Advice on Mutual Funds

FIIs are finding Indian mutual funds so attractive

2006-11-29T18:34:00.000+05:30

Just as individual investors in India have started to accept mutual funds (MFs) as viable saving options, MFs have started warming up to an unorthodox category of bulk investor, the foreign institutional investor.

Several funds have announced discounted entry loads for FIIs. The FIIs find it convenient to step up exposure to companies where cumulative or individual FII holdings have hit the permitted ceiling.

FIIs are now believed to be routing their money into the stock markets through local mutual fund schemes and exchange traded funds. This interest of FIIs in local funds is being attributed, among other things, to their need to take indirect exposure to stocks that have already reached the maximum permissible FII investment limit. Domestic MFs seem to be running the assets under management (AUM) race. This growing relationship may not be very good news for the small investor.

The increasing interest of domestic funds in FII money is evident from the various addendums to the offer document filed by funds relating to loads for investment by FIIs and their sub-accounts. There is no firm estimate as to the proportion of FII money in total assets under management of the fund industry.

But, fund managers and industry watchers agree that the interest of FII and MFs in each other has picked up. ‘Some money has come in the last few months’ said the CEO of a fund not wanting to be named. ‘FIIs are looking at ETFs and other funds for investing money’ said Sanjay Sachdev, former CEO Principal PNB Asset Management and currently country manager India & regional manager, Shinsei Bank Group.

There is, however, no estimate to the scale of investment so far. ‘FII holding in fund AUM is less than 1%, but we will know better once figures are collated in March’ says A P Kurien, chairman AMFI. R Sukumar, CIO Franklin Templeton India too feels that the proportion is not very high. ‘it is highly unlikely to exceed 5%’ he says. Kurien also disputes that there is a sudden spurt and believes that the proportion is not much higher than before.

The question however is why FIIs are finding Indian mutual funds so attractive. The reasons are many and varied. While Sukumar feels that demand from India dedicated fund-of-funds (FoF) and offshore feeder funds too is technically being counted as FII money, Kurien avers that FIIs are finding Indian fund management at par with world standards. While these reasons are valid, the more important reason seems to be the need to take further exposure to companies where FII investment limits have been reached. ‘FII investment in a ETF is not counted for the purposes of determining investment limits’ says Sachdev. ‘Indirect investment through funds enables FIIs to go beyond the limits.

This is also the reason why there has been an increase in FII interest in the derivatives segment’ says the fund CEO not willing to be named. Sukumar however feels that not all funds are permitting this. ‘Some second or third rung funds may be doing it, not the top rung ones. Moreover, investor tags are not important, there can be quality FII money too. But, we are not marketing our funds to FIIs ’ he says.

So, where does this leave the retail investor. A growing FII-MF relationship could be a cause for worry, condsidering how enamoured funds have been with corporate money for much of their history in India. Kurien disagrees, ‘corporates are investing, so what is wrong with FIIs investing in domestic funds’ he questions.
Sanjay Sachdev however feels that it is the race for assets which is driving funds to FIIs. Considering the renewed retail investor interest in mutual funds, it would be in the interest of the MF industry to keep the faith.

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Invest in Standard Chartered Mutual Fund

2006-11-29T11:46:00.000+05:30

Standard Chartered Mutual Fund has launched Standard Chartered Arbitrage Fund (SCAF), an open-ended equity scheme that plans to take advantage of the differential pricing between the cash and the future markets and in the bargain make some risk free profit.

Experts believe that it is a good option for conservative investors who wish to improve their portfolio returns without changing their risk profile. However, there are some concerns:

Lack of arbitrage opportunities

Investment expert Sandeep Shanbhag feels that while the idea of profiting from the differential pricing between the cash and the future markets seems good on paper, the main problem remains lack of such arbitrage opportunities. Without abundant opportunities, the returns of such funds suffer, he added.

However, Rajiv Anand, head (investments), Standard Chartered Mutual Fund believes that the arbitrage potential available in the market is a function of:

Interest rates / money market rates, and
Underlying equity market sentiment

As the equity market sentiment improves, the arbitrage opportunities available in the market increases and vice-versa, he added.

Expenses weigh heavy

Experts feel that the transaction cost and fund management charges in this scheme are likely to impact its returns. Shanbhag said, "The four legs of each transaction (buy in cash, sell in futures, selling in cash and buying in futures) entail transaction costs.

"Coupled with fund management fees and administration costs, such funds would be hard pressed to beat the risk free rate of 8 per cent p.a. that is otherwise available on RBI Bonds or FDs".

Anand differs as he says, "Transaction costs are part of the entire arbitrage trade. The biggest component of the transaction cost is STT (Securities Transaction Tax) and is applicable to all segments of the market."

Meanwhile, he highlights that the key advantage of investing in Arbitrage funds is that it is an "equity" fund as per tax laws and hence dividend distribution tax is zero and long term capital gains is also zero.

