The next big wealth generating opportunity in India today

          We all know India is called the land of opportunities. There are opportunities in the form of setting up business, higher education, investments, etc. for the people in India as well as people outside India. We have lot of MNCs setup in India, FDI in certain sectors, FIIs investing in stock markets. But when we specifically look at investments opportunities in India, there are varieties of investment avenues for various kinds of investors across different asset classes whether it is Equity, Debt, Commodity, Real Estate, etc.

Out of these different asset classes, historically Equity has performed extremely well. In the last 23 years i.e. since 1981, the 10 years moving average return of Sensex has been 16.04% p.a., whereas Gold has given 9.47%, PPF has been 8.31%, Residential Real Estate (returns calculated from Ready Reckoner – Colaba region) has given 8.73% (as per our proprietary research). Mainly the stock market is driven through the Foreign Institutional Investors (FIIs) and Domestic Institutional Investors (DIIs); but still lots of retail investors are hesitant and afraid of investing in equity market. This is due to the stock market volatility and human behavior that cannot see negative returns.  

Today we have different kinds of investment instruments for taking equity exposure other than investing directly in equity shares; like Equity Mutual Funds, ETFs (Exchange Traded Funds), ULIPs (Unit Linked Insurance Plans), NPS (National Pension System), etc. for retail investors. But investors still rely on traditional products like Fixed Deposits, Postal Schemes, insurance policies (their so called investment), real estate, and gold etc. These instruments barely earn real returns i.e. their returns are slightly above inflation. Though equity does not fetch you real returns year over year, but over a longer period, say above 7 – 8 years, it does earn you significantly higher real returns comparatively.

As it is said, high returns necessarily entail high risk; and low risk necessarily entails low returns, which is called the risk – reward ratio. Equity investment do fetch you high returns, but it also carries high risk. Also investing in direct equity requires bit of research exercise to be done. It is not a magic box, where you put your money and it multiplies over a period. But, you can take exposure to equity by investing in equity-diversified mutual funds systematically via SIPs (Systematic Investment Plans) route, which reduces the timing risk.

Everyone is optimistic with the Modi-fied government, which can bring the change in the industry by introducing new regulations for different regulatory bodies as well as different sectors, for bringing in transparency and protecting investor’s interest, if these aspirations are fulfilled, investment in the equity sector would increase by leaps and bounds as I firmly believe that. Equity was and will be one of the most wealth generating investment tool and; we have a live example of India’s Warrant Buffet - Mr. Rakesh Jhunjunwala. It is also the next big wealth generating opportunity for those have never invested in equities. Though it’s said, “Past performance is not necessarily indicative of future results”; but it is also said, “history repeats itself”, and equity has been delivering similar returns what it has given in the past!

Published in: Moneycontrol.com, The Tribune

Be skeptical: Your portfolio is not going to remain green every day!

It has been a month since the Lok Sabha results have come and the new NDA government is in action; the stock market has been touching new highs every day. Sensex has crossed 25,000 mark, and has risen by approximately 30% in the last one year. Everyone is optimistic about the stock market and economic development of India and expecting a lot from the new NDA government.

Most of the investors must be finding their direct equity, equity mutual fund portfolio in green and must be feeling happy looking at the supernormal returns. In current market scenario their portfolio would be skewed towards equity. Many of my investor friends have started calling me seeing supernormal returns of more than 20% returns on their mutual fund portfolio due to the current stock market rally. They share their views with me saying that they are very happy with the returns. Some friends ask whether they should withdraw some money or at least book profits, while some of them want to invest more. Exactly the opposite happens in the worst-case scenario; when the stock market is falling and the portfolio returns turn negative, investors start blaming their investment advisers and financial planners and think this is the result of the poor advice. They start comparing returns with fixed return instruments like Fixed Deposits, PPF, etc. This is human psychology, where investors cannot accept negative returns and losses on their investments.

Here I would like to share with you that you should pay heed to your   financial planner when he tells you about the risks associated with the recommended investments. Not only this, you should always be skeptical if you are investing in Equity or equity linked investment instruments. You are not going to see your portfolio in green with double digit returns everyday or every time. There are going to be periods where you will get to see negative returns as well, where your total portfolio value will be less than what amount you invested.

