ones. How to decide if the New Fund is an appropriate one for you? 1. Take a look at your Financial Plan if you have one or at your existing portfolio. What kind of funds do I have in my existing portfolio? Are they large cap funds, mid cap funds, flexi cap funds, balanced funds, tax planning funds? The next to see is how does this new fund really add value to my existing portfolio? How does this New Fund fit into my portfolio, my asset allocation, and help achieve my goals? This is a million-dollar question. (Also read -Investment lessons from Sachin Tendulkar)

2.

3. 4.

Is this really a New Fund with an interesting theme that might fit well within my portfolio? Understand the investment objective, strategy and asset allocation of the fund. What has been the fund managers track record of managing other schemes? Which

are the other schemes managed by this fund manager? How have they performed in the past? Especially what has been his previous funds performance during tough times like the May 2006 mayhem, 2000 crash etc. 5. How stable is the investment team of the fund house and how many schemes are they managing? What is their track record of launching new funds? If the fund house is notorious for launching new schemes once every 2-3 months, you will be better off skipping such schemes or fund houses altogether. (Also read - 7 investment tips to improve your returns) 6. If after doing this, you still cannot figure out if you should opt for the new scheme, seek the advice of your financial advisor. Just look at the track record of the some of the New Fund Offers launched in the last 12-18 months and compare with the some of the existing funds with a 5-10 year track record (marked in yellow)
Returns as on 01-Sep-2006 Scheme Reliance Vision (G) Franklin India Bluechip (G) SBI Magnum Sector Umbrella - Contra (G) HDFC Premier Multi-Cap Fund (G) Birla Gen Next Fund (G) UTI Contra Fund (G) Tata Contra Fund (G) Prudential ICICI Fusion Fund (G) HSBC Advantage India Fund (G) Birla Top 100 Fund (G) ABN AMRO Future Leaders Fund (G) ABN AMRO Dividend Yield Fund (G)

3 mth 6 mth 11.82 13.78 7.20 10.14 9.89 5.59 7.72 0.70 7.39 12.22 -1.42

1 yr

2 yr

3 yr

5 yr

7.31 44.21 53.98 51.48 62.11 7.18 44.06 48.20 46.37 43.03 9.01 42.86 63.98 41.58 42.16 2.08 28.93 -1.37 24.28 N.A 1.02 N.A 0.68 6.03 N.A N.A N.A N.A N.A N.A N.A N.A N.A N.A N.A N.A N.A N.A N.A N.A N.A N.A N.A N.A N.A N.A N.A N.A N.A N.A N.A N.A N.A N.A N.A N.A N.A N.A N.A

-1.43 -12.69

We can arrive at the conclusion that indeed existing funds have surpassed newer ones by a mile and we would be much better off sticking to existing funds with excellent track records than running after fancy terms, names & themes. In true Munnabhai style , OLDbole tho GOLD. - Amar Pandit The author is a practising Certified Financial Planner and runs My Financial Advisor www.myfinad.com. He can be reached at amar.pandit@moneycontrol.com

Growth or Dividend - How to make the right choice?

Growth, dividend payout or dividend reinvestment? Choosing the correct option is as important as choosing the right fund. Sandeep Shanbhag lists out the various factors to be considered before you take your pick.

utual Funds offer three options:

Dividend Dividend Reinvestment and Growth Which is the best and why? In my experience as a financial and investment planner, I have largely found that investors tend to give a lot of time and importance to the process of selecting a mutual fund. However, once a particular fund is chosen, choosing an investment option is done on an almost arbitrary basis. Some like the idea of receiving periodic Dividend, some like recurring investments and hence choose the Dividend Reinvestment option and others choose Growth. And some even leave the entire exercise to the discretion of the agent or distributor.

However, choosing the correct option is perhaps as important to the health of the investment as choosing the particular mutual fund is. What are the various factors one should consider and why? Background There are two factors that are of prime importance when choosing an investment option - a. Fiscal policy b. Your investment needs and goals. Both these factors play an important role and let us see how we can tweak each for the maximum benefit. Choosing the Dividend Option - Drawbacks Before considering the drawbacks, let us look at the benefit of choosing the Dividend option. The foremost and the most obvious benefit is that the dividend is tax-free --- in the real sense of the term. Though all MF dividends are tax-free, dividends received from non equity-oriented schemes are subject to a distribution tax of 14.025%. This means that though such dividend is tax-free in your hands, you are receiving 14.025% less than what you would have otherwise received. This by inference means that it is you who is bearing the 14.025% tax, the MF only pays it on your behalf. Dividends from equity schemes do not suffer this distribution tax and hence are truly tax-free. Then shouldn't all investors choose the Dividend option? Isn't this entire discussion a non-issue? Not so fast. Let's consider a live example --- that of Franklin India Prima, a scheme that has been in existence since November 1993. As on 19th June, 2006, the NAV of the Growth Option of Prima was Rs 153.86 whereas that of the Dividend Option was Rs 48.99 - almost 68% lower. Why is this? The difference is the dividend received by the investor. It should be understood that dividend from a mutual fund, unlike stock dividend, is your own money coming back to you. Therefore, had you invested in the Growth option of the scheme, the NAV of Rs 153.86 would apply to you. But since you have chosen the dividend option, periodically, some of your investment amount was paid back to you (by calling it dividend) and hence the market value of your units is Rs 48.99.

