Monday, April 30, 2007

When to Say Good Bye to your Mutual Funds? - Part-II

When to Say Good Bye to your Mutual Funds?(contd.)

Evaluating your funds’ performance in conjunction with your financial situation every quarter is the basic prerequisite while reviewing your mutual fund portfolio. Having elaborated the You related factors, we now move over to the Fund related factors as to why you would want to sell your mutual fund.

Poor Performance

In the first place, compare the fund vis a vis itself at varying time periods. Obviously a fund should be sold due to poor performance. Be careful not to sell a fund because of poor short-term performance. One bad quarter or even a sub-par year is not sufficient justification to ditch a fund, especially if it has a good long-term performance record. Usually two to three years of unexplained or dramatic underperformance are appropriate indicators.

Change in Style or Objective of the Fund

If you researched your fund before investing in it, you most likely invested in a fund that accurately reflects your financial goals. If your fund manager suddenly starts to invest in financial instruments that do not reflect the mutual fund's original goals, you may want to re-evaluate the fund you are holding In case there has been a change in the fund’s investment objective or strategy you are justified in selling. If you bought a fund for exposure to large blue-chip companies and all of a sudden it starts buying small start-ups, that’s a definite red flag! Or if you bought a fund that buys undervalued companies and it starts buying companies at any price whose earnings are growing rapidly ....another red flag. Note that funds are typically required to notify unitholders of any changes to the original prospectus. Some funds may change their names to attract more customers. When a mutual fund changes its name, sometimes its strategies also change. If you are not comfortable with the direction of the fund, sell it.

Change in the Fund Manager

While 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 your money, you should not forget the contribution of the research team, the investment committee, the top management and AMC's investment philosophy. Therefore, a change in the fund manager need not necessarily mean exiting the fund. But it may be worthwhile keeping the fund under a close watch. If the fund mimics a certain index or benchmark, it may be less of a worry as these funds tend to be less actively managed. For other funds, the prospectus should indicate the reason for the change in manager. If the prospectus states that the fund's goal will remain the same, it may be a good idea to watch the fund's returns over the next year. You could also research the new manager's previous experience and performance. Give the new fund manager time, particularly if he has a similar investment philosophy as the previous manager. If there is a perceptible decline in the performance or if the new fund manager has a different investment strategy, you may consider selling.

Change in the Fund's Size

Sometimes the size of the fund starts affecting the returns. The bigger the fund, the harder it is for a portfolio to move assets effectively. Note that fund size usually becomes more of an issue for focused funds or small-cap funds, which either deal with a smaller number of shares or invest in stocks that have low volume and liquidity. Certain mid-cap 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 send their prices soaring and (iii) too large a holding in such stocks will be difficult to offload when required. 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, you should take appropriate steps at the right juncture.

Selling funds based on comparative evaluation will be dealt with in the next blog.

Monday, April 23, 2007

When to Say Good Bye to your Mutual Funds? - Part-I

When to Say Good Bye to your Mutual Funds?

A fund once bought cannot be held for eternity. There are certain circumstances that wave a red flag signaling the need to part with your prized possession. They can be those related to you as a person, who has a definite investment objective in mind as well as a certain risk tolerance and of course reasons related to the fund’s management and its performance. I shall take up the ‘you’ related factors in this blog.

First and foremost are the questions - Why did you buy the fund in the first place? What is the time horizon for which it was bought? If it is not fulfilling its purpose or in case it has already fulfilled its purpose, it may be time to sell. In case the appreciation you had expected has happened in a shorter while than expected then it does not matter. Go ahead and sell. In case you had bought for long term so as to cream capital appreciation or for its past dividend record and it has slipped up, then there is no reason for you to hold the same.

Financing a need

We all invest money with a view to financing some need or a desire in the future. Say, you plan 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. 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.

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 take a much higher exposure in equity funds. But with marriage and kids your responsibilities may increase, which would require you to reduce your equity risk to more manageable levels.

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.

A new asset class has been introduced in the market - a capital protection fund or a gold fund - and you want to take advantage of it. You may have to sell a part of your existing investment and re-invest in this new asset class.

A change in your personal circumstances or investment objective. Depending on your investment life cycle stage, in case your long-term goals have now become short-term, shifting assets to more conservative investments may be required. So there is no harm in shifting from equity funds to debt funds. If you are now in a different stage in your life where you are getting closer to retirement, you might want to sell aggressive growth funds for more sedate growth and income funds.

Lastly, if there are changes in your risk tolerance, there is a mismatch between your risk profile and that of the fund. The change in the risk profile could have happened due to change in personal circumstance/fortunes, or due to age, change of job etc.

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.

Monday, April 16, 2007

Behold, Hold and Fold!

Behold, Hold and Fold!

Many people think that once they invest in a fund, the job of taking care of their investments has been successfully passed on to the fund manager. But this can be a dangerous strategy to adopt. If you think that your work ends when you buy a mutual fund, you are mistaken.You should regularly monitor and review your mutual fund investment. Unlike shares, mutual funds can be reviewed once a quarter.