When you are investing in equity-oriented investments like Equity Diversified Mutual Funds, you should always keep in mind that you are investing for long-term (i.e. at least 8 to 10 years). You cannot think of “Return OF Capital” anytime during your investment time horizon of less than 8 years, but over a period of 8 to 10 years, which is the minimum holding period you should have for investing in equity; you can think of a reasonably good “Return ON Capital” compared to other investment instruments. So, whether your returns are positive or negative should not bother you between your investment tenure. The prices are bound to be volatile and returns will fluctuate.

Equity market does not move in a single direction (i.e. always upwards or downwards), it is always volatile. I would say, the Newton’s law of gravitational force applies to stock market, “what goes up, must come down”. So, if today stock markets are moving up, it will (or may) go down, though we don’t know how much and when it will go down.

You must be feeling “Acche din aa gaye hai”; but for equity investments it is always temporary. You should neither get excited when your portfolio value is green nor should you panic when your portfolio value is red. Systematic Investment Plan (SIP) is one of the ideal and the best ways of investing in equity mutual funds. If you are investing via SIP, you should be least concerned in what direction is the market moving since you are investing month over month. Whether the market is rising or falling; you should not withdraw all your funds, should not invest more and should not increase or decrease the SIP amount with changing market scenario. You must review your portfolio periodically (preferably quarterly) and check whether the fund has beaten their respective benchmark or not; and also rebalance your portfolio and have an appropriate asset allocation as per your risk profile and time horizon.

Published in: Moneycontrol.com, The Tribune

Why is investing in the REAL ESTATE sector still a favourite among people?

In the mid-nineteenth century, our forefathers didn't have many options for investment. There were only bank deposits, postal savings schemes, gold and real estate. After the emergence of the stock market, very few people used to invest in equity shares. Real estate has been the perennial investment favorite of our forefathers. Some people have also inherited properties and probably have not sold them yet, and held on to them, as they could be good for capital appreciation.
    

Today, a lot of things have changed. After globalisation, we have a number of investment options open to us like mutual funds, bonds, PMS, ETFs, international funds and other alternative investments but still we see people investing heavily in real estate. Why do people invest in real estate?
 

Capital Appreciation

Majority of the investors have a belief that 'property values never fall'. This statement is true to some extent, since historically, in the last 23 years, property prices have fallen only during the period of 1999 and the prices recovered by the year 2004 (as per the data from Ready Reckoner - Mumbai). The primary reason for any kind of investment is appreciation. In the last four tofive years, the real estate sector has performed extremely well and has given superlative returns. These have attracted investors and also, there is less volatility in property prices, as compared to equity investment.
 

Regular Income

Ready to occupy properties can be leased and you can earn regular rental incomes. Rental income is another attraction, since you earn regular rents that add to your income, along with capital appreciation. Usually, investors increase the rent annually by 8-10 per cent. The net rental income, what you get in hand is less of taxes and maintenance and other operating costs. Though, there is a regular rental income, there are chances of a vacancy for certain periods due to poor market conditions.
 
Easy availability of debt capital, is a lumpy investment. If you do not have sufficient funds to buy a house, you can take a home loan for the balance amount. Today, home loans are available at the rate of 10-11 per cent pa, from banks and housing finance companies (HFCs). Investors take a home loan to increase the return on property investment. As long as the investment (ie property) return is greater than the interest paid to the lender (ie home loan interest rate), there is positive leverage and thus, the overall return magnifies. So, with the help of leveraging, you can take the benefit of price appreciation in property prices, by contributing only a certain sum of money from your pocket and the balance amount by taking a home loan. Leveraging is one of the key benefits, for real estate investment over other investment instruments, since you cannot leverage for investing in mutual funds, fixed deposits (except for Futures and Options, where you can leverage but they carry high risks).
 

Diversification 

As it is said, you should not put all the eggs in one basket. You must diversify your investment portfolio and not go overboard on a single asset class. Lower the correlation (price movement of two assets in the same direction), greater are the diversification benefits. The real estate market is considered to have a very low correlation with other asset classes like equity and debt i. real estate prices are not affected by the price movement in equity or debt markets and vice-versa. Thus, real estate, as a component of your overall investment portfolio, helps you reduce the overall risk and diversify your portfolio.
 