Now, also note that the scheme performance is calculated based on the Growth option NAV. Actually, technically, it doesn't matter, which NAV is chosen, as the dividends received are assumed to have been reinvested in the scheme at the Internal Rate of Return or the IRR. But without getting into mathematical jargon, it suffices to say that the Prima performance (which has been nothing less than spectacular) is based on the NAV of Rs 153.86 and not Rs 48.99. So far so good. As long as you needed the dividend, all this really doesn't matter. But my next question is what one should do when the dividend comes and sits in your bank? Do you reinvest it in the same scheme or for that matter into another scheme? If so, do realize that you are reinvesting the money in the same asset class --- Equity. It needn't have come out of the asset class (in this case Prima) in the first place! Plus you may have to bear a load for the fresh investment. Of course, your distributor is happy since this means extra commission. The second problem is agility. You may forget that the scheme has paid dividend and the money is lying in your bank. It happens. Or even if you are well aware of the fact, the market is behaving in a whimsical manner and this volatility is delaying your decision to enter. The money again sits in your bank. All this time, when the money relaxes in your SB account, the rate of return of your investment is falling. The reason is simple arithmetic. The capital that is invested in Prima is growing at the IRR as discussed above (44% for the last year, 69% over 3 years and almost 26% since inception). However, the dividend that is lounging in the bank is growing at just 3.5% p.a, which is the SB interest rate. Over time, this substantial difference in the two rates dilutes the net return on the investment. More the time spent in the bank, more the dilution.
Other Reasons for choosing Dividend...

Other Reasons for choosing Dividend Of course there are a couple of excellent reasons given to me by investors for choosing the dividend option. One is of course, needing the funds for day to day life. The second one was that getting dividend in a rising market is like partial profit booking, which is good form. The funds representing dividend can be invested into fixed income avenues or even fixed maturity plans thereby rebalancing the asset allocation. Excellent arguments that cannot be argued with, per se. Only one hitch. Unlike fixed income avenues (such as PPF, RBI Bonds etc.) when the interest is fixed, not only in terms of the amount but also the timing thereof, dividends from mutual funds are at the discretion of the mutual funds. One never knows how much would one receive and when. In other words, the fund manager may decide not to distribute dividend.

Or he may decide to distribute much less than what you need. Or much more than what your intended shift of the asset allocation dictates. What do you do? There is a simple solution. Ask for the dividend yourself. Yes, you read that right. You can ask for the dividend. To put it differently --'When the MF pays you money, it is called dividend. When you yourself withdraw an equivalent amount, it is called capital gain! We all know that after one year, withdrawals (capital gains) from a mutual fund are tax-free. Therefore, for your annual dividend requirement, do not depend upon the whims of the mutual fund concerned, instead withdraw the funds as per your requirement. This way, you can earn dividend not at the whim of the Mutual Fund, but at your fancy! The value of your investment remains the same, whether dividend is paid to you by the MF or whether you redeem units of an equivalent amount. To Sum Up The psychology of investing, fiscal policy and your requirements from your investments, all go hand in hand in deciding the optimal option to choose from. As fiscal policy stands today, the dividend option doesn't stack up against the alternatives. However, if tomorrow, long-term capital gains tax is imposed, this strategy wouldn't work and the dividend option would once again come to the fore.
To check out the pros and cons of the Dividend Reinvestment option vis a vis Growth, read - Dividend Reinvestment v/s Growth Let your taxes decide - Sandeep Shanbhag The writer is Director of A N Shanbhag NR Group, a Mumbai based tax and investment advisory firm. He may be reached at sandeep.shanbhag@moneycontrol.com

Beware of MF dividend declarations!

As an investor, you are very often tempted by the dividends declared by mutual funds, little realizing that such declarations are a bait to get investors to invest. Amar Pandit tells you why you shouldn't fall for this.
XYZ Scheme is declaring 100% dividend and my distributor is telling me to invest in this scheme . This is important information which I have received from my relationship manager that ABC Scheme is declaring a dividend of 50% . I come across statements like this every now and then where dividends declared by mutual funds are used as a bait to get investors to invest. The scenario is presented in a manner that if you invest Rs. 1 lakh today , you will receive a Rs. 30000 as dividend or some other amount based on the NAV of the fund. Nothing could be further from the truth. Dividends are not any form of additional gains that you can expect. In fact, dividend in Mutual Funds is a function of Capital Appreciation. Let's say you invest on 20th September Rs. 5 lakh at an NAV of Rs. 50. This means you end up getting 10000 units (have excluded Entry load for simplicity).

Investment NAV Number of Units Dividend Declared Dividend Received

Rs. 500000 Rs. 50 10000 100% (i.e Rs. 10) Rs.10 * 10000 = Rs. 100000

Happy arent you to receive Rs. 1 Lakh as dividend. I wish it was this simple and easy to make money in just a few days . There would be far more billionaires and millionaires than we have now.

Now for the catch, after the dividend is declared the NAV of the fund falls down from Rs. 50.00 to Rs.40.00 Value of your holding = 10000*40= Rs. 400000. This along with the dividend already received of Rs. 1 lakh will translate into your original investment of Rs. 5 lakh. So you see things are not as rosy as they are projected to be.

POST DIVIDEND NAV Number of Units Investment Dividend Received Rs. 40.00 10000 Rs. 400000 Rs.10 * 10000 = Rs. 100000 Rs. 5000000 same as earlier

Total Amount in hand

So how should one react to these advertisements that a 100% dividend is being declared or should anyone invest just on the basis of this information. The answer is an outright no. However, People have utilized a strategy called Dividend Stripping on the basis of this information. This was more rampant when Mutual Funds used to declare dividends a month or so before the record date.

The way it works is as follows. Suppose you have a short term gain of around Rs. 100000 . Instead of paying a short term capital gains tax of Rs. 10000 (considering 10 % short term capital gains), you make an investment of Rs. 100000 in a fund to declare a dividend of say around 25% (NAV= Rs. 25 ) . Number of Units you have : 4000 Dividend per unit = Rs. 2.50 (25%) Total Dividend Received : Rs. 10000 Value of your investment now : 4000 units * NAV (RS. 25-10%) Rs. 22.50 = Rs. 90000 Redeem your investment now for Rs. 90000 and you have a Rs. 10000 Short Term Capital Loss.

POST DIVIDEND NAV Number of Units Investment Dividend Received Rs. 22.50 4000 Rs. 90000 Rs.2.50 * 4000 = Rs. 10000 Rs. 100000 same as earlier

Total Amount in hand

Here you have received tax free dividend and you have been able to offset this against your short term capital gains.