How do you keep track of your fund's performance? All AMCs provide you with their annual report, a half-yearly report (unaudited results) and a quarterly and monthly factsheet/newsletter. Over and above this, there is public disclosure of the NAV of a scheme on the AMFI website, on the AMC's own website, as well as in the financial dailies. While NAV information tells you very little other than how well your investments are doing, it is basically the portfolio disclosure made through the newsletters and AMC reports that one should be interested in. You can actively monitor your mutual funds to ensure you keep as much of your profit as possible. Your portfolio pulls together all the information you will need to stay on top of your funds and avoid being caught off guard by negative price movements. In addition, try to gauge the fund's performance vis-à-vis its benchmark and its peers (at least to the extent possible). The fund manager will not tell you when to exit the fund. This is something you will have to decide, based on the information available. So, keep track of the fund's performance. After all, it's your money and you should know what the fund is doing with it.

An important point you need to understand is that mutual funds are not synonymous with stocks. So, a decline in the stock market does not necessarily mean that it is time to sell the fund. Stocks are single entities with rates of return associated with what the market will bear. Mutual funds are not singular entities; they are portfolios of financial instruments, such as stocks and bonds, chosen by a portfolio or fund manager in accordance with the fund's strategy. Relying only on market timing to sell your fund may be a useless strategy since a fund's portfolio may represent different kinds of markets. Besides, mutual funds are geared toward long-term returns. A rate of return that is lower than anticipated during the first year is not necessarily a sign to sell.

But holding onto a persistently losing fund is the most crucial mistake many mutual-fund investors make. For whatever reason—they become emotionally attached to the fund, they tell themselves the fund is bound to turn around or that they are long-term investors and just need to stick it out—they sit back and watch these losing funds drain money out of their portfolios. But you do not have to suffer the same fate. For most investors, especially those with equity exposure and long term perspectives, buy-and-hold is the easiest strategy and one that has proven effective on a historical basis. What buy-and-hold really means is staying the course through short-term market dips. However, there is a time when selling a fund is not so bad an idea. Remember mutual funds are bought to be held, to hold for a lifetime, if possible. But you obviously do not want to marry your mutual fund, as things may change even if you are a long-term investor. There are times to admit a mistake and go on with your life.

Do keep in mind that even if your fund is geared to yielding long-term rates of returns, that does not mean you have to hold onto the fund through thick and thin. The purpose of a mutual fund is to increase your investment over time, not to demonstrate your loyalty to a particular sector or group of assets or a specific fund manager. The key to successful mutual fund investing is knowing when to hold them and knowing when to fold them.
I shall discuss some situations that are not necessarily indications that you should fold, but situations that should raise a red flag, in the subsequent blogs.

Monday, April 09, 2007



SIP is an ideal route to embark on your journey in the financial markets. It is the answer to preventing the pitfalls of equity investment while reaping rich rewards. A SIP can be useful for a debt fund as help build a pool of savings. It can be thought of as something akin to a recurring deposit where a part of your savings is automatically deducted from your account.

If SIP is for making a disciplined investment in the market, the Systematic Withdrawal Plan (SWP) is a disciplined way of unwinding your investment. If you keep booking profits in predefined successions, you avert the risk of getting stuck should the market fall suddenly. This happens rather frequently in our system where liquidity and therefore depth is rather low. The amount of withdrawal can be subject to the minimum limit set by the asset management company, your requirements, as well as the corpus invested. You will have to leave instructions with the fund on the periodicity of withdrawal (monthly or quarterly), a date for each withdrawal and the delivery of the money.

Fund houses such as Franklin Templeton, HDFC Mutual, Birla Sun Life and Kotak Mahindra Mutual offer two sub-options within the SWP — Fixed and Appreciation. Under the Fixed SWP, you can choose to receive a fixed sum, say, Rs 1000 a month, over a specified number of months by way of systematic withdrawals. Under the Appreciation option, you can leave instructions with the fund to redeem units only to the extent of the capital appreciation, if any, earned on the units. A few fund houses such as PruICICI Mutual Fund and UTI Mutual Fund offer a Trigger facility that is a variant of the Appreciation SWP. The Trigger facility saves you the bother of having to keep track of your investment; you can leave instructions on booking profits on fund holdings when a specified `trigger', say appreciation, stop loss, etc. is reached.

SWPs are an ideal way to supplement your monthly cash flow, reinvest periodically in other instruments or meet your periodic payment schedules like your EMIs, insurance premiums, your children's school fees etc., without leaving your money idle. The SWP could be a good alternative to the dividend option of a mutual fund, because payouts can be timed to your convenience, instead of you having to wait for the fund to declare dividends.

