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Why read all scheme related documents carefully before investing in Mutual Funds?

Mutual Fund

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December 4, 2013

Why read all scheme related documents carefully before investing in Mutual Funds?

“MutualFundInvestmentsAreSubjectToMarketRisks, ReadAllSchemeRelatedDocumentsCarefully.”

What is this? No… my space key has not malfunctioned. But this is how like a bullet the caption is used after an advertisement by a mutual fund company.

But the question is – Why should we read these document? Is it necessary??? Which are the documents, they are talking about?

3 Versions in last 5 Years

First Version “Mutual Fund investments are subject to market risks. Please read offer document carefully before investing.”

Couple of years back in place of offer document – they mentioned “Statement of Additional Information (SAI) and Scheme Information Document (SID)”

Second Version “Mutual Fund Investments are subject to market risks. Please read the Statement of Additional Information (SAI) and Scheme Information Document (SID) carefully before investing.”

Last year there was a major change “please” & “before investing “ is out & now they are talking about “all scheme related documents”.

Current Version “Mutual Fund investments are subject to market risks, read all scheme related documents carefully.”

Investment Guru – Why you should avoid their advice?

Image courtesy of ddpavumba at FreeDigitalPhotos.net

Which are the documents they are talking about?

Let’s see which are the documents you should check – links from HDFC AMC

Scheme Information Document (SID) – 104 Pages
Statement of Additional Information (SAI) – 118 Pages
Key Information Memorandum (KIM) – Abridged document of SID & SAI – 64 Pages
Monthly Factsheet – 54 Pages

Let’s talk about SID & SAI – we will call them “Offer Document” or OD.

Check – ICICI Prudential Opportunities Fund Review

Why you should read these documents?

Offer document is a key source of information for investors and prospective investors regarding the objective and fundamental attributes of a mutual fund. Offer document is a record of scheme details. This is individual for all schemes and covers various aspects how a scheme will be managed by the fund house.

Below are some of the important points listed which are covered in an offer document and which serves as a guide to present and prospective investors to take decision regarding their investment.

Why read all scheme related documents carefully before investing in Mutual Funds? Click to Tweet

Date of Issue– An investor should read the latest version of offer document and hence must consider its date of issue. The OD is updated once in a year so that new changes done throughout are incorporated.

Investment Objectives– It tells what the scheme intends to do. The investment objective of the fund must match with the investor’s investment objective-whether to generate regular income through investment in debt instruments or provide long term capital appreciation through investment in equity and equity related instruments etc.

Investment Policies– The offer document will outline the asset allocation pattern, diversification policy and other general strategies the fund manager will implement while managing his fund. The asset allocation pattern will determine the fund manager’s flexibility in choosing the appropriate portion of the three asset class- equity/debt/cash.It may also state the type of equity parameters or bond rating the fund manager will invest in. The asset allocation should be inconsistent with the objective of the scheme. Asset allocation pattern along with the risk profile is given in the below format – an illustration:
Instruments Indicative Allocation(% of total class) Risk Profile

Maximum Minimum High/Medium/Low

Equity 100% 20% High

Debt 80% 0% Low

The diversification policy determines the kind of sectors or stocks the fund manager will invest. The investor should consider whether the fund is offering adequate diversification.

Risk Factors– The investors must access the risk factors associated with his investments. They must ensure that the risk associated with the fund’s investment is in line with their own risk appetite and tolerance level. The offer document list down both the type of risks-standard and specific.

Information about the scheme: All the minute details about the scheme are mentioned in the offer document. The offer document gives answer to all the basic queries of the investor like who manages the fund, who all can invest, what are the various plans and options available under the scheme, what is the dividend policy, how to apply , how to redeem, what is the benchmark of the scheme and the list goes on.

Past Performance Data– The offer document highlights the past performance data of the scheme. In case of a new scheme, the offer document carries the statement ‘This is a new scheme and does not have any performance track record.’ In case of existing schemes, those schemeswhich have been in existence for more than a year, compounded annualized returns are given and for scheme in existence for less than a year-absolute return are given. The investor while analyzing the returns must always remember‘Past performance is no guarantee of future returns.’ These returns are just trend analysis showing how scheme has fared in past.

Fees and Expenses– In the present scenario, fees and expenses charged to fund forms an important point for consideration. Excessive fees charged can affect the returns of the fund in the long term. The offer document list the limits of all the type of fees and expenses charged to the fund like entry load, exit load, annual recurring expenses, management fees etc.

Key Personnel– The offer documents provide the educational qualifications and work experience of the Key personnel of the AMC. Similar list is also uploaded on amfiindia.com. Key Personnel includes the Chief Executive Officer, Chief Investment Officer-both equity and debt scheme, Compliance head, Sales head, HR head, Operations head and other officers from the top management who play a crucial role in running the AMC. An investor is generally interested in experience and expertise of fund management team who are running his invested scheme.

NAV and Valuation– This section in the offer document describes the policy with regard to computation of NAV of the scheme in accordance with SEBI (Mutual Funds) Regulations Act 1996. The investor can come to know whether his investments are valued at ‘mark to market rate’ or a different valuation policy is followed.

Tax Benefit Information– This section enables the investor to gauge whether their investments are enjoying significant tax benefits or not. Mf investment enjoys lot of tax benefits and responsibilities and investor should be aware of these. We still meet investors who think FMP investment qualifies for Sec 80 C deduction. This section enables the investor to plan their taxes in a better way and enhance their post-tax returns.

Penalties and Litigations-This section contains the details of penalties, pending litigation or proceedings or investigations for which action may have been taken or is in the process of being taken by SEBI or any other regulatory authority. This forms an important part for consideration for the investor whether to investor in a particular fund or fund house or not.

Rights of unit holders– The offer document list down all the rights of the investors. There are certain service standards mandated for a mutual fund towards its investors, details of which are provided in the offer document.

Redressal mechanism– This section mentions the name of the person to be approached by investors in case of their complaints, queries and grievances.

So, when they nonstop mutter at the end of the advertisement reminding to read all these documents, it has significance. My personal experience is that it increases your knowledge in personal finance subject also. Do you know, what’s the meaning of “insurance is the subject matter of solicitation”.

7 Life & Financial Lessons from Sachin Tendulkar’s Farewell Speech

Miscellaneous

Hemant Beniwal

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November 19, 2013

26

7 Life & Financial Lessons from Sachin Tendulkar’s Farewell Speech

The “Die Hard” and “Expandable” fans could not hide their tears when the Master was thanking from the center of the Wankhede Stadium, after his last performance. To surprise all he was with a paper with pointers so that he does not forget anyone. If you noticed he started with his late father and went on to thank till the fans who yelled Sachin…Sachin, in such a brilliant order covering his parents to family, in-laws, friends, gurus, people on the field, off the field that one can never debate if he missed anyone. The perfectionist, the finisher and the legend may not return to field again but even in his last speech he taught us a few lessons.