Inflation Hedge

Just like gold is considered as a hedge against inflation, similarly, real estate is also considered as a hedge against inflation; which means, property prices and lease rents increase as the inflation increases at a similar pace. This helps you earn real returns (ie net of inflation).

Every coin has two sides; similarly real estate investment also has its pros and cons. Real estate attracts high tax on rental income as well as appreciation on sale of property (capital gains), poor liquidity and uncertainty of lease renewal when the lease expires. Real estate investment (except land) has both, bond-like and stock-like characteristics. Lease rental payments serve as periodic fixed coupon (interest) payments like bonds and price appreciation like shares, which depend on the state of the overall economy. It is important to review your real estate investment periodically and maintain appropriate asset allocation. Diversifying your portfolio with real estate investment is a good strategy but you should not have a real estate heavy portfolio. 

Published in: Times Of India - Times Property

Which mutual fund market cap suits you?

Nowadays, many investors have started investing in equity mutual funds by way of SIP or lump sum. They invest in schemes as recommended by their advisor, distributor, financial planner, friends, relatives, media and few do their own research. Most of the investors know in which schemes they have invested and are aware how mutual funds works, but are not aware in what kind of companies (large cap, mid cap or small cap) do mutual funds invest and how risky the investment is. Let us understand what kind of Equity Mutual Funds are available in the market, how much risk is attached to it and its suitability to you as an investor.

Kinds of Equity Mutual Fund

Equity: Large Cap Fund

A Large Cap fund invests approximately 80% of the assets (funds) in large cap companies. Large cap companies have market capitalization more than $8 billion. These companies have a well-established business and are generally dominant in the industry. These companies have good historic track record. The growth rate of these companies is usually constant. So, the performance of the Large Cap funds is stable compared to other funds. Investment in Large Cap fund is advisable for investor who has investment horizon of 10 to 12 years for their goals like child’s education or child’s marriage and is not willing to take much risk and compromises on the return on his investment.

Equity: Large & Mid Cap Fund

A Large & Mid Cap fund invests approximately 60% to 80% of assets (funds) in large-cap companies and the balance in mid cap companies. The performance of these funds is similar to Large Cap funds but due to 20% - 40% exposure to mid caps, you may earn bit higher returns comparatively.  So, if you are willing to take some risk than you can consider investing 20% - 25% in Large & Mid Cap fund and balance in Large Cap fund for investment horizon of 10 to 12 years.

Equity: Mid & Small Cap Fund

A Mid & Small Cap fund invests approximately more than 60% of assets (funds) in mid and small cap companies and the balance in large cap companies. Mid and small companies have market capitalization less than $8 billion. These companies are new in the industry, in early stage of their business. They have lot of expansion and growth opportunities, so they have the potential of earning super-normal profits and growth compared to large caps. Investment in Mid & Small Cap funds can be fruitful when the market conditions are good, because mid & small cap companies generally outperform the large caps. But on the other hand, it can be a poor investment option in times of market instability because the companies in the portfolio suffer greatly during such times since they are less stable and less established. Thus, investment in Mid & Small Cap funds is advisable for aggressive investors who are willing to take high risk to earn higher returns. It is advisable to have an exposure to Mid & Small Cap funds of approximately 15% to 20% if your investment horizon is more than 15 years for goals like child’s marriage or retirement.

Equity: Multi Cap Fund

As the name says ‘Multi Cap Fund’ it is a combination of large, mid and small cap companies. It invests approximately 40% to 60% of assets (funds) in large-cap companies and the balance in mid and small cap companies. The fund manager has the flexibility to invest in different companies. Due to the combination of variety of companies in the portfolio, the portfolio gets diversified. Thus diversification reduces the risk of the overall portfolio and increases the return. Investment in Multi Cap fund in suitable for investors who wish to take moderate risk. It is advisable to invest in Multi Cap funds approximately 15% to 20% if your investment horizon is more than 12 years.

Equity: Sector Funds

A Sector Fund invests in companies of particular sector (for example FMCG, Banking, Power, etc) as per the fund objective. The performance of these funds depends on the performance of the respective sector. So it is not advisable to invest in Sector Funds, since they are very risky and the portfolio of these funds is not diversified.

Equity: Index Fund

An Index Fund is fund, which tries to replicate a benchmark equity index like Sensex, Nifty, etc. Since these funds mimic the benchmark, the returns are also similar but are subject to tracking error. Investment in Index Fund is advised for investors who follow buy and hold strategy and are not able to review their portfolio periodically.