Now your short term gain is around 90000 instead of earlier Rs. 100000. This results in a saving of around Rs. 1000 or 10% for you.

Short term Capital Gain Loss from sale of investment post dividend Net Short term Capital Gain Saving in Short term Capital Gains tax

Rs. 1,00,000 Rs. 10,000 Rs. 90000 10% of 10,000 = Rs. 1,000

IT Department through its annual budget have tried to fix this loophole by increasing the holding period of the investment post the record date based on whether it was bought 3 months before the record date or within 3 months of the record date. SEBI on the other hand issued guidelines that required the AMC to issue a notice communicating the decision to distribute dividends within 1 calendar day of decision by the trustees. At the same time the record date should be 5 calendar days from the issue of this notice. Though these are steps in the right direction and dividend stripping has been slowed to a certain extent, AMCs in the race to gather more assets are still using this as a ploy. Dont fall for this or any such trick as your purpose of investing in equity oriented funds should be capital appreciation and not because a dividend is being declared. Dividend Payout, Dividend Reinvestment and Growth are options to choose based on your situation and need. Mutual Funds can only pay out dividends if they have made gains on the portfolio. Dividends are like fruits on a tree...If you do not give

enough time for the tree to grow...where will the fruits come from...Don t know about this but your dividend will certainly come out from your principal. - Amar Pandit

Is your Mutual Fund Agent taking you for a ride?

The standards for being a mutual fund agent are shockingly lax and its critical to do some due diligence before taking financial advice from anyone
Being a mutual fund agent is one of the easiest things to do in India anybody could do it. All a person, call him Mr. Anybody, needs to do is pay Rs. 500 to AMFI and score fifty out of hundred on a test where most of the questions are something like this, What does an equity fund invest in?. The options are, (a) debt, (b) equities, and (c) neither. Mr. Anybody will then receive an AMFI Registration Number (ARN), regardless of whether he is a bored housewife, a steel magnate, or anybody else for that matter. He is now licensed to tell you where to invest your hard earned money, and of course, earn a healthy commission along the way. No wonder there are more than 90,000 AMFI registered distributors in India. I wont claim to have spoken to all of them, but of the 500 I spoke to, I can confidently say that most of them are as qualified to give me financial advice as Mr. Anybody. Thats a pretty scary thought. Our otherwise stringent regulatory system is the first culprit, in particular the Association of Mutual Funds of India (AMFI), which certifies mutual fund agents. The person selling mutual funds is not selling soap, he is making asset allocation decisions that shape his clients lives. If fund management selecting a few stocks from the hundreds out there requires professional qualifications and experience, why doesnt wealth management selecting a few funds from the thousands out there? SEBI on its part has set outstanding standards for fund managers. Mutual funds need five years of stellar investment track record and a net worth of ten crores. Portfolio managers pay ten lakhs in fees to SEBI and complete an application that scrutinizes everything from their professional qualifications to their IT infrastructure to their office space. That is why we have only 40 mutual fund houses and 250 portfolio managers. Why isnt a mutual fund agent often your first entry point into investing in the markets held to a comparable standard?

The industrys compensation structure is also guilty and consumers are often unclear and unaware of how their agent is compensated. Agents are paid a commission by the mutual fund comprising of an upfront fee and a trail fee later in the year. Although SEBIs recent regulations have improved the situation, the incentive for your mutual fund agent is still two-fold. One, sell you the mutual funds that are earning him the highest commission, and two, convince you to move from one fund to another frequently, to increase the amount of upfront fees he earns. Agents get paid nothing for either giving you good advice or for picking good funds for you, a grave misalignment of incentives. The solution is for AMFI and SEBI to upgrade the mutual fund agent into an investment advisor, a full time professionally qualified individual who can say more than choose equities over debt when you are young and choose the best performing fund of the week. An investment advisor should understand the entire range of products available to various classes of investors, the risk profile of each, systematic asset allocation, and the basics of manager selection. Give us good advice and charge us for it. As for buying mutual funds, we dont need someone to do that for us. We buy stocks online, and with an online platform for mutual funds, we should be able to do the same. I would certainly be happier paying for good advice and knowing I am investing money in whats right for me, not what makes money for my agent. What should you do with your favourite mutual fund agent in the time being? For starters, check his qualifications at the minimum, he should have a degree in economics or finance and multiple years of experience in investment or wealth management. Then, test his asset allocation skills ask him how his recommendations would change for different individuals in various hypothetical life situations? What does he define as risk and how does he measure and quantify it? Finally and most importantly, understand his incentives and how they are influencing his recommendations. Is he always advising you to choose equities over debt because commissions on equity funds happen to be much higher? Does he periodically recommend you switch to a different fund, because he is running low on commissions? If you suspect that his recommendations favour his interests more than yours, confront the problem. Its about time Mr. Anybody stopped giving us financial advice. Money management isnt rocket science, but it isnt anybodys business either.

How to secure your child's future?

The initial celebrations on the arrival of a child gradually leads to a sober reflection on how best to ensure his / her comfortable upbringing and education. Investment advisor Ramganesh Iyer addresses the finance aspect of this concern.
On at least one aspect, I think several of the insurance company advertisements have got it spot on. The initial celebrations on the arrival of the child gradually leads to a more sober reflection on how best to ensure his / her comfortable upbringing and education. Doubtless, finances are but one aspect of this concern; but they are an important one! Moreover, they are probably much easier addressed than some of the softer and other cultural aspects of parenting. INVESTMENTS Investment is distinct from Savings Savings simply mean you set aside a portion of your income for future use. Yet, it is (careful and planned) investing that makes maximum use of these savings and optimizes your portfolio in later years. This is especially important since inflation tends to erode the purchasing power of money over a period of time. A headline inflation of 6%-7%, actually translates into a lifestyle inflation of 10%. Thus, if your money is lying in a deposit fetching 7% interest rate, you are actually eroding wealth! India is the best growth story to invest in In contrast, with the medium to long-term prospects of India s growth being as strong as they are, the long-term returns on equity can be assumed to be 15%. Thus, this provides an effective way to not get left behind the growth story that is India. In addition, investing in equity as an asset class, if well researched and carefully done, enjoys various benefits, such as:

High liquidity, to withdraw money in desired quantity whenever needed High flexibility in terms of investing as and when funds are available Favourable tax treatment (especially compared to real estate and fixed deposits) Low transaction costs High degree of transparency in knowing how your corpus grows The power of compounding Returns on investments exhibit the effect of compounding. Very simply put, it means

that the returns earned on the investment in the first year, gets added to the corpus in subsequent years and fetches its own returns. Thus, in the illustrative returns shown above, if you invest Rs. 1 crore today in equity @15%, the corpus would grow to Rs 4 crore in 10 years time. In contrast, in a fixed deposit @7%, the corpus would only be Rs 2 crore in 10 years time. Index investing Investing in the index is possibly the best long-term way to benefit from the India growth story. You can invest in the index either one-time, or systematically as you earn more, or a combination of these. The benefit of index investing is the low transaction cost and low need for research involved. Thus, for those not very comfortable with the markets, or with those having no time to do extensive research, it is also a good starting point to gain familiarity with the working of equity markets. Once you are more comfortable with equity markets and with how an investment portfolio works, you can consider allocating funds to more actively managed portfolios as well. These require much more research and active management, but at the same time have the potential to generate higher returns than the index by leveraging existing market conditions. Trust formation Very often we come across customers desirous of making a trust in each of their childrens names. In India, unlike in some other countries, such trusts by themselves have no special tax benefits. Yet, they often have softer benefits such as helping mentally allocate resources for each child s milestones, monitor each set of investments clearly, etc. Given the formalities and procedures around trust formation, maintenance and reporting, we would recommend this to people having a large corpus only. With most others, the money may be managed through mental accounting alone, without going through the legal procedures around trust creation. LIFE INSURANCE The concept of life insurance is to secure the lifestyle and indeed the financial well being of the family in the unfortunate event of the breadwinner not being around. Due to cultural reasons, this often brings unpleasant thoughts, and hence the subject of insurance gets pushed under the carpet. However, we would rather look at it as a means to lead a more secure and worryfree life. While the emotional trauma of loss of a family member is unavoidable, insurance atleast spares the financial burden that this could bring. Thus, an insurance of five to seven times annual earnings is a useful benchmark to have as amount of life insurance.

A term plan is a simple and effective life insurance policy. Very roughly, the annual premium for a healthy 35-year old, for a life cover of Rs. 1 crore, should amount to about Rs. 45,000. There are two important points to note here: the earlier you start the life cover, the lower the premium rate you can lock-in (once locked-in, the premium does not ever change). Secondly, it is a huge benefit to start life insurance when one is healthy and unaffected by any chronic ailments. This ensures much lower premiums, and a hassle-free claims process. We would, at this stage, advise against the more complicated unit linked products; or the typically low yielding traditional insurance products. These are useful for investors only in very specific cases, and only when the investors have understood the cost-benefit equations of these plans very carefully. The insurance agents very seldom do such elucidation; and hence it may be useful to stay away from these for a while. KEY NEXT STEPS Just as it is impossible to learn swimming without jumping into the pool, we believe a start has to be made sometime along both these dimensions. And there is no better time than today! Thus, we would recommend a simple starting point for parents thinking about their childs future: Invest a lump sum in an index fund, and plan to systematically build this through authorising smaller additional investments monthly. You can look at research to see which are the good funds, and keep your portfolio under periodic monitoring. Insure your life, for atleast five times your annual earnings. Again, a simple shopping expedition should get you the best term insurance cover applicable for your age and health. Ramganesh Iyer

Start planning early for your retirement

Though it is a well known fact that we need to save to build a retirement nest egg, many of us fail to do so. Investment expert Hemant Rustagi tells you how to achieve the desired results.

Retirement planning is a process of establishing retirement goals and working out allocation of finances to achieve these goals. This process, if properly followed, can go a long way in ensuring the right level of preparedness required for a dream retired life. While it is a well known fact that we need to save to build a retirement nest egg, many of us fail to do so. No wonder, we often get overwhelmed by the thought of retirement and end up wondering how we will ever generate the huge amount of money required to lead a happy retired life. Many of us face this dilemma because we consider retirement planning as a single event rather than considering it as a life long process. If we save and invest regularly over the years, even a small sum of money can suffice for this purpose. The key, however, is to start investing early as the real power of compounding comes with time. Unfortunately, few young people look that far ahead. Another challenging aspect of retirement planning is to calculate how much we will need to support ourselves and our dependants. As a thumb rule, one requires around 75- 80% of ones current income to maintain the similar standard of living. Of course, this amount will increase with inflation. Though it is a proven fact that starting early is an important aspect of retirement planning, it is extremely difficult to decide how much one will need after retirement. A professional advisor can make things easy and hence it is always prudent to go for professional advice to ensure success in the process of retirement planning. One can also enhance the chances of success by making retirement planning an integral part of overall investment planning. Hence, it is crucial to examine one s current situation and the attitude towards risk. Remember, investing without a clear picture can be too risky. The key to success is to adopt a disciplined savings programme as well as have the flexibility of multi-stage approach to investing. The road to success for this all important and a long-term goal can at times be bumpy. Therefore, having patience and discipline can go a long way in achieving the desired results. While it is impossible to anticipate every obstacle, knowing some of the common mistakes can help in avoiding them. The important ones are not having a plan as well as a backup plan in place, making frequent changes in the portfolio and investing too conservatively.