Let me try to put forward a few lessons from Farewell Speech:

1. Retirement is inevitable

He said “My life, between 22 yards for 24 years, it is hard to believe that that wonderful journey has come to an end”
Message for you “Retirement is inevitable – gymnasts retire at the age of 18, athlete at the age of 25, other sportsman at 35, and you may be at the age of 55 or 60. Only politicians never retire so they don’t have to worry about money after retirement. But you are not that lucky, you should always remember that you have to save & invest enough for your golden years.”

7 Life & Financial Lessons from Sachin Tendulkar’s Farewell Speech Click to Tweet

2. Do not find shortcuts

He said “My father gave me freedom at the age of 11, and told me that [I should] chase my dreams, but make sure you do not find shortcuts. The path might be difficult but don’t give up…”
Message for you “There are no shorts cuts to success; you have to really work hard to achieve your dreams. Avoid “get rich quick” schemes, whenever you think about short cuts in investments, think of Snakes & Ladders game.”

3. Coach can play important role

He said “And it all started from the age of 11 when Ajit (brother) took me to Archrekar sir, my coach, and from there on my life changed. Sir has never ever said ‘well played’ to me because he thought I would get complacent and I would stop working hard.” He also thanked other coaches.
Message for you “Why ‘God of Cricket’ need a coach? He was talented and luck in his favour when injuries occurred but why an advisor? Coach/Advisor is someone who can give advice based on his experience, keep your head cool & can take decisions without emotional impact.”

4. Behind every successful man, there is a woman

He Said “Anjali (wife) took the initiative to step back and say that ‘you continue with your cricket and I will take the responsibility of the family’. Without that, I don’t think I would have been able to play cricket freely and without stress.”
Message for you “If your spouse is homemaker that doesn’t mean she is not contributing to your financial success. She is… & she needs big appreciation for that. Even if she is not interested in managing finances, make sure she participates in setting goals & her goals should get higher priority than your personal goals.”

5. Have balance in your life

He Said “Time has flown by. I wanted to spend so much time with them (kids) on special occasions like their birthdays, their annual days, their sports day, going on holidays, whatever. I have missed out on all those things.”
Message for you “This is Regret. Before starting financial planning process for our clients, we conduct couple of Life Planning exercises. And one thing that is common in every case is – they are not able to give quality time to family. Time is flying…. ”

6. Being healthy

He said “I would be failing in my duties if I did not thank all the doctors, the physios, the trainers, who have put this difficult body together to go back on the field and be able to play. So a big thank you to all three of you for keeping me in good shape.”
Message for you “Managing stress free life is not just making good investments and buying mediclaim & term insurance. You have to keep yourself abreast on daily basis. Keeping a healthy diet, exercises, managing stress-free work life, regular medical checkups are few things which one must follow. Life it not a 100 mts race where you put your best in the first 25 mts. It is a marathon with lot of laps and you need to keep replenishing yourself to see yourself a winner.”

7. Bigger Purpose

He said “I had a brief message for the team. I would like to repeat that. I just feel that all of us are so, so fortunate and proud to be part of the Indian cricket team and serving the nation.”
Message for you “Try and figure out the–bigger picture and make the best of what you have. Feel and appreciate what you are part of. In finance your family well-being can be your salvation, so try to achieve it without accumulating tensions. This will not only ensure success but give you the all elusive satisfaction which we all seek, albeit unconsciously. And once you achieve your goals – try to do something for society.”

Apart from the final thanks-giving speech, one thing which Sachin has repeated again and again in his interviews is that having idols in life is important but our own individuality needs to be nurtured. He was a great fan of Gavaskar and Viv Richards. But he does not mirror any of them. He had the stability of Gavaskar and attack of Richards. He came to cricket when new forms of the game like one days and T-20 were flourishing. He adapted to those styles and in fact introduced few shots which millions of fans would remember forever. Sachin gives us the motivation and focus for sure, but ultimately we also need to use our own judgments when the moment arises. So weather its choosing an investment or a job we need to access our strengths, opportunities and situation and then do what is best suited for us.

Well Done Sachin… We will miss you…

7 ways to buy GOLD – this Diwali…

Investment Options

Hemant Beniwal

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October 25, 2013

26

Gold has always caught attention as investments. Festivals add to this charm as they form part of rituals to become top of items in the shopping list. In the given scenario people buy and consume gold in different ways. With advent of technology and development in financial markets, gold is no more jeweler dominated market. One can purchase it through various other means with advantages like purity & safety. But still the jewelers are not crying as people still like to buy/invest in gold through them. This article will enumerate the avenues available to invest in gold during this festive time.

Image courtesy of renjith krishnan at FreeDigitalPhotos.net

Before we move forward, it is worth mentioning that gold is an important part of any investment portfolio. But the quantity as any other asset class depends on your individual requirement, risk appetite and future goals. So we have already answered “How much to buy” in previous articles, this is an attempt to tell “How” to buy gold. Below is the list of various avenues available today to buy gold:

1. PHYSICAL GOLD

Physical Gold can be purchased through the below two sources

Jewelers
Banks

7 ways to buy GOLD – this Diwali… Click to Tweet

Jewelers: This has been the traditional source of buying gold since ages. The most common form of buying physical gold has been jewelry. The other forms available with the jewelers are gold coins, utensils, statues and bars. Indians are big consumers of gold when it comes to jewelry. Wearing gold is status symbol and many favor jewelry over coins or bar as gold can easily be converted to cash, new jewelry or may be coins. Gold in the form of jewelry should be purchased only for ornamental use and not for the purpose of investment as it loses value while converting to cash/gold in form of making charges. But still people favor it countering that they enjoy wearing it and showcasing status and for this a loss of 15-20 percent is not a deterrent.

Banks: Gold Coins and Gold bars are available now in mostly all the banks (SBI, ICICI, BOB to name a few). Very soon the marketing departments will call you for booking it as they have their own targets and figures have shown that banks have imported handsome quantity to sell to Indian buyers. (not sure about this year)

Now the question arises-whether to purchase physical gold from jewelers or bank?

Below is the comparison of gold purchased from jewelers and gold purchased from banks (with the advantages and disadvantages)

2. Monthly Investment Schemes managed by jewelers

Few jewelers manage monthly contribution schemes. Investor pay for the entire year and some jewelers also contribute 1 or 2 installments. These are of two types. In one variation one accumulates in terms of Rupees contributed and investor redeems as per the rate prevailing. In the second type the investor accumulates in grams. So here he can take advantage of the price fluctuations throughout the year and redeem when the prices are high. The advantage like an SIP it is disciplined way of investment and one can plan in advance. The drawback is that few jewelers compulsorily redeem in jewelry to earn on making charges. Conversion to coins/bars is not allowed. Also instant purchases cannot be done under these schemes.