You need to have a diversified portfolio by investing in different market cap funds, in order to reduce the overall risk of your mutual fund portfolio. Apart from choosing the right mutual fund for you, you must also review your portfolio periodically. You should invest in a mix of different market caps of funds as per your risk-taking capacity, investment time horizon and your financial goals.  As it is said, ‘The art is not in making money, but in keeping it’; so it is very important to make informed investment and manage your portfolio efficiently. 

Published in: Moneycontrol.com The Tribune

How to become a SMART Investor???

Today morning while going to office, I met one of my school friends in train after five long years, who is a Computer Engineer and had just got his first job. After recollecting and cherishing the memories of our school days and everything, he asked me, “Yaar, tell me one thing; how to make money, earn highest possible returns on investments with minimum risk? In short, I want to become a SMART investor”. I told him that you couldn’t get everything in one basket; you should consider these factors for becoming SMART investor.

Safety: First thing an investor considers before making any investment is the safety of the investment instrument. Safety is nothing but the risk in the investment. The risk can be loss of principal amount invested or risk of negative returns. As you know the thumb rule, higher the risk, higher will be the returns and vice-versa. Risk taking capability differs from person-to-person and the investment time horizon. Some people are conservative while some are very aggressive with their investments. For short-term goals, you cannot afford to take high amount of risk, by investing in equity mutual fund.

Maturity: Maturity is nothing but the holding period of the investment i.e. how long do you wish to stay invested in any instrument. You must first decide the time horizon of your investment and then select the investment instrument. If you have time horizon of say 2 to 3 years, then you should invest only in debt instruments like Income Funds, bank fixed deposit or conservative MIP fund only. Similarly, if you have medium term time horizon of around 5 to 7 years; then you can invest some portion in equity (70% - 80%) and balance in debt (30% - 20%). For long-term investment (10 years or more), you can consider investing 80% to 90% in equity mutual fund and balance in debt fund and /or gold fund.

Asset allocation and asset selection: You should never go overboard on any asset class and never put all your eggs in one basket. You must always diversify your portfolio by investing in various asset classes in different proportions. You cannot bet on a single asset class. Your asset allocation should be rebalanced periodically and reviewing the same. You should not have exposure to gold more than 10% - 15% of your portfolio. Real estate can be a part of investment only for wealth creation and should not be considered as a goal based investment.

Systematic Investment Plan (SIP) in mutual fund is one of the best ways of investing in equity. You should avoid investing in direct equity (shares) since it requires in-depth research of the company, sector and the market. For investing debt, you can choose income funds, Fixed Maturity Plans (FMPs) or Public Provident Fund (PPF). You can invest in gold by buying E-Gold, gold fund or Exchange Traded Funds (ETFs).

Return: Return is the most important factor of any investment because the reason you are investing is to earn return. All investments are a risk and return game! Recalling the thumb rule, higher the risk; higher the return. You cannot expect high return from low risk investment instrument. For example, you cannot expect a bank fixed deposit to give you double-digit returns. So for earning high returns, you need to bear the risk attached to the instrument.

Taxability: After considering risk, return, tenor of the investment instrument, you must also consider the taxability of the investment instrument. Taxability of the instrument with respect to tax on dividend or the interest paid, capital gains and deduction on initial investment. So, in case you want to invest in a debt investment, you should consider debt mutual funds income fund or FMPs, instead of fixed deposit; since you get indexation benefit for holding debt fund more than one year whereas in fixed deposit the interest is taxable (added to your income, and is taxed as per your tax-slab rate). The capital gains on equity mutual funds are tax free if you hold it for more than one year, also the dividends paid on equity mutual funds are tax-free.

That’s it, I reached my station and I had to get down. My friend was very happy after learning how and where to invest and said, “I hope, when we meet next time, I will proudly say, now I am a SMART investor!” This was our journey with few discussing moments of our school days and a bit of sharing few healthy investment tips. You should always keep in mind these factors before making any investment.

 Published in: Moneycontrol.com, The Tribune

Which mutual fund is best suited for YOU?