Investing to beat inflation is an important aspect of retirement planning. To understand as to how inflation can impact our future requirements, let us take an example of someone who is 30 years away from retirement. If we assume a 5% inflation rate, the Rs. 100,000 annual expenditure will increase to over Rs. 435,000 by the time he retires. Therefore, if he plans for Rs. 100,000 per annum for his retirement, he would be having less than 25% of what he would really require. Therefore, a retirement plan and the strategy to implement it should cover the following: Begin investing early Invest to beat inflation Invest regularly Know your risk tolerance Evaluate your insurance and investment needs Follow a buy and hold strategy Invest in tax efficient instruments like mutual funds. Investing regularly is another key ingredient of retirement planning. Broadly speaking, we need to save a certain percentage of our annual income and invest in instruments that have the potential to give the desired results over different time horizons. The following can act as a guideline: Ages: 25 to 40- Depending on the age, 15 to 25% of the annual income should be saved. The portfolio should be dominated by equities and/or equity funds. These should comprise 70 to 80 percent of the investments. To balance out the portfolio, one could rely on stable yet tax efficient investments such as PF, PPF and debt and debt-oriented mutual funds. Ages 41 to 50- In this age group, one should save around 25 to 35% of the annual income. As the time horizon to retirement is still long enough, equity and/or equity funds should continue to be a crucial part of the portfolio i.e. around 60% or more. The balance can be invested in PF, PPF and other debt and debt related mutual funds. Ages 51 to 60- At this stage of ones life, the time horizon for retirement starts shrinking. Therefore, the prudent thing to do would be to follow a slightly conservative approach. However, it is important to remember that it may only be a

few years before one retires, but one may need to depend on retirement funds for many more years. Therefore, the key is to maintain a portfolio that will continue to grow for many years after one retires. Equity and/or equity funds should still be a part of the portfolio, though in a moderate percentage. If you havent started planning for your retirement yet, you need to do it now. Remember, for every 10 years of delay in the process, you will need to save three times as much each month to catch up for the lost time. -Hemant Rustagi..

Is it time to say Goodbye to your fund?

Any decision to sell your fund has to be a well thought out one and not based on some immediate urge. Sanjay Matai highlights seven points to be considered while making a decision to sell.
Many investors are still to fully understand the concept of a mutual fund. They continue to treat it similar to investing in shares. Therefore, they tend to buy mutual funds for wrong reasons - low NAV of a fund; dividend announced by a MF; New Fund Offer etc. The same misconception is seen in selling too. One of the most common instances of selling a mutual fund has been to invest in a New Fund Offer. This is under the false impression that a fund at Rs.10/- is cheap and an excellent opportunity to invest. Many investors have been misled by distributors into this kind of switching. (Also read - Invest wisely and get rich with equity MFs)
Further, the profit booking strategy for stocks may not strictly be applicable to mutual funds. It is the job of the fund manager to keep buying under-valued or fairly-valued stocks, while booking profits by selling overvalued stocks Therefore, by selling a MF from a profit booking perspective, we may actually be selling off a fairly valued portfolio - with a good long-term potential. Therefore, what could be the possible situations for selling a MF? Financing a need

A very obvious reason to sell would be when you need money. We all invest money with a view to finance some need or a desire in the future. Say, you planned to buy a car or a house; or need to pay your child's fees; or maybe you want to take a vacation abroad. All this would require you to liquidate some of your investment. (Also read - Trading tricks that've stood the test of time) However, proper choice is essential in deciding which fund(s) to sell. You could either sell those funds, whose performance has not been encouraging; or those where the tax impact is minimal; or those where the amounts are not very significant; etc. Or sometimes, possibly it may be better to borrow rather than sell a good investment. Poor performance There are more than 200 equity funds and their number is growing. The returns from practically all funds have been comparatively quite good, given the current bull-run. Even the worst performing funds have given 30-35% returns in last 1 year. In absolute terms these are excellent returns. But when compared to the top performers with 110-115% returns, these look extremely poor. However, the key here is to look at long-term returns - 1-yr, 3-yr & 5-yr - and compare it with both the benchmark index and other funds in the peer group. In the short term there could be a genuine reason for under-performance. Some of the investments may be from a long-term perspective; certain sectors may have been under-performers; contrarian investments take time to catch market fancy, etc. (Also read - The Investors biggest Dilemma) But if the performance of the fund continues to be consistently below par over long periods of time, then it may be worthwhile considering switching over a better performing fund. If possible, one should also try and assess the reasons for poor performance. This will give a good insight into the market. Rebalancing the portfolio We all have a certain asset allocation across various investment options such as debt, equity, real-estate, gold etc. A change in your financial position may require you to rebalance your portfolio. Suppose you are presently having a well-paid job and are unmarried with no liabilities. You can, therefore, take much higher exposure in equity MFs. But with marriage and kids your responsibilities may increase, which would require you to reduce you equity risk to more manageable levels. Or the portfolio balance changes with time, due to different assets growing at different rates. Your equity portion may have appreciated much faster than your debt, distorting the original balance.

Hence you would need to sell equity and re-invest in debt to restore the original balance. (Also read - Mutual Funds: Your best personal Portfolio Manager) Or maybe a new asset class has been introduced in the market - a real-estate fund or a gold fund - and you want to take advantage of it. Thus you may have to sell a part of your existing investment and re-invest in this new asset class. Change in taxation policy...