Before moving to other options available to buy gold, the question arises should gold be bought in physical form or electronic form.The biggest disadvantage of buying jewelry in physical form is the need to keep it in safe custody as it carries high risk of theft. This feature makes electronic gold more attractive. Moreover, in electronic form, a person can purchase as minimum as 1 gram of gold which is not always possible in case of physical gold.

3. GOLD ETFs

Gold Exchange Traded Funds are very popular these days. These are mutual fund schemes that invest only in gold. Its units are held by the investors in electronic form. Generally, one unit of Gold ETF is equivalent to approximately one gram of Gold and hence its price is also approximately equal to one gram of gold. (there is some difference noticed in last few months) The minimum unit that can be purchased in Gold FTF is 1.The units of Gold ETF are traded on stock exchange and can be bought and sold like ordinary shares.

The biggest advantage is that one can be free from safety angle. ETFs are like securities which can change hands like other securities. And the disadvantage is the cost as broker charges both ways to buy or sell ETF units. Also if you open a demat account only to buy gold ETFs, the demat maintenance charges will also eat part of your gains. Also you will have no enjoyment of touching or wearing your investment.

4. E-GOLD

E Gold was launched recently by the National Spot Exchange. (NSEL) E Gold too is an electric form of holding Gold with the only difference that here the investor is directly the owner of Gold whereas in Gold ETF the Asset management Company is holding the Gold on behalf of the investors – right now regulator allowed them to hold certificates also. (right now you may not be able to buy E-Gold)

Gold ETF and E Gold have slightly distinctive features which are listed below:

5. GOLD FUNDS

Gold funds have been launched by mutual funds as fund of fund scheme that invest in Gold ETFs. Below are the advantages and disadvantages of Gold Funds. Normally fund houses with ETFs have launched these funds.

6. EQUITY BASED GOLD FUNDS

Equity based Gold Funds are mutual fund schemes that invest in stocks issued by companies engaged primarily in mining, extraction, processing and marketing of gold. The idea is that gold is a natural limited quantity. If the gold is in demand the companies engaged in gold business will also gain from the demand. In India, there are very few listed companies (Like MMTC) associated with gold. Therefore these funds are essentially global funds and Indians can invest through the feeder fund which operates in India through the Indian Mutual Funds. These funds involve the following risks

Equity risk
Gold price risk
Currency risk

Hence low risk seeking investors should not invest in these funds and look for other suitable options like Gold ETF/E Gold.

7. GOLD FUTURES

These are derivatives (F&O) where the underlying asset is gold prices. Dealing in gold futures requires knowledge of international commodities market and understanding how local commodity exchange works. This is a short term product mainly for trading in gold rather than investing. Hence, from the point of view investment, this product should be avoided.

If you ask me, the best preferred option is Gold ETF amongst the various alternatives. But I have seen that people are comfortable buying jewelry or coins as it suits their current consumption also. Share what do you feel on this and how are you planning to buy gold this festive season.

Finally Financial Planners & Investment Advisers are regulated in India

Financial Planning

Hemant Beniwal

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October 22, 2013

6

Finally Financial Planners & Investment Advisers are regulated in India

Those were really painful days when investor called everyone dealing in Financial Product as Financial Advisor or Investment Adviser or Financial Planner. So people like me who have invested time and money to establish their practice with an aim to make clients life better were called, understood and believed to be synonym to someone who is an government employee, had affiliation in the name of wife who has entered this field to enjoy foreign trips, free meals in 5-stars and exotic Diwali gifts. When I poked details, it was grey area as regulators had no provisioning to “mark” an agent against adviser. They have guidelines to differentiate between Bank and a Non- Banking Financial Company or Mutual Fund Manager and a Pension Fund Manager but no regulations for us….. Until 20^th Oct 2013….

Image courtesy of kibsri at FreeDigitalPhotos.net

Now Apple will call, conduct and hopefully taste as an Apple

SEBI came with Investment Adviser Regulation in Starting of 2013 – they gave 6 months to existing advisors/financial planners for registration. From 21^st Oct 2013 no one can claim himself as Financial Planner or “Investment Adviser” or promote such services – if he is not registered with SEBI or applied for registration before 21st Oct 2013. So finally, life of investors will become simple – single question may answer lot of things –

“Are you SEBI Registered Investment Adviser?”

Who is Investment Adviser – SEBI’s definition?

“Investment Adviser” means any person, who for consideration, is engaged in the business of providing investment advice to clients or other persons or group of persons and includes any person who holds out himself as an investment adviser, by whatever name called.

Finally Financial Planners & Investment Advisers are regulated in India Click to Tweet

SEBI included “Financial Planning” in the definition of “investment advice”. And important to note, they are not only regulating word “investment adviser” but act of advice, clearly mentioned “whatever name called” so be it “Wealth Manager, Life Planner, Investment Specialist, Retirement Planner, Wealth Coach, Financial Planner or WHATEVER creative name that you came across”. There are few exceptions but none for Financial Planners or any other serious adviser.

Check –7 Compelling Reasons To Hire A Financial Planner In India

Infographics – Key features, Code of Conduct & how it’s beneficial for you

We have already applied for registration as Investment Adviser with SEBI – as a body corporate (Ark Primary Advisors Pvt Ltd). If your adviser is not registered with SEBI – ask him to do as soon as possible because ultimately this is going to benefit you as a client.

Step by Step guide to writing a WILL & why it’s so important

Financial Planning

Hemant Beniwal

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October 8, 2013

39

Step by Step guide to writing a WILL & why it’s so important

If you have seen war movies, the soldiers are given time to write their last letters before any fatal combat or assignment. These letters are normally emotional writings talking about their life, memories, remorse and unfinished tasks. In such letters, the solider also gives the family some directions regarding how they can survive if he is no more. Although they are quiet emotional, these letters have some lessons for us as well. We should also write a similar letter (WILL) addressing the spouse or family or people who may be responsible enough to help our survivors in case of an accidental and tragic death.

Image courtesy of ddpavumba at FreeDigitalPhotos.net

Why it’s so important to write a WILL

In case of a death, in the absence of any Will the State rules of intestacy will apply. So the State or Law of the Land will decide on the transfer and maintenance of your estate. Just a question, if you had to appoint a guardian for your kids, would you appoint a “working but drug addict uncle” or a “retired but fit uncle”. The chances are that the court may give custody to the first one as he has earnings and age on his side. And court may not know that he is a drug addict. These kinds of fall outs can be avoided if you have a proper Will in place.