"If you compare this with a fixed deposit for example where you are paying full tax as per the investor's slab, these funds effectively strip out the interest component from the equity market through market neutral trades and at the same time give you the tax benefits of equity funds. Hence the benefit relative to other fixed income instruments can be significant", he added.

StanChart's arbitrage fund v/s existing arbitrage funds

Investment advisor Hemant Rustagi feels, "There are some existing open-ended schemes that have similar investment objectives and strategies and have done well. There may not be a great advantage for investors investing in this scheme compared to the existing ones."

However, Anand clarifies that, "Not all of the existing funds carry the concessional tax status of an equity fund. Those that have the concessional tax status do not provide any day liquidity that is available under this fund."

Conclusion:

Experts believe that Standard Chartered Arbitrage Fund is a good option for conservative investors who are looking to improve returns on their portfolio without changing their risk profile. Besides, the scheme is tax efficient, as an investor in this scheme will enjoy the tax benefits that are available for investing in equity funds.

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All about Fund of Funds (FOFs)

2006-11-29T11:44:00.000+05:30

Fund of funds (FoFs), as the name suggests, are mutual fund schemes, which invest in other mutual fund schemes. There have been a few such FoF schemes in the past and recently too some new FoFs have been launched.

Does it make sense to invest in FoFs? Let us look at the various issues associated with FoFs -- some are positive and some negative.

Diversification (+ve)

Just as a mutual fund scheme offers diversification by investing in various equity scrips, a FoF offers diversification by investing in various MF schemes. Experience of the past few years shows that the top performers are usually different from year to year. However, there are certain funds, which have been consistent performers.

Therefore, a FoF that invests say in 4-5 of the top ten funds today, is expected to yield better returns than say investing in the top performing fund of the day.

Secondly, you get a chance to diversify across various fund managers and investing styles.

Thirdly, even if a fund manager quits one AMC and joins another whose fund you already own in the FoF, you are not affected by this constant movement of the fund managers.

Convenience (+ve)

As a prudent investor, one would like to diversify one's investment across both equity and debt funds. By choosing a suitable FoF, you get a chance to invest across different class of funds with just one investment. Thus, it becomes very convenient for investing and monitoring.

Also, suppose you wanted to invest in 5 equity funds and 5 debt funds. Assuming each fund has a minimum stipulated investment of Rs 5,000, you would need Rs 50,000. In a FoF, Rs 5,000 would do the job.

Rebalancing (+ve)

This is a great benefit that a FoF offers - in fact 2 benefits as we see later.

Suppose you have Rs 100 to invest and your debt-equity allocation is 30:70. After one year the Rs 30 in debt has grown to say Rs 32.40 @8% p.a. and the Rs 70 in equity to Rs 94.50 @35% p.a. The debt-equity allocation has now become 25.5:74.5.

Thus the portfolio has become riskier than your profile of 30:70. Therefore, you need to sell Rs 5.67 of equity and put in debt to bring back the debt-equity ratio to 30:70.

Conversely, say after one year the debt had grown to Rs 32.40 @8% p.a., but equity portion suffered a loss of 20% and reduced to Rs 56. The debt-equity ratio changed to 36.7:63.3. Now you need to sell Rs 5.88 from debt and put into equity.

This rebalancing will involve capital gains tax, if you do it by holding individual MFs. When a FoF does it, there is no long/short term capital gains tax, which can be as high as 30% on short-term capital gains in a debt-fund. This is a big benefit.

The second benefit that FoF rebalancing offers is a psychological one. Usually people don't sell when the markets are rising and don't buy when the markets are falling. Yet this is exactly what one should be doing. FoF does it automatically (and it usually can be in your long term interest).

Higher costs (-ve)

A FoF charges 0.75% annual management fees. This will be over and above the annual management fees of the MF schemes it will invest in, which are typically 2.5% for an equity MF and 1.5% for a debt MF.

Thus the effective cost for you works out to around 3.25% and 2.25% for equity & debt MF respectively.

Single AMC FoFs (-ve)

Most FoFs were, till recently, not true FoFs. They invested only in the different funds of the same AMC, which promoted the FoF. Only recently, some FoFs have been launched which will invest across different AMCs and hence will be truly diversified.

Higher Tax (-ve)

As per the present tax laws, equity FoF does not enjoy the benefits available to a normal equity fund. Therefore, if one invested in an equity FoF he would be liable to pay dividend distribution tax of 14.03% or LTCG tax of 10% (without indexation), which is otherwise NIL for a normal equity MF.

This higher tax can significantly reduce the post-tax returns.

Since the advantages and disadvantages are quite varied, the investors would have to assess their individual situation in the light of these factors and then take a decision as to whether FoF suits them or not.

Also, one should check the costs and the close-ended nature (thus not giving an investor a chance to do SIP), when investing in new FoFs.

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Top performing funds globally on five year basis

2006-11-28T20:16:00.000+05:30

Two domestic mutual fund schemes -- Reliance Growth and Reliance Vision -- managed by Reliance MF have emerged as the two top performing funds globally on a five-year basis, the data available with international fund intelligence agency Lipper shows.