A change in the tax policy could become a reason to sell and reinvest somewhere else. (Also read - How to optimize your tax using mutual funds?) Suppose our risk profile is such that we can take around 50:50 equity to debt exposure. Thus we had invested in the balanced funds. But, in the recent budget, the tax laws have been changed wherein a fund would classify as an equity fund only if the equity component is more than 65%. Therefore, the balanced funds would have to increase the equity component to 65% so that they can continue to enjoy the lower tax applicable to equity funds. But with 65% equity it becomes riskier. Hence, it could be time to exit. Change in Fund-Style or Objective We invest in a fund with a particular objective or style in mind. Suppose, we already have exposure in mid-cap funds and in order to diversify our portfolio, we choose a large-cap fund. However, after some time we observe that the fund is taking exposure in mid-cap sector too. This increases our overall exposure to mid-cap. Thus it may be time to sell and move to a truly large-cap fund. (Also read - 5 corners of a sound Investing Strategy) Or say, we choose a fund for its' passive style of investing. But later the fund manager starts following an aggressive style with frequent churning. If this style does not suit our risk profile, it may be the time to say goodbye to such a fund. Or take the case of some technology funds. These came at the time of tech boom and subsequently fared very badly. However, at Rs.4-5 NAV these looked quite attractive from a long-term perspective and some investors, confident of recovery in the tech sector, invested in these funds. But in the meantime, the AMCs in their anxiety to improve the performance of such funds, changed the investment objectives. This defeated the very purpose with which some investors had taken exposure in these funds; and hence had to consider exiting.
Change in the Fund Manager

When investing, one of the criteria is to evaluate the expertise, knowledge, experience and past performance of the fund manager. However, while the fund manager is a key player in managing our money, one should not forget the contribution of the research team, the investment committee, the top management and AMC's investment philosophy. Therefore, a change the fund manager need not necessarily mean exiting the fund. But it may be worthwhile keeping the fund under a close watch. If there is a perceptible decline in the performance, one could consider selling. Change in the Fund's Size Sometime the size of the fund starts affecting the returns. As we have also recently seen that certain mid-caps funds took a voluntary step to stop accepting fresh money into the fund, when the size became too large to manage. This is because (i) the mid-cap space is limited (ii) even small purchase of such stocks sent their prices soaring and (iii) too large a holding in such stocks will be difficult to offload when required. (Also read -Investing situations that cause Panic) Here, of course the funds took a proactive step to protect the returns of the existing investors. But if the funds themselves do not take such a step, we investors should keep track of the fund sizes. The moment they become too large to manage or say too small to capture new investment opportunities, it may be time to exit. There could, of course, be other reasons to sell, more specific to one's circumstances. The basic idea is to define, beforehand, certain rules for oneself for selling one's investments. This would reduce the day-to-day dilemma and ad-hoc decision-making, thereby make investing more scientific and unemotional.

How to optimize your tax using mutual funds?

Mutual Funds by their very nature are not tax saving instruments but investment products that may offer tax concessions. But the question is whether these should be looked at as tax saving instruments? Moneycontrol tells you how to kill two birds with one stone - how to optimize tax while getting the best from mutual funds.

utual Funds by their very nature are not tax saving instruments but investment

products that may offer tax concessions. But the question is whether these should be looked at as tax saving instruments? Moneycontrol tells you how to kill two birds with one stone - how to optimize tax while getting the best from mutual funds. Equity Linked Savings Schemes (ELSS) Are Strong Favorites: ELSS schemes give twice the benefit as compared with diversified equity schemes. They give you tax sops on investments and are also exempt from long term capital gains tax. These are special equity funds, which have to invest at least 80% of their corpus in equity, and investments are locked in for a period of 3 years. Investments can get you benefits under Section 80 C i.e. investments of upto Rs 1 lakh in such schemes can be reduced from your gross income. Hemant Rustagi, CEO, Wiseinvest Advisors believes that ELSS is the best example of an investment option that provides you a very simple way of investing in stock market and save taxes while doing so. Being equity oriented schemes, ELSS have the potential to provide better returns than most of the options under section 80C. Also, as per the current tax laws, an ELSS investor is not only entitled to earn tax free dividend but also the long term capital gains are not taxable, he adds.

Returns (in %) ELSS Can Robeco Equity TaxSaver Fidelity Tax Advantage Franklin India Tax Shield HDFC Tax Saver Reliance Tax Saver (ELSS) * Returns are Annualised 3 Year 5 Year 16.6 14.8 15.2 14.8 16.0 11.1 7.5 8.5 6.5 6.5

Assets (Rs in cr) 362.35 1,167.14 812.36 3,114.00 1,972.80

Click here to know the Best Funds to Buy But should an investor go the whole nine yards and put in the entire permissible amount of 1 lakh in ELSS? Probably not! Ranjeet Mudholkar, Head - Certified Financial Planners Board, cautions that Sec 80 C covers your principal on housing loan, PF, pension plan, life premiums, so only what is left after that can give you a benefit if invested in ELSS.

All Smiles From Equity Funds: Apart from ELSS schemes, diversified equity schemes are a good investment considering that capital gains in equity funds below one year are taxed at a rate of 10% and over a year are tax-free. This option can be best excercised using a Growth Plan offered by mutual funds. The primary objective of a Growth Plan is to provide investors long-term growth of capital. Dividend paid in Dividend Plans is tax free, and no distribution tax is deducted. However, every time we buy or sell equity shares a Securities Transaction Tax, STT, of 0.25% is paid and further when you redeem your investment, again STT is deducted from your redemption price. So what strategy will help to reduce the burden of STT to the minimum possible extent? Investment expert Krishnamurthy Vijayan advises to choose the dividend option, while it remains tax-free. Though both decisions are by and large tax-neutral, your STT will go down if your profits have already been taken out by you in the form of dividend, he adds.

Returns (in %) Equity Diversified Scheme 3 Year 24.7 16.1 19.8 14.6 5 Year 9.80 8.301 11.4 8.50

Assets (Rs in cr) 3,325.34 4,092.27 273.03 1,261.95

Reliance Equity Oppor - RP ICICI Pru Dynamic Plan Tata Dividend Yield Fund HDFC Growth Fund
* Returns are Annualised

Debt Funds Can Benefit From Indexation: Debt funds have lost their sheen thanks to falling interest rates and paling tax sops when compared with equity schemes. Any fund wherein the average holding in equity is 65% (as per Budget 2006) or below is treated as a debt fund. If you invest for less than 1 year in the growth option of a debt fund, you will have to pay Capital Gains Tax on your "profits" at the rate at which you pay income tax on your income. But, if you stay invested for over a year, you can either pay 10% tax on the profits or pay 20% after reducing the rate of inflation (indexation benefit). So if you are invested for three or four years, your tax may become much, much lower than 10%. Nevertheless for the risk averse, there are ways to reduce the tax burden on returns. Investors can also benefit from double indexation benefit (when you invest late in one financial year say on March 28, 2005, and redeem early in the next financial year say on April 2, 2006, you use the index of both Financial Year ending March 2006 and March 2007 to get this benefit for as little as 366 days) provided the two financial years' index adds up to more than 10%. In the dividend option, dividend is tax free in your hands. But the dividend distribution tax deducted at source also comes out of your NAV. So you end up paying a tax of 10%. Further any increase in NAV over and above the dividend distributed, is taxed as in the case of the growth option.