Step by Step guide to writing a WILL & why it’s so important Click to Tweet

Most people think that after their death their entire property and financial benefits will pass on to their spouse, automatically. But the truth is that a lot of ungrateful people also get benefitted, eating into the due share of the worthy ones. If you are NRI – things are even more complex.

A one-time effort saves both you and your family a lot of stress and ensures that the beneficiaries of your estate do, in fact receive what is due to them.

Read – NRIs Should Read This Before Making a WILL

Step by Step guide to writing a WILL

A legal Will includes a signature, a date, a statement of legal capacity and soundness to make a Will, witnesses (preferably a neutral one), and typically, a named executor (whose job it is to see that the terms of the Will are executed to the letter). A Will may also include various kinds of testamentary trusts, which take effect and are irrevocable at death.

Some essentials in Will are:

Name of executor
Guardian for minors
Direction on how financial assets will be distributed.
Direction on how the family will get their expenses.
Direction on how the existing property will be distributed.
Direction on how payments, debts and obligations will be provided for.
Charity instructions.

A person can make his own WILL and there is no specific format. But a WILL should be detailed enough to cover various clauses which can also be tailored as per the individual’s needs and circumstances. Since there are legalities involved in the language, it is advisable to take the help of a professional. This will help future beneficiaries get their claim on time as non-beneficiaries may challenge in court.

Here are various sections which a WILL should include

1. Introduction: This will contain the name and address of the person making the will. Since there are State laws which determine how the transfer of assets will take place, an introductory clause helps in identifying the state of the testator and nullifying any previous Will which may have been written.

2. Details of assets and liabilities: This clause contains the details of when assets were purchased and who owns them. All this information will be required to determine the value of the assets and the process of transfer of ownership.

3. How payments should be made: There can be various liabilities added during a life time and expenses incurred post the death of the testator. This clause directs all the payments to be made from the estate to creditors or towards expenses incurred.

4. How properties should be distributed: This is the most critical element of any Will as it contains details regarding which assets should be given to whom. A careful thought must be given to this clause and the names of the assets or the amounts and names of beneficiaries to whom these should be transferred should be very clear. If the benefits are going to be for a lifetime, as in the case of a trust, then the manner in which the benefits should be passed on should be made clear.

5. Appointing an executor or nominee: This will carry the name of the person who is being appointed as the executor or even a nominee. In case of minors, this clause will also contain the names of the guardians. If a trust is created, then it contains the names of trustees.

6. Taxation: Any tax which is to be paid towards inheritance or any other taxes can be directed from the estate through this clause.

7. Attesting the Will: Every Will has to be written and should carry the signature of the person who has written it. Signing on every page of the Will is a good precaution, when it is long enough. This protects it from the possibility of any changes being made by anyone other than the testator.

8. Witnessing: Finally, a Will has to be written in the presence of witnesses to confirm it is of the deceased. This clause will carry the details, like names, addresses and signatures, of the witnesses.

If you would like to understand more about Estate Planning or Hindu Succession Act or Power of Attorney or data gathering process for a WILL or looking for Sample Formats – I have covered that in my book “Financial Life Planning” – click here

Do you have a WILL? If not, what you are waiting for…… If you have any questions regarding WILL, feel free to add in comment section.

Rupee Cost Averaging (SIP) Vs Value Cost Averaging (VIP)?

Mutual Fund

Hemant Beniwal

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September 25, 2013

20

Rupee Cost Averaging (SIP) Vs Value Cost Averaging (VIP)?

Various debates are happening on different platforms on the stand that must be taken in these volatile and patience-testing times. Certain mutual fund companies have started to suggest value averaging. But what is this concept and does it has an edge over the Rupee Cost Averaging or what we call SIP (Systematic Investment Plan) in simple words?

Both, Rupee Cost averaging and Value Cost Averaging are important tools of mutual funds that help investors to get maximum value for their invested money in volatile scenario. One is an auto mode-investment and second is tactful move but can it help to sort the dilemma of whether to keep investing when markets play their games. Let’s see both options in detail.

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

What is rupee-cost averaging?

Investors generally tend to speculate on the right time to invest. But it is a known fact that no one can predict where the market is going to move-upwards or downwards. Rupee-cost averaging has been the answer to such a scenario.

With rupee-cost averaging, an investor invests a specific amount at regular intervals irrespective of the investment’s share (unit) price. By investing regularly, the investor takes advantage of market dips without worrying about when they’ll happen. Their money buys moreunits when the price is low and fewer when the price is high, which can mean a lower average cost per unit over a period of time.

The key factor of rupee-cost averaging is commitment. How frequently an investor invests (weekly, fortnightly, monthly or quarterly) is not that much relevant in long term? What matters is to stick to his investment mode in tougher times like we experiencing now.

Read: KISS strategy in Finance

How does Rupee Cost Averaging works when prices are moving upwards and downwards?

Below are the two examples to see what an investor’s average price per unit would be when prices are rising and when prices are falling.

Rupee Cost Averaging (SIP) Vs Value Cost Averaging (VIP)? Click to Tweet

Unit price is rising scenario. Rs.1000 is invested in a mutual fund on the first of each month. The investor in this example would methodically acquire 244.53 units at an average cost of Rs.24.54 each

Rupee-Cost Averaging (unit price rising scenario)

Month	Amount Invested	Unit Price	No. of units purchased
15-Jan	Rs 1000	20	50
15-Feb	Rs 1000	22	45.46
15-Mar	Rs 1000	23	43.48
15-Apr	Rs 1000	25	40
15-May	Rs 1000	30	33.33
15-Jun	Rs 1000	31	32.26
	Total: Rs 6000	Avg Cost:Rs 24.54	Total:Rs 244.53

Unit price falling scenario. Rs.1000 is invested in a mutual fund on the first of each month. The investor in this scenario would have bought 204.87 units at an average cost per unit of Rs.24.91.

By comparing, someone who invested the entire Rs.6000 in January at Rs.35 per unit would have owned only 171.43 units, and the investment would have been worth only Rs.4285.75 at the end of the period.

Rupee-Cost Averaging (unit price falling scenario)

Month	Amount Invested	Unit Price	No. of units purchased
15-Jan	Rs 1000	35	28.57
15-Feb	Rs 1000	33	30.30
15-Mar	Rs 1000	30	33.33
15-Apr	Rs 1000	28	35.71
15-May	Rs 1000	27	37.03
15-Jun	Rs 1000	25	40
	Total: Rs 6000	Avg Cost: Rs 29.29	Total: Rs 204.87

What is Value Cost Averaging and how it differs from Rupee Cost Averaging?

