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07Jan2013
201 4 5 Ne w
Years res ol uti on s
for mut ual fu nd
inve st ors
- Vidya B ala
An yea r t o forget ,
and one t o l ook
forwa rd t o?
Dh i r e n d r a K u m a r
Greetings from FundsIndia! Trust you all had a wonderful new year!
Scarcely does a year arrive as laden with expectations as the year 2014 has. Rarely has an election
seemed as important as the one that is on tap in a few months from now.
People are counting on a new government to deliver the country out of the economic morass that it
finds itself in. Be it taming inflation, stabilizing the value of rupee, increasing GDP growth rate, or easing the business climate for a robust growth in industry - people are hoping for strong performance
from whoever it is that would form the next government whether it is UPA III or NDA II or AAP I.
Needless to say, at FundsIndia, we share these hopes. A poor, inflationary economy is especially bad for
an investment services business such as FundsIndia. We get hit on both sides our customers portfolios do not do well, and inflation eats away at peoples savings. That means people have less to invest
even while whatever they had invested in the past is not doing well which further diminishes interest in
investing. While no new government will be able to wave a magic wand to make all problems disappear,
it might help improve the economic outlook and investor sentiment in the country. Wed be happy to
take that.
Coming to our platform and services, the first few months of year might prove to be eventful for us.
Recently, we launched a handful of new deposit products in our platform (Gruh Finance, PNB Housing,
Apollo Hospitals, Exim bank, and more). We plan to be launching an exciting new way of doing systematic investing in physical gold as
well shortly. There are more new products and services on the anvil, and well keep you updated as and when we bring them online.
Im also happy to announce that we opened our first physical outlet on a pilot basis near Chennai. It is at Mahindra World City a planned
township that houses many corporates including Infosys and BMW. It is located at The Canopy, a central shopping complex in the campus. If you or your friends live or work in the township, please drop in to say hello.
Tax saving season is here. Hope you have completed your ELSS investments for the year. If you need any recommendation on where to
invest, you know you just have to ask for it.
In this newsletter, we carry '5 New Year's Resolutions for mutual fund investors' by Vidya Bala and a look ahead by Dhirendra Kumar. I highly
recommend both.
Happy Investing!
Disclaimer: Mutual Fund Investments are subject to market risks. Please read all scheme related documents carefully before investing.
Volume 7, Issue 01
Page 2
So here are 5 resolutions that I can think of, for any mutual fund investor:
1. Spend less time timing the market and more time staying in the market
Simply put, stay invested over your intended time frame. This is true of equity and debt funds.
Most of you may be investing in mutual funds because of the convenience of investing in equity and debt markets without having to track
your investments or time the markets right or pick the right stocks; and yet manage inflation-beating returns.
If that be the objective, then there could be little need to try and time the market by waiting for a dip (or a bigger dip) to invest, or worse
still, continuously starting and stopping SIPs based on market movements. You may do more harm to your portfolio than good, often
times.
For instance, assume you had an SIP running from January 2013 and the market volatility panicked you into stopping your SIPs by June
and you just held the money invested thus far.
In a mid-cap fund like HDFC Mid-Cap Opportunities you would have got an IRR of 17% but had you continued the SIPs till the end of the
year, your SIP returns would have been a good 30%. Even in a large-cap fund such as ICICI Pru Focused Bluechip your returns would have
been 19% if you ran your SIPs than the 14% IRR had you stopped it mid-year and held on.
If you are a very long-term investor (10 year or more) then no harm in investing a lump sum and hoping you can build your wealth. But if
you wish to time the market every time, you need to have deep pockets and acumen to spot market movements. For those with limited
sums, SIPs remain the best bet.
2.
I know the toppers chart for the year can really tempt you into switching your existing holdings to the chart toppers of the year. But remember, the toppers seldom find a place in the next years chart busters. Do read our article on choosing funds based on 1-year performance: Should you invest based on 1-year performance?