Vijayan advises most debt fund investors who have a reasonable horizon to invest for at least one year or more, in any case and choose the growth option, since by and large this would prove most tax efficient for retail investors in the lower tax brackets. - Reena Prince

10-point checklist for planning your taxes

The end of the fiscal is less than two months away. Here is a ten-point checklist for planning your taxes. The end of the fiscal is less than two months away. Start planning your taxes if you haven't started yet. The following is a ten-point checklist.
1. The most important thing to do is start compiling a list of the TDS you have paid. TDS operates like tax already paid i.e. from your final tax liability you have to pay only such amount that is over and above the tax already deducted. It is important for all taxpayers to collect the TDS certificates after the end of the fiscal year. Though these dont have to be attached with the tax return anymore, they have to be filed and kept on record and produced before the ITO if called for. 2. If you have availed of housing finance, be sure to collect the certificate of your EMIs and the total interest paid from the housing finance company. 3. If you haven't bought Mediclaim, do so now. There is a deduction of Rs. 15,000 (Rs. 20,000 if you are a senior citizen) available under Sec. 80D. 4. It is time to make your Sec. 80C investments to claim tax rebate. PPF offers 8% tax-free. Equity linked savings schemes are yet another option. Have you considered these?

Check out - Equity Linked Saving Schemes

5. Sec. 88 used to be unavailable to those earning above Rs. 5 lakh. However, its not so with Sec. 80C. Everyone, regardless of income level, can take advantage of the Rs. 1 lakh tax break offered by 80C. Sec. 80C doesnt impose sub-limits like Sec. 88 used to. For example, under 88, you could invest only up to Rs. 10,000 in ELSS. Or only Rs. 20,000 was available for housing finance. Now, 80C is extremely flexible, as the erstwhile sub-limits have been dispensed with. The EET tax regime has yet not been notified. Therefore, all your tax saving investments for FY 07-08 will be under the old EEE system. For next year, defer your tax saving investments till such time there is clarity on the issue. The Government is expected to come out with the new tax laws anytime next year. 6. If you have made a donation, you need to submit the receipt issued by the institute (receiving the donation) to get the benefit of the deduction under Sec. 80G. If you have not collected such a receipt, do so soon. 7. If you are a female assessee under the age of 65, do not forget to take into account the special tax exemption slab of Rs 1,45,000 while arriving at your tax. And if you are above the age of 65, remember to claim the special slab exemption of Rs. 1,95,000. 8. If you are a trader, remember, Sec. 88E allows you a set-off of the Securities Transaction Tax against your trading profits. Arrive at your taxes only after claiming this set-off. 9. Last but not the least; get in order all your supporting documents of the tax planning/saving instruments that you have invested in. For employees, this directly affects the amount of TDS on your salary. If you are late, you would end up bearing a higher amount of TDS than what ought to have been deducted. 10. The last date for payment of advance tax is March 15th. However, if your advance tax payable is less than Rs. 5,000, then you can pay such tax while filing the return. Also, if you earn any income after 15th of March, pay tax on it on or before 31st and such tax would also be treated as advance tax. - Sandeep Shanbhag

How to use equity loss to reduce tax liability

Here is a simple way to use already accrued losses to save your tax outflow. You can use your equity capital loss to off set gains from debt mutual funds, gold or real estate.
Every dark cloud, they say, has a silver lining. For investors who have lost heavily in the recent Indian equity market crash, it would seem rather difficult to believe this. While little can be done about the actual losses that you may have suffered, there is a way to use them to reduce your income tax liability on other gains. Let us look at one such method in this article. A brief excursion into the relevant tax rules would be in order first. Long term capital losses can be set off only against long term capital gains. However, short term capital losses can be set off against both short term and long term capital gains. In the context of listed shares and mutual funds (both debt and equity), a period of over one year is long term, and anything less than that is considered short term. The corresponding time period for real estate and gold is three years. For easy reference, let us put down the currently prevailing short term and long term capital gains tax rates for each of these categories below:

Asset class

Short-term capital gains tax rate

Long-term capital gains tax rate

Listed shares Equity mutual funds Debt mutual funds, FMPs Real Estate Gold

15% 15% 33.6% 33.6% 33.6%

0% 0% Lower of 10% non-indexed or 20% indexed 20% indexed 20% indexed

Of course, all these capital gains accrue when the asset is sold or transferred out. The central theme of the idea is to use the equity market downturn to book short term capital losses. And then utilise these booked losses to set off long term or short term capital gains on gold, real estate or debt fund portfolios. Let us look at this theme in more detail through an example. You may note that in this example, we have not taken any view on the portfolio allocation strategy per se. For instance, to determine whether you are over-weight on real estate or underweight on equity, etc, a closer analysis of your individual portfolio is called for. Rather, we are only looking at a general strategy you can adopt to minimise tax liability within the boundaries dictated by your portfolio allocation strategy. Assume you had a portfolio over Rs 10 lakh of investments in shares or mutual funds. Most of these investments were done late in 2007 or in early 2008. After the market crash, you find yourself looking at a portfolio value of only Rs 7 lakh today. Assume you have decided to weather this downturn and hold on to equity portfolio, either because you are willing to wait for the next up-cycle, or because your portfolio allocation suggests that. If you simply hold on to your shares, and they again rise to Rs 10 lakh in two years time, you would have squared off your losses. There would be no capital loss (or gain) that you would have. Thus, if you have any other capital gain this year say from selling some real estate or debt mutual funds, you would incur capital gains tax on those, as per the table given above. There is, however, a better strategy. On one of the days when the market is on a downturn, you can sell all your shares purchased over the last year. Immediately, you buy another portfolio (this can even be the same old portfolio) at the prevailing