What investor want is to Buy low and Sell high. So, while investing regularly through systematic investment plan (SIP), investor tends to average his rupee cost on investments. Generally investors follow this standard technique called SIP to invest regularly into mutual funds. But people investing in equity direct follow a different strategy called the Value Cost Averaging (VIP). It was given by Michael Edelson of Harvard Business School.

VIP/VCA is an investment tool in which an investor would invest at regular intervals for a pre-defined period in particular mutual fund scheme. Their periodic investment amount in mutual fund scheme would vary due to market volatility. Through this technique an investor ensures that his portfolio value rises by a specified amount at each installment irrespectiveof market movements. It helps to achieve the investor’s financial targets in a better way. (Theoretically)

Suppose that an investor has Rs 2,000 invested and the goal is for the portfolio to increase it by Rs200 every month. Now in the first month itself the portfolio grows to Rs2,024, the investor will buy the units worth Rs176 only (2200 – 2024) since his target is to reach Rs 2200. In the next month, the goal would be to have portfolio value of Rs2,400. No if the market falls and value of portfolio is Rs 2176, the investor will buy units for Rs 224 (2400-2176). This pattern is repeated in the following month.Investor continues to buy in such a way that his predefined value of portfolio is achieved at each revaluation point.

So, when market is declining, he is required to purchase relatively more units to maintain his portfolio value. Similarly, when market is rising, he is required to purchase relatively few units or might even redeem some units to maintain his portfolio value at the desired level in particular month.

Rupee Cost Averaging Vs Value Cost Averaging

Below are the Illustrations to differentiate better between Rupee Cost Averaging and Value Cost Averaging.

Rupee Cost Averaging

Month	NAV	Amount Invested	Units purchased	Net Units
Jan	10	Rs 1000	100	100
Feb	12	Rs 1000	83.33	183.33
March	9	Rs 1000	111.11	274.44
April	8	Rs 1000	125	419.44
May	10	Rs 1000	100	519.44
Total		Rs 5000		519.44

Value Cost Averaging (hypothetical)

Month	NAV	Amount Invested	Units purchased	Net Units
Jan	10	Rs 1000	100	100
Feb	12	Rs500	41.66	141.66
March	9	Rs1200	133.33	274.99
April	8	Rs1500	187.5	462.49
May	10	Rs800	80	542.49
Total		Rs 5000		542.49

*Real numbers may be totally different from above shown example.

Advantages of Rupee Cost Averaging (SIP)

Averaging reduces the risk factor associated with lumpsum investing. For example we all are familiar with the scenario where investors who invested their money at one go when market was at its peak in the year 2007-2008 what their plight was when market crashed drastically in the year 2008. With RCA, investors get a buying opportunity when the NAV falls as he will be able to accumulate more units of the mutual fund scheme.
RCA frees investors from the onus of monitoring stock positions on a daily basis which would be the scenario in case of lumpsum investment or VCA.
It serves as a cushion against the downward trend of the market.
Investor no longer needs to look at dates, markets or anything.
Investor no longer needs to monitor external factors like economy condition, interest rates, inflation etc.
It is a disciplined approach towards investing regularly in mutual funds.

Disadvantages of Value Cost Averaging (VIP)

The technique may work well in volatile markets but is not useful in stable markets or bull markets or long bear markets.
It edge over RCA only when the market is perfect, trends are predictable and asset prices move in known ranges. This is a hypothetical scenario.
If an investor is looking for a period of 15-20 years of investing, VCA cannot be used as it lacks discipline.
In longer tenure say 15-20 years the difference between exact timing and awkward timing averages out and is very close to RCA method. So why take mental stress?

If the rain is good, a farmer does not decrease the distance between the two saplings that he sows in order to get more yield. Share your thoughts on this in the comments section.

Core & Satellite – Best of both Worlds in your portfolio

Hemant Beniwal

-

September 17, 2013

22

Core & Satellite – Best of both Worlds in your portfolio

Core & Satellite is a very old & proven investment approach. Portfolio construction is a part of the overall investment planning process, that is essential to generate and accumulate wealth in the long-term. Almost everyone has some kind an investment portfolio consisting of assets. For instance, a person having a fixed deposit of, say, Rs 1 lakh and post office savings of Rs 75,000 can also be called portfolio.

You must have read or heard that an investor should have a diversified portfolio. So there are two important terms Diversified & Portfolio.

Diversification – it is dividing your money in different assets or investments. Why? “Don’t keep your eggs in one basket” because if it falls all eggs will be broken. So one should invest his money in different assets like equity, debt, real estate & gold – it should also be further divided on investment level like 5-6 equity funds, 2-3 debt products.

Core & Satellite - Best of both Worlds in your portfolio Click to Tweet

Portfolio – it is a combination of all your investment for a particular goal or all goals or just for wealth creation.

The systematic method of portfolio making involves several factors that come in steps. These include identifying investment goals, assessing one’s risk appetite, deciding on asset allocation as per goals, determining a time horizon, and diversification of asset classes to minimise risk and weather market volatility. The ultimate goal of systematic portfolio making is to maximise returns and minimise risks.

Read – 3 Principles & 3 Practices to generate superior returns

Core & Satellite Portfolio

A significant way to make a systematic or smart portfolio is to divide the assets into core and satellite segments. Core assets, as the name suggests, are an indispensable part of a portfolio without which one cannot realise his/her investment goals. Asset allocation in core assets is planned keeping in view the long-term goals of an investor and to generate higher returns with low risk. Core assets are the foundation of a portfolio and require passive management, which means occasional and not frequent readjustment is required in response to the market dynamics.

The mix of core assets varies according to individual’s goals, risk appetite, time horizon, disposable income, age, among others. For instance, for an investor with a long-term horizon and a high risk appetite, giving a higher weightage to equity in his/her portfolio would better serve the investment goals as a high-risk instrument like equity generates returns in the long term and not in the short term. Similarly, an investor with low risk appetite and short time horizon should allocate more in debt instruments than equities.

Satellite assets, on the other hand, require more active management or rebalancing than core assets. One should not invest more than 15-20% of his investments in satellite assets. Once you allocate amount that is sufficient to achieve your goals – you can think about increasing satellite assets.

Now the question is which should be core assets & which should be satellite assets.

Types of Core & Satellite Portfolios

There are many types of core & satellite portfolios – depending on risk profile & for particular goal that portfolio is constructed.

For risk-averse investor: He can build a core portfolio with most of debt instruments & rest with equities. This will preserve his capital & also help him cross inflation mark. Eg. 80% in debt & 20% in equity.

For Passive Investor: Such investors prefer passive investments like ETF/Index funds (check DSP Black Rock Nifty Index Fund & how its different) over active investments life diversified equity mutual funds. So they can have 60-70% in passive investments & rest in active investments. Internationally this is the most common meaning of Core & Satellite. Check its benefits.