By unnecessarily switching funds, you may not only make your portfolio volatile and incur loads/taxes but lose out on the SIP and compounding benefits in the existing steady funds that you may hold.
3.
If you have been following one of the few mutual fund ratings available for domestic funds, you might at
least every quarter be faced with a dilemma on whether you should be exiting some of your funds that
moved from a say 5-rating to 4 or from a 4-rating to 3.
Yes, ratings are a good tool for you to keep track of the performance of funds but remember no fund can
have relentless top notch performance. Only several quarters of sustained under performance should give
you the warning signal.
Disclaimer: Mutual Fund Investments are subject to market risks. Please read all scheme related documents carefully before investing.
Volume 7, Issue 01
Page 3
There will be slip ups that may result in some of the rating agencies lowering the ratings. While you may have to keep watch of the performance of such funds, do not let all the noise, especially a media update on top quarterly performers, tempt you into disturbing your portfolio.
You can though, check with your advisor on whether you need to be worried about the performance of any specific fund as a result of the
rating change.
Also different rating firms have different criteria to provide/change ratings. Follow one of them and not be confused by the difference
across the rating houses.
4.
Most often, your investment decisions seem wrong at a later date because you did not have a goal/time frame for your investment. How
does this affect your portfolio?
If you did not have any time frame and started investing in say an equity fund and see the fund returns fall in 1 year, you believe you were
given a wrong fund or believe that mutual funds result in losing capital.
But if your investment purpose was for 5 years and you have been advised to keep the investment going for that period to generate wealth,
then the 1-year dip should not bother you as long-term performance tends to even out any short-term falls.
Lack of a clear idea on when you need your money back forces you into changing your investment decisions every time you see a market
movement.
This is true of debt funds as well. If you bought an income fund this year and saw the performance dip after July, the first question in your
mind would be whether to exit it. But income funds are meant to be held for at least a 3-year period and it was only the interest rate hike
that caused funds across this category to fall. Your time frame cannot change just because the market goes through a few kinks.
If you do invest without a goal or time frame, know what is the minimum time frame over which a particular fund/category is required to
be held for it to deliver optimal returns and hold on to that time frame. Chances are that you will end with decent returns (sector funds are
certainly exceptions to this rule).
5.
While we keep talking of not disturbing your portfolio, there would certainly be times when you need to review or rebalance your portfolio.
And what better time than a year end to examine your portfolio health?
Short-term blips both in equity and debt market are not reasons for you to be worried. But if a fund has steadily under performed its
benchmark by a t least 5 percentage points over 4-8 quarters, then the first thing would be for you to check with your advisor whether you
need to stop your SIP on the fund.
Review of your asset allocation is also an important project. In sharp bull markets your equity portfolio may have become inflated; conversely in a down market, your equity allocation may be much lower than your original equity allocation, as a result of any sharp fall.
Rebalancing will not just help you bring back your asset allocation; it directly helps you to buy more of an asset class that has fallen and is
therefore cheap; and also book profits in asset classes that have become expensive.
If the above is too much time for you to follow, take a look at our Smart Solutions, an automated advisory service that will remind and help
you to do both at the click of a button!
Just try following these rules with some discipline and you will see your portfolio bloom.
If you actually read through this long article patiently, thanks. I hope I can spare you of such long articles in future; for my resolution for
2014 is to convey as much, in as little words as possible. Have a fabulous year ahead!
Vidya Bala is the Head of Mutual Fund Research at FundsIndia. She writes for our monthly newsletter on topics including mutual fund,
personal finance and equity markets. Vidya Bala can be reached at vidyabala@fundsindia.com
Disclaimer: Mutual Fund Investments are subject to market risks. Please read all scheme related documents carefully before investing.
Volume 7, Issue 01
Page 4
After a prolonged period of downtrend, Kesoram Industries seems to be getting ready for a short-term rally. A look at the weekly chart of
the stock featured below indicates that the stock has formed a consolidation and has since broken out above Rs.70 resistance.