You have made big money on equity fund investments over the past year and want to plough the capital gains into safe investment avenues - a Systematic Transfer Plan (STP) or Drip Investing could be the answer. A STP allows you to make periodic transfers from one fund into another managed by the same fund house. As with a SWP, you have to specify the instalment and the periodicity of the transfer. Fund houses usually offer monthly and quarterly STPs. But a few funds, such as PruICICI, allow systematic transfers even at weekly intervals. The STP can be a useful facility to re-balance your portfolio or to phase out investments in a fund over a period. You can invest a lump sum in a liquid or floating rate fund and leave instructions to transfer Rs 1000 every month into an equity fund. Or you can transfer a fixed sum every month from a debt to an equity fund. While many fund houses permit STPs from debt to equity funds, only a few allow the reverse. Franklin Templeton, PruICICI and Birla Sun Life allow systematic transfers out of their debt schemes and into their equity funds, but not the reverse. Kotak Mutual Fund permits two-way STP. STPs, too, offer a choice between a Fixed and an Appreciation option. A Fixed option STP allows you to sweep a fixed sum at periodic intervals into another fund. The Appreciation STP is activated only when the capital appreciation on your investment crosses a limit you have set.

Unlike SIP, in STP no entry loads will be levied on the equity and balanced schemes being entered into. However a CDSC equivalent to the entry load is levied for redemptions made within a year of investing. Also unlike a SIP where you have to cut a number of cheques depending on your investment duration, in STP only one form has to be filled.

Having been exposed to the different modes of purchasing and redeeming mutual fund units, it is time now to take a look at certain circumstances under which you should redeem or sell Mutual Fund units. This is as important as purchase since both the actions together complete the money multiplying matrix of Mutual Fund.

Monday, April 02, 2007

Systematic Investment Plan (SIP) ..(contd.)

Systematic Investment Plan (SIP) – the time-tested method to multiply your money! (contd.)

The proof of the pudding lies in the unique advantages that SIP enjoys…

No strain on your day-to-day finances

Mutual funds were never meant to be elitist; far from it. The retail investor is as much a part of the mutual fund target audience as the high networth investor (HNI). Investing smaller amounts over a period of time is a lot more convenient, particularly for the salaried class. Given that average per capita income of an Indian is approximately Rs 25,000 (i.e. monthly income of Rs 2,083), a Rs 5,000 one-time entry in a mutual fund is still asking for a lot (2.4 times the monthly income!). So, if you cannot shell out Rs 5,000, that is not a huge stumbling block. Take the SIP route and trigger your mutual fund investment with as low as Rs 500 (in most cases).

Relevance of market timing reduced

Studies have repeatedly highlighted the ability of stocks to outperform other asset classes over the long-term (at least 5 years) as also to effectively counter inflation. So, if stocks are such a great thing, why are so many investors complaining? It is because they either got the stock wrong or the timing wrong. Both these problems can be solved through a SIP in a mutual fund with a steady track record. One of the biggest difficulties in equity investing is WHEN to invest, apart from the other big question of WHERE to invest. While, investing in a good mutual fund solves the issue of ‘where’ to invest, SIP helps us to overcome the problem of ‘when’.

With a SIP, you are relatively indifferent to how stock markets behave over a period of time. The truth is, none of us can time the market. No one knows when a fund's NAV will rise or fall. When the market is falling you may feel that it may decline further and that you should wait a while. Often stock markets make a recovery before you notice and the opportunity is lost. When markets are rising it is scary to invest money. Isn't it better that you wait for a correction and then make an investment? But if the correction doesn't come about, then even this opportunity is missed. And if markets are going nowhere, then what is the point in investing at all? It thus makes the market timing totally irrelevant.

Reduces the average cost

In a SIP, you invest a fixed amount regularly. Therefore, you 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, you would stay away from buying when the markets are down. and 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.

The magic of compounding unfolds

The early bird gets the worm is not just a part of the jungle folklore. Even the early investor gets a lion’s share of the investment booty vis-à-vis the investor who comes in later. The following example illustrates how the power of compounding can do wonders. Imagine A is 20 years old when she starts working. Every month she saves and invests Rs. 5,000 till she is 25 years old. The total investment made by her over 5 years is Rs. 3 lakhs. B also starts working when he is 20 years old. But he doesn’t invest monthly. He gets a large bonus of Rs. 3 lakhs at 25 and decides to invest the entire amount. Both of them decide not to withdraw these investments till they turn 50. At 50, A’s investments have grown to Rs. 46,68,273 whereas B’s investments have grown to Rs. 36,17,084.A’s small contributions to a SIP and her decision to start investing earlier than B have made her wealthier by overRs. 10 lakhs. Benjamin Franklin had once said “ Compound interest is the eighth wonder of the world”. And no doubt it is. Even if each investment is small, over time this can add up to a neat kitty.

Helps realize our dreams

Most of you have needs that involve significant amounts of money, like child’s education, daughter’s marriage, buying a house or a car. If you had to save for these milestones overnight or even a couple of years in advance, you are unlikely to meet your objective since many of them require a huge one-time investment. As it would usually not be possible to raise such large amounts at short notice, you 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 your dreams & aspirations.