Stability with some additional kick: If we talk about equity stocks/funds – large cap are more stable than mid caps but mid caps can generate higher returns in the long run. So an aggressive investor, who still prefers stability, can have most of his investments in large cap but have some small amount in midcaps for some extra kicker. HDFC Mutual Fund is having a fund based on this strategy.

HDFC Core & Satellite Fund Investment Strategy – The net assets of the Scheme will be invested primarily in equity and equity related instruments in a portfolio comprising of ‘Core’ group of companies and ‘Satellite’ group of companies. The ‘Core’ group will comprise of well established and predominantly large cap companies whereas the ‘Satellite’ group will comprise of predominantly small-mid cap companies that offer higher potential returns but at the same time carry higher risk. The ‘Satellite’ group will complement the ‘Core’ group. The ‘Core’ portion is expected to be between 60-80% of the portfolio.

For Aggressive investors: People who feel that they can do better than advisors & fund managers can also make their portfolio in 80% pooled investments & 20% direct equity.

You can design you own core & satellite portfolio strategy

Similar to what is mention in the above types – you can design your own portfolio. Let’s talk about your retirement portfolio – assuming you still have 15-20 years in that. You have medium risk profile & wanted to have 50% of the amount in equities. After reading the concepts you decided to structure your portfolio in 2 parts – core (80%) & satellite (20%).

Your Core Portfolio – 80%

Equity 40%

Diversified Equity Mutual Funds – further divided in Large Cap & Mid Cap

Debt 40%

Half amount is going in EPF and rest of the amount is divided into PPF, Bank FD & Debt Mutual Funds.

Your Satellite Portfolio – 20%

Direct Equity/Commodity – 5%
Sector Fund or Quant Fund– 5%
NCD – 5%
Private Debt (Loan to neighbor) – 5%

Try to seal core & satellite portfolio in air tight compartments so that they should not impact each other. Sometime you can move money from Satellite to Core but never vice versa – this will make sure that even if your risky bets don’t perform as expected, still you will be in position to reach closer to your goals.

Do you think this strategy makes some sense to you?

Cost Inflation Index (CII) How it impacts Capital Gain Tax on Real Estate & Mutual Funds

Hemant Beniwal

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September 6, 2013

18

Cost Inflation Index (CII) How it impacts Capital Gain Tax on Real Estate & Mutual Funds

If I mention a string of numbers like 939, 852, 785, 711, can you guess what these are? Well, this is not a question that you get in numerical ability question of any recruitment exam, but these numbers have potency to save a lot of money particularly if you are investing in Mutual Funds or Real Estate. And to answer the question- these numbers are value of Cost Inflation Index (CII) from year 2013-14 to year 2010-11. As the term suggest it refers to the cost of asset, which faces inflation. Let’s try to understand the concept and application in detail.

Cost Inflation Index – The Concept

There are 2 terms to calculate gain on any investment. One is the simple (nominal) return and second is called the real returns. The difference between the two is inflation. For eg a house purchased in 2005 for Rs 4 Cr in Mumbai and sold for 5 Cr in 2013 the gain is Rs 1Cr. Or simply:

Nominal Gain = Selling Price of Asset – Purchase Price of Asset

But is the concept right? Was Rs 4 Cr in 2005 a smaller amount? It is not equivalent to Rs 4 Cr of present times as the value of money has eroded due to country’s inflation. So would it be right by the Income Tax department to charge tax on entire gain? Instead they should be charging the tax on Real Return, which are returns minus the inflation.

Cost Inflation Index (CII) How it impacts Capital Gain Tax on Real Estate & Mutual Funds Click to Tweet

Real Gain = Selling Price of Asset – Inflation Adjusted Purchase Price of Asset

So how do you calculate the Inflation Adjusted Purchase Price? If let on investor, each person will have his own view in inflation, hence the CBDT (Central Board of Direct Taxes) comes out with a unique number, which is used for calculating indexed cost. For the year 2013-14 the number is 939 vis a vis 852 for year 2012-13. This means CBDT thinks that in this year inflation eroded value of assets by 10.2% ((939-852)/852 multiply by 100). The table below shows the indexation figures for 1981 when the base was taken as 100.

Cost Inflation Index (CII) 2013-14 939

Hence CBDT standardizes the calculation for purchases price of an investment. They started giving this number for year 1982-83. For all purchases before 1981, the factor used is the base factor which is 100. (but if its real estate you have to bring some documents which provides rates of property in that area in 1980 – registries that were done in that period)

CII – The Implication

In case of long term capital gains an investor can reduce his tax payment by using the indexation benefit. The rules are a bit different for real estate and securities:

1) For investments in Property: The Long Term Capital Gain (LTCG) is calculated when property is sold after 3 years otherwise it is a Short Term Capital Gain.

Tax payment= 20% of gains after taking indexed purchase cost

(It is mandatory to take the indexed cost as purchase price)

2) For investments in Securities: The Long Term Capital Gain (LTCG) is calculated when investments is sold after 1 years otherwise it is a Short Term Capital Gain.

Without Indexation Tax Payment = 10% of Gain

With Indexation Tax payment= 20% of gains after taking indexed purchase cost

Calculation for above example:

Indexed purchase price = Purchase cost multiply Index Factor

Indexed purchase price = (4 Cr * Index Factor of 2013)/Index Factor of 2005-06

Indexed purchase price= (4 Cr * 939)/497

Indexed purchase price= 7.56 Cr

Since purchase price is more than the Selling price, the investor is making a loss hence no tax is payable.

Read – Mutual Fund Taxation in India

Applicability

The cost inflation index can be used for calculating long term capital gains (LTCG) for investments in securities and real estate. Since LTCG is nil for investments in Equities, hence it has no relevance for calculating LTCG for investments in shares and equity mutual funds. But it is useful to calculate LTCG in debt oriented mutual funds (especially Bond funds and Fixed Maturity Plans).

Ground rule:

In case of Debt Mutual Funds LTCG can be claimed only if the holding period is more than 1 year.
In case of property LTCG can only be claimed if the holding period is more than 3 years. (However DTC has suggested to reduce property holding time to 1 year.)

It cannot be used to:

Calculate STCG in case of property if sold in less than 3 years of holding period.
Calculate LTCG on equity investments as they are tax free as per current rules.