market rates. Thus, you have booked a short-term capital loss of Rs 3 lakh; and the purchase value of your current portfolio is Rs 7 lakh. Now, you can use this capital loss to set off gains from debt mutual funds, gold or real estate in the year. In fact, you might actually want to actively book profits in real estate or gold if you believe these prices are at their peaks and are likely to come down in future. You can book just enough gains from these sales, to ensure your next capital gains tax liability over the year is zero. To be sure, your cost value of the new equity portfolio would be only Rs 7 lakh (as against Rs 10 lakh in the earlier hold strategy). Thus, if you were to sell it within a year at higher value, all the losses you had shown earlier would be wiped out in the gains that would accrue here. To avoid this, it would be advisable to hold on to the new portfolio for atleast a year, after which capital gains tax is anyway zero. The transaction cost of doing all this is likely to be minimal: 1% - 1.5% of your portfolio depending on your equity broker. By doing the sale and purchase transactions with minimal time lag, you are likely to minimise market risk of fluctuation in the interim. You can also do this if you had mutual funds instead of shares. A simple switch transaction from one fund to another would be counted as a tax event, and hence you could book your losses there. After all, this strategy is completely agnostic to market view and future movement. It is simply a way to use already accrued losses to save your tax outflow. - Ramganesh Iyer

How to earn better returns from your MF portfolio

Pick up any mutual fund portfolio of an active investor and you will usually find it plagued with typical problems. If we can understand, identify and rectify these common blunders, we can make much better returns out of our money.
Pick up any mutual fund portfolio of an active investor and you will usually find it beset with typical problems. These can affect the overall performance. If we can understand, identify and rectify these common blunders, we can make much better returns out of our money.

A bloated Portfolio Many people have the habit of collecting funds. Over time, therefore, you will find such portfolios having 40-50 funds. Diversification is good, but over-diversification is not. Firstly, a large portfolio would mean that some funds in the portfolio will always be belowaverage, thus dragging down your total returns. Secondly, even with all the support of the computers and specialized websites, it is not possible to effectively manage a large portfolio. This again is going to impact the performance on the whole. One should, therefore, have a limited but power-packed portfolio. The idea is to extract maximum punch with minimum cost and effort. Chasing the Top Performers There is too much focus on the performance and that too usually the recent one say over 3 months to 1 year. Thats why you always find this fascination among people for fund rankings. Of course, performance matters! But making performance (and that too short-term) as the sole selection criteria can prove counter productive. Historical evidence shows that no fund can always remain the top performer. It also shows that a fund, which has been consistently amongst the top quartile say over 3-5 years, will usually continue with its good performance. Similarly, a consistently poor performing fund usually finds it difficult to make it to the top. Besides this the markets, as we all know, are highly sentiment-based. Therefore, more often than not, you will find some theme or the other being market fancy. It could be infrastructure, mid-caps or technology and so-on. At any given time you will find that most of the top performers belong to the same category. So if you chase top performers you will end with similar schemes in your portfolio. In the process, the portfolio becomes concentrated, defeating the very idea of using MFs to diversify one s investment. Your focus should not only be the past performance but also reputation & management of the AMC, funds investing style & focus, asset size, etc., besides of course, other key factors such as your investment horizon, risk appetite and other funds in your portfolio. Mismatched and Unbalanced

It is but natural that the money you need in the short term should be in debt, while only the long term money should be in equity. Liquidity apart, your asset allocation between debt and equity should be in line with your risk appetite. Some people of course do not do so. Some others start in planned manner. But, as equity and debt follow different paths, over time the portfolio will become mismatched and unbalanced. As such you may either be over-exposed to equity thus increasing risk; or under-exposed thus losing out on the benefits of equity. Or a liquidity mismatch may happen between the investment and your need. For example equity markets may be down when you need money, thus forcing you to sell at a loss. Thus your portfolio needs timely review and correction in tune with your risk appetite & liquidity needs. Infested with NFOs Thousands of pages have been devoted to pointing out the myth of NAV. Yet the logic that NAV has absolutely no bearing on the future returns, simply does not register with a common investor. Hence one can see thousands of crores flow into NFOs especially in a bull market, while the existing funds get practically nothing. In fact, its the opposite. People switch out of existing schemes to invest in NFOs under the false impression that Rs.10 NAV fund is cheaper. As such a typical portfolio would be infested with NFOs. Higher costs in NFOs vis- -vis existing funds will eat into the returns. Also as the so-called low NAV is why you invested in the NFO, it is quite likely that the funds style and focus does not fit with your needs. This also is going to hamper your returns. Too Much Churning Call it impatience or a false sense of being proactive or the instant-culture - we simply cannot wait and watch our portfolio grow. We always feel that we need to do something regularly. Therefore, as soon as a fund shows good appreciation, we are quick to book profits. Or if a fund does not move for some time, we are equally prompt to dump it. This, for one, is adding to the costs in terms of capital gains taxes, entry loads, exit loads, STT, etc. But more importantly, we may be getting out too soon and thus missing out on future performance. For example, I know investors who want to exit from some funds whose focus is on smaller or mid-sized companies. Now these are the funds, which usually will take time to show returns. It s quite logical. A Bharti or a Suzlon or an Infosys did not become big in one day. Similarly, who

knows how many such future stars are there in these funds? If we wait for 3-5 years, many such budding companies will blossom into beautiful flowers and give us super-normal returns. The question is are we willing to wait for it? Building and maintaining a well-diversified and balanced portfolio is no rocket science. All it needs is common sense and discipline to act prudently, promptly and purposefully. - Sanjay Matai