Continued on page 5 . . .
Disclaimer: Mutual Fund Investments are subject to market risks. Please read all scheme related documents carefully before investing.
Volume 7, Issue 01
Page 5
Mr. B. Krishna Kumar also hosts a weekly webinar that discusses the market outlook for the following week. You can follow him on Livestream to receive reminders for his webinars: http://
new.livestream.com/accounts/4749821
Volume 7, Issue 01
Page 6
funds--registered a drop in the NAV. This was an unexpected shock for investors who've always thought these funds to be proof against even a single
day of losses.
Gold Decline
Gold ended with its worst year since 1981. The international price of gold is down 28.28 per cent since 2013 began. This is it's worst year since 1981. Is
the gold mania over? It certainly looks like it, although in India the plunging rupee and the government's increased duties meant that the loss was not
all that severe. The domestic price of gold was down 7.8 per cent in the same period.
However, with the rupee stabilising and the government determined not to reduce duties, Indian gold prices are now tracking international ones. In
fact, if curbs are lifted and duties reduced, Indian prices could fall more than international ones. Since its peak in September 2011, gold is down 35 per
cent internationally. Value Research has long maintained that gold had a one-time boom during the last decade. Fundamentally, gold is a poor investment and will remain so.
Global Delights
Given India's external sector weakness, along with our high inflation and interest rates relative to the US Dollar, it is likely that the rupee will continue
to get weaker. This might sometimes happen in fits and starts and sometimes steadily, but the basic trend will remain true. What this means is that all
sensible investors must have some exposure to international funds. In this regard, investors would do well to look beyond the category average of 13 per
cent returns that the Value Research International funds category has.
Much of this category is made up of exotic thematic funds which are not suitable for anyone. Investors should focus on mainstream diversified equity
funds that focus on the US and other developed economies. Such international funds have returns of well above 30 per cent over the last year. Examples include FT India Franklin US Opportunities, Motilal Oswal MOSt NASDAQ-100 ETF, ICICI Pru US Bluechip Equity, DSPBR US Flexible Equity,
and Birla Sun Life International Equity.
Looking Ahead to 2014
Most investors expect the 2014 general elections to be a big agent of change and since investors are by nature an optimistic lot, we expect the change to
be positive. At this point of time, this expectation generally takes the shape of an NDA government led by Narendra Modi. Of all the possible political
configurations in India, a Modi-led NDA government would be most growth-oriented. However, it's by no means certain that such a government would
actually be formed.
India's polity has always been a fertile ground for socialist-leftist ideas that prioritise big expensive promises and spending over growth that could finance that spending. The ease with which the AAP has gained ground is fresh proof of this. It's entirely possible that May 2014 could see a dysfunctional coalition coming to power that could make the UPA look like a model of action and good governance.
However, that's not to say that mutual fund investors should follow some special strategy based on what they think will happen on the markets. Markets are uncertain even at the best of times and we always recommend an approach that can be followed without regard to the events that could happen.
Here's our investing strategy for 2014, which is the same as it has always been: Take a look at your own life and try and make a liberal estimate of how
much of your savings you would need to tap into over the next five to seven years. This would include some sort of an emergency amount, plus predictable big-ticket expenses like weddings, education, the down payment on a house and such things. This is the amount you should hold in debt investments which could be anything from PPF to short-term debt mutual funds. The rest should be in diversified equity mutual funds with a good long-term
track record. Any fresh investments into equity funds should be done gradually and continuously regardless of the state of the markets. Don't invest in
too many funds--four or five is enough diversification.
Much could possibly change during 2014. On the other hand it's possible that nothing could change. It could change for the better, or for worse. However, there's would be no need to change this investment strategy. And that's the way it should be.
Syndicated from Value Research Online. Read the article online here: http://www.valueresearchonline.com/story/h2_storyview.asp?
str=24280
Disclaimer: Mutual Fund Investments are subject to market risks. Please read all scheme related documents carefully before investing.