I have mentioned an example above showing how this is used in property transaction. Let me show you how this can be used in debt funds. The concept is widely used in FMPs from mutual funds. This is the reason you see plethora of FMP issues of 13 months or 25 months in March month. The idea is to get a double indexation or triple indexation benefit. So if a 13 month FMP allotment date is on 21 March 2012 and maturing on 22 April 2013, it passes through two 1 April dates hence it can claim a double indexation benefit and will use indexation figure of 2011-12 and 2013-14 for calculating the LTCG. (this may go away after DTC)

So if one invests Rs 7.5 Lakhs in a 367 day FMP in March 2012, and gets maturity in April 2013 the working under Double Indexation Benefit will be as mentioned below. Also a comparison with the fixed deposit of similar tenure has been tabulated:

Calculation with Indexation Benefit
	FMP	Fixed Deposit
Amount of Investment	7,50,000	7,50,000
Annualised Yield	10.35%	10.35%
Tenure	367 Days	367 Days
Maturity Amount	8,28,077	8,28,077
Gain	78,077	78,077
Indexed Cost	8,26,585	NA
Indexation Gain/Loss	(76585.00)	NA
Income Tax	Nil	Gain will be added to income.

So indexation can be used to save a good amount of tax payment especially if a person comes in higher tax brackets. This is the reason Fixed Maturity Plans (FMPs) and bond funds have seen a rise in issue and subscription. This benefit can and should be taken by investing towards the end of a financial year, if the investor has surplus funds, because the capital gains virtually becomes tax free due to the double indexation benefit. A major number of investors are unaware about this benefit.

Read – Fixed Deposits Vs Fixed Maturity Plan (FMP)

You may feel that I have put lot of numbers in this post, but this is a simple concept which must be brought into light so that investors can take benefit from taxation. I am not saying that you have to memorize the calculation. Just learn the concept and the CII figure and calculators are available online or through your financial planner.

Hope you enjoyed learning this concept. Do share if you have used this concept and benefited. Waiting for your comments.

What is the Average Financial Planning fees In India?

Financial Planning

Hemant Beniwal

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September 2, 2013

15

What is the Average Financial Planning fees In India?

Thank God! Till now no one has asked me the cost of one kg financial planning fees in India or one square foot of reviews. Financial Planning is at a nascent stage in India; hence fee discussion is very common in a preliminary call. I have also seen few surveys done by financial bloggers – on “how much should financial planners charge?” & numbers can frighten any serious planner. So, I decided to discuss this here – hope this will be helpful to clients as well as fellow financial planners.

Financial Plan vs Financial Planning

People feel that financial planning is about writing a financial plan when actually the financial plan is just the beginning of financial planning. An excellent analogy for this can be the difference between a wedding and a marriage. A wedding is an event, but a marriage is a lifelong journey. So the financial plan is just like a wedding which is just the beginning of your second innings. The major challenges start after that. So for most planners, financial planning is about building long-term relationships rather than having a one-time event of plan creation.

We, planners, keep saying that a financial plan is a blueprint or roadmap for the client’s financial life. I believe it is more of a reference document for planners and not clients. You will be surprised to know that there are many planners, who collect the data, prepare the plan and keep that plan with themselves, as they take the responsibility of bringing financial happiness to their client’s life. Here in this post, we are talking about financial planning, not financial plans.

Check Benefits of Financial Planning

Is there a standard processor model for financial planning?

You have to understand that financial planning is not a commodity or product so there can be no standardization. However, you will find that every planner talks about the same things like retirement, investment, insurance, etc., or risk profiling, data collection, asset allocation, etc. the basic components of a plan are the same. Just like Tata Nano or an Audi Q7 will have the same components like tires, seats, steering wheel & will use the same fuel. But they are still very different cars and will serve different categories of people in different ways.

I think this clarifies that there can be several models of the same product (even if you don’t want to compare financial planning as service/advice – just imagine two lawyers, Harish Salve {he charges Rs 30 Lakh per day} with the lawyer you recently met or 2 doctors in your city – hope you got the point). I would like to share a couple of common financial planning models and tools/techniques

This list is not an exhaustive list as there will be many other models in various permutations and combinations. Even if we consider just these models, each one of them has a different set of engagement by planners and clients. There will be different processes and outcomes for all models. There will be requirements of time, systems, processes, and tools. So it is not right to compare two planners based solely on fees.

What is the Average Financial Planning fees In India? Click to Tweet

How (can) planners arrive at a logical fee structure?

Planners are in the profession of advice but the scarcest resource they have is time and the most valuable thing they have is wisdom. So either they can charge for their time or wisdom or a combination of both. This is something every planner will have to decide. The price should reflect the value that you are offering to the client. If the client is able to see the value proposition, he will find it easier to be able to pay. Clients should also keep in mind that a planner is also a business owner. He is charging for taking care of your financial future. He needs to be compensated well to keep his business viable. Adequate compensation will ensure quality people enter the profession and stay in it. If the profession does not pay well, all the good people will move out to alternate professions. The clients may end up with sub-standard advisors who might not be good for their financial health.

Defining an appropriate fee is both a subjective and objective exercise. It is complicated but let us try to put some numbers to arrive at some fee structure. Let us take few assumptions before starting:

We are talking about a boutique financial planning firm, which is the most common setup across the globe. Normally you will find 3-5 staff members in these firms. They will be – Principal Planner (normal owner of the firm) who is your advisor, the paraplanner who creates the plan (data collection & entry), the investment manager who does product research and/or keeps portfolios updated, and operations/compliance/systems executive.
Usually, such firms handle about 100 families or a maximum of 150 families if they are super-efficient or working on limited deliverables.

We are trying to arrive at a fee/revenue per client on a simple cost basis.

There are three main components of overall cost:

Principal Planner’s Earning: He is the entrepreneur who started the practice; he is the person who is responsible for the client’s goals, the firm’s goals, and staff member’s goals. But what about his own goals and family responsibility? How he will be rewarded for the time he is giving, the wisdom he brings, and the risk he has taken? Passion for personal finance is what brings him here and decent earnings will be needed to keep him here.

Operating Cost: This includes everything from office rent, software, hardware, communication, staff salaries, continuous education cost, marketing, client events, compliance, audit cost, and a lot of other things. A firm needs to spend on these to service clients in the best possible manner.

Firm’s Profit: You must be thinking, why is this required when the owner is taking salary or profits? Each business or profession has its ups and downs. Similarly, even financial planning firms will have different phases including some multiyear rough phases, especially since it is a relatively new profession in India. If the firm does not retain some profit, is it a bad sign both for clients and for the practice? You must have heard of many financial advisors have moved to other jobs/businesses in the last few years. The biggest reason for this is that they never saved for a rainy day. Normally for running a healthy practice minimum profits that any firm should retain is 25-30%.

You may have noticed I have not considered tax implications anywhere. But a planner would have to pay service tax, income tax for the firm/company, and also on his own income as an individual.