Today India has around 35 to 40 asset management companies (AMCs), which provide variety of mutual fund schemes to the investors. Investors are not aware of the risks associated with various schemes and in which kind of securities these schemes invest. Investors have a misconception that mutual funds invest only in equity markets and believe they are less risky as compared to direct equity investments.

In this article I will explain which kind of mutual fund scheme you should invest in by taking into account your financial goals and investment time horizon.

Equity diversified funds

Equity diversified schemes invest funds in shares of large-cap, mid-cap and small-cap companies and diversify the portfolio. Thus the performance of the fund depends on the performance of these companies in the portfolio and equity markets. There is high risk associated with investment in equity funds, but the high risk is followed by high returns in the long-term.

Investment in equity diversified funds is advisable (up to 90 per cent) for accumulating corpus for long-term financial goals such as retirement, child's education and child's marriage, etc. which have time horizon of more than nine years.

The best way for investing and accumulating corpus for your goals under equity-diversified schemes is by monthly investment through SIPs (systematic investment plans) or STPs (systematic transfer plan) from a liquid fund.

Equity linked savings schemes (ELSS) funds

ELSS fund is a kind of equity fund. Investment in these fund provide tax deduction under section 80 C upto Rs 1 lakh. It is not advisable to invest in these funds if you are not a taxpayer and do not require tax benefit u/s 80C because, these funds have a lock-in period of three years. You should invest in ELSS funds only as tax planning investment and not goal-based investment.

Balanced funds

Balanced funds invest 70 per cent to 80 per cent in equity and the balance 30 per cent - 20 per cent in debt instruments; the proportion of investment is rebalanced regularly depending on the performance of equity and debt.

Since certain proportion is invested in debt, the risk in balanced fund investment is less compared to equity-diversified schemes. The poor performance from equity when the market is bearish gets compensated to some extent with the fixed returns earned from the debt investment. You can invest in balanced funds for accumulating corpus for your medium term goals having a time-horizon of five years to nine years such as accumulating funds for down payment for buying a house, starting up new business or child's education, etc. It is preferable to invest in balanced funds via monthly SIPs.

MIP funds

MIP fund is just the converse of balanced funds; they invest 70 per cent to 80 per cent in debt instruments and the balanced 30 per cent to 20 per cent in equity.

The returns from MIP funds are relatively higher than debt/income funds when the markets are bullish since some equity portion is also attached to the fund. Investment in MIP fund is best suitable for accumulating corpus within five years for short-term financial goals like buying a car or for your sibling's marriage or even arranging down payment for buying a house etc.

Debt funds/FMPs

Debt funds invest in debt instruments like bonds, certificate of deposits (CDs), govt. securities and commercial paper (CPs), which are least risky and earn fixed rate of return.

Fixed maturity plans (FMPs) are debt funds having a fixed term of investment like 90 days, 366 days, etc. Investments in income fund is more profitable as compared to fixed deposits since they are tax efficient and thus earn better post-tax returns. Investment in debt funds is advisable for short-term financial goals like buying a car or going on a dream vacation or any other goal having time horizon of less than five years.

Liquid funds
Liquid funds are debt funds that invest only in money market instruments having maturity of less than one year like treasury bills, CPs, etc. Investment in liquid fund is suitable to park lumpsum money for contingency funding, since they are flexible and are expected to earn better returns than savings account. Lumpsum investment can be made in liquid funds for starting STP into equity diversified fund or balanced fund.

Gold funds
Gold funds invest in gold ETFs (exchange traded funds) thus returns from gold funds are relatively similar to gold ETF and physical gold.
A certain portion of investment (up to 10 per cent) should be allocated to gold funds for long-term financial goal like child's marriage or general wealth creation. Investment in gold funds is a better option than buying physical gold due to factors like easy liquidity, tax efficiency and no risk of holding physical gold.

Index funds

Index fund is a replica of equity market index Nifty or Sensex. These funds invest in same securities that are in these indices in the same proportion and try to replicate the price movement and earn similar returns.

The risk is very high, since 100 per cent investment is in equity securities. Investment in index funds is advisable for long-term financial goals particularly for those investors who don't have time to review their investment regularly.

This way you are well equipped to know which kind of mutual fund is appropriate for you and can help you achieving your financial goal. But the most important thing is that you should review your investments periodically and accordingly switch your investment to some other fund if your existing fund is under performing.

Published in: Rediff, The Tribune