Minimum Revenue Required – Calculator

Yearly Revenue Per Client based on Revenue/Fee Required & Number of Clients

Are these our firm’s numbers? No, our numbers are even higher. But these are based on my experience and interaction with a lot of other planners.

Few Important Points:

Numbers can significantly vary from firm to firm.
Numbers are not inflation-proof – so the number will increase in the future.
Most of the financial planners across the globe are Fee-Based, so some part of the revenue will come from product advisory.
Some financial advisors may charge less initially, in expectation to grow with clients.
Few readers may feel this is unaffordable & they may be right. (we discussed this earlier – also check comment section)
These charges may look small if you open your ULIP illustrations & check what you have paid in the last couple of years. So planners & advisors can save you from big mistakes. I will also share a post on how planners add value to your finance & life but it will not talk about the best returns.

Download calculator – You can change the numbers & arrive at minimum fees/earnings that a financial planner should earn/charge. (Though you can’t put a limit on what should he earn, but still if you want to play with the numbers you can)

Do you think if your planner/advisor is not earning that money, he will continue his practice or he will serve you right, and if yes, for how long. He may do something else, which will help him to achieve his goals but what about clients. Will you work, if you are not rightly compensated for your job? Feel free to share your views in the comment section.

Image courtesy of adamr at FreeDigitalPhotos.net

3 Principles & 3 Practices to generate Superior Lifetime Returns

Investment Planning

Hemant Beniwal

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August 29, 2013

34

3 Principles & 3 Practices to generate Superior Lifetime Returns

All of sudden the dollar has become Mogambo for the investment market as both Equity and Debt markets have become very volatile. News channels have shifted their bases in coffins, and have started using terms like “bloodbath”, “butchered” and “bankruptcy”. Are you also disturbed? If your answer is Yes or May-be-little types, this article is for you. Yes your fear of investments turning into negative returns and panic is understandable but not justified if you have set your goals and believe in your financial plan. And the challenge to control your emotions, to stay away from panicking and taking impulse decision regarding your portfolio has come now. And it is not so hard if you believe in basics.

Image courtesy of KROMKRATHOG at FreeDigitalPhotos.net

This article is part of EQUITY Series – that I started last week. This post is inspired from Nick Murray – he is financial advisor’s coach, based in US. My firms name (Ark) is also inspired by one of the books written by Nick Murray.

Superior Lifetime Returns

First we have to understand “Superior Lifetime Returns” – it’s not the highest return in the cosmos but return that is required to achieve goals with minimum time, effort & stress. If you stick with these principles & practices – they will account for 90% of your investment success. So goal is never to earn the “maximum return” or “be in safe zone returns”. So here are the 3 Principals and the 3 Practices:

3 Principles & 3 Practices to generate Superior Lifetime Returns Click to Tweet

3 Principles

Faith

First and foremost principle is Faith – if you have “faith in the future” nothing else matters and if you don’t have “faith in the future” nothing else matter. You have to understand that there is difference between HOPE & FAITH. Hope is the state which promotes the desire of positive outcomes related to events and circumstances in one’s life or in the world at large. But we don’t have proofs for hope but faith is based on historical data and facts. So you have Hope from your kids and not Faith. Last week I shared some data to restore investor’s confidence but our media can shake confidence of anyone. Currently media is comparing current situation with 1991 crisis, and they may be right but in the same period our index has gone up by 16 times or CAGR of 13.5%.

Read: Indian Equities – Past, Present & Future

Patience

Warren Buffett said “The Stock Market is a highly effective mechanism for the transfer of wealth from the impatient to the patient.” Even who don’t lose faith easily lose patience based on current situation. Most of people focus more on breaking news than their goals. Even the long term investor will say, let me right now shift to debt till the things improve but he should remember, now he is taking responsibility and stress of being right TWICE – one at the time of exiting present investments & then to enter at the right time again. So now focus is shifting to “Timing the Market” – which is undoubtedly worst strategy for retail investor.

Read: Secret of Achieving High Returns.

One study suggests, more changes you will make in your portfolio, lesser will be the returns – another study suggests more often you look at your portfolio, lower the returns. So what one should do?? Read 3 practices that are given in second part of this post & stick with them.

Discipline

Patience will help in not doing wrong things and Discipline will help in keep doing right things. Not far back, Indian investors learned benefits “Systematic Investment Plan” but now I realize that it was just because of herd mentality. I keep getting queries on TFL – “how I can discontinue my SIPs & redeem funds?” and even industry data suggest the same thing that investors are closing the SIPs. In 2010 I wrote this article “Do you really understand SIP” – this talks about why I am saying it was just herd mentality. When discipline fails, the plan fails.

3 Practices

Principles dictate practices – if you don’t believe in principles, these practices will be counterproductive.

Asset Allocation

Combination of asset classes in different proportions is called a Portfolio. And the PROPORTION in which these assets are mixed is called ASSET ALLOCATION. Asset allocation means dividing the ratio of asset classes for investments as per the RISK and TIME HORIZON of the investment. So your asset allocation can be like-

50% Equity 50% Debt
50% Real Estate 40% Debt 10% Equity
40% Real Estate 40% Debt 10% Equity 10% Gold
70% Equity 20% Debt 10% Gold

Or whatever that you or your planner decide.

Diversification

Diversification is a portfolio in particular asset class. If we are talking about equity (and we are sticking with Mutual Fund for that purpose) – adding 2 large cap funds & 2 mid cap funds is a diversification strategy. If we talk about debt – that can be split in FDs, Bonds, PPF etc. Make sure you don’t under-diversify or over-diversify. Also remember with whatever efforts you make, you will never be able to invest in best performers of future – for that you need a time machine to go back in history.

Rebalancing

In Asset Allocation the weightage of each asset class are kept constant. Once you have made this portfolio you just need to rebalance it at pre-decided date. The profit in the asset lass which outperforms is booked & the proceeds are used in the asset classes which underperform in that particular period. This is done keeping the original weightage of the asset class in the portfolio. (same can be done at individual asset level – diversification)

You can read more about Asset Allocation & rebalancing here.

Without any doubt these are testing times for everyone but you have to understand that you should change your investment strategies if there are some changes in your life & life goals and not markets. If you don’t have any investment strategy – build one, write on paper – be it aggressive or conservative – important is it should be consistent. If you don’t have a written policy it will be tough to control your emotions and hope you know “Investing is a Mind Game”. Your behavior is more important than anything else in achieving superior lifetime returns.Stick with your “Goal Focused Investment Strategies”.

Feel free to share your view – what you are going through & what you feel about that.

Instruments	Indicative Allocation(% of total class)		Risk Profile
	Maximum	Minimum	High/Medium/Low
Equity	100%	20%	High
Debt	80%	0%	Low