According to Lipper, Reliance Growth and Reliance Vision topped the list of 20 best performers from a global universe of open-ended equity funds based on their five-year performance till October 31.

Reliance Growth Fund has given compounded returns of 71.39 per cent per annum, while Reliance Vision Fund has given return of 68.16 per cent over the past five years in the US dollar currency, the Lipper data shows.

The two schemes have also emerged as the top performers among all the domestic open-ended equity schemes based on their five-year performance as on yesterday, data available with Association of Mutual Funds in India (AMFI) reveals.

Reliance Growth tops the chart with a return of 69.01 per cent as on November 15, followed by Reliance Vision at the second position with a five-year return of 66.03 per cent.

Magnum Contra, managed by SBI Mutual Fund, is at third position with five-year return of 60.83 per cent, followed by Franklin India Prima and Magnum Taxgain with returns of 60.83 per cent and 59.85 per cent, respectively.

Birla Sun Life MIP (Monthly Income Plan) tops the list of open-ended debt schemes with five-year returns of 12.15 per cent, followed by FT India MIP at the second position with a return of 12.11 per cent.

Reliance Mutual Fund, which is owned by Anil Dhirubhai Ambani Group company Reliance Capital, manages Rs 31,572 crore (nearly 7 billion dollars) with over 2.3 million investors as on October 31.

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Infrastructure funds outperformed their benchmarks

2006-11-28T20:15:00.000+05:30

Mutual fund schemes investing in infrastructure and related sectors have largely outperformed their benchmarks in the past one year. However, fund managers of these schemes may struggle to sustain this performance going forward because of the effect of higher base and pricey stock valuations.

These funds have delivered returns of 63-76% in the last one year, while the indices to which these funds are benchmarked have risen 56-57%. This outperformance has been due to the steep rise in several key shares in these sectors.

While these funds, in theory, are termed “infrastructure funds”, they more or less play the role of diversified funds rather than themes, which enables them spread the risks in comparison with sector funds. Infrastructure funds generally invest in stocks related to capital goods, construction, roads, power, oil & gas, engineering etc.

ET takes a look into the performance of five such funds, which have been in existence for more than a year, including DSP Merrill Lynch’s TIGER Fund, UTI’s Infrastructure Fund, Prudential ICICI’s Infrastructure Fund, Tata Mutual Fund’s Infrastructure scheme and Sundaram BNP Paribas’ CAPEX Growth Fund.

Among performance highlights, Prudential ICICI’s scheme has been the best performer of the lot, returning approximately 76% in a year, as per data available on Value Research.

Sundaram’s CAPEX is the only fund, which has underperformed its benchmark, though it has registered returns in line with other related schemes. The scheme has returned roughly 64% since last year, Value Research said. However, BSE’s capital goods index, against which it has chosen to compare its performance, rose 77% during the period.

Reasons Srividhya Rajesh, fund manager of Sundaram’s CAPEX, “The fund is thematic and has a focus compared to other such schemes, which have opted for wider investment options. Also, we had 10-15% cash after the May crash, which is negligible now.”

Out of the five funds, the construction sector has the highest weightage for four schemes, followed by engineering and energy. L&T, BHEL and Grasim Industries find a place in such schemes of most of these fund houses.

Going ahead, fund managers choose to stick their bets to shares in road, construction and power equipment companies given their visibility in earnings enabled by a strong growth in order book positions. Also, with the government planning huge investments to develop infrastructure in the country, these companies are expected to have sustained order book inflows.

While analysts remain positive on their earnings prospects, there are concerns about valuations, considering the cyclical nature of the business. “These stocks are bound to command a premium in valuations (compared with the broader market) because of earnings visibility,” said Mr Rajesh, while adding that these funds would continue to outperform the broad market, but may not replicate this year’s returns.

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Fidelity Fund launches new Cash Fund

2006-11-28T20:14:00.000+05:30

Fidelity Fund Management Private Ltd has launched Fidelity Cash Fund with a credit risk rating of MfA1+ from Icra, which indicates highest-credit-quality short-term rating assigned by ICRA to debt funds. The Fidelity Cash Fund is an open ended liquid scheme that aims to generate reasonable returns with lower volatility and higher liquidity through a portfolio of debt and money market instruments. Subscriptions will be open during the NFO period from November 20 - 22, 2006 and thereafter for ongoing purchase and redemptions from November 29. Sameer Kulkarni is the fund manager of the Fidelity Cash Fund, which is benchmarked to the CRISIL Liquid Fund Index.

The Fund will be managed on the basis of Fidelity’s global fixed income investment philosophy, which combines its research on markets, sectors, yield curves and individual bonds with highly focused trading skills to build “multi strategy” portfolios in a way that deliver consistent returns.

The Fidelity Cash Fund will have retail, institutional and super institutional plans. Each plan will offer growth and dividend options. The minimum initial investment for the Institutional Plan is Rs 1 crore while the Super Institutional Plan requires a minimum initial investment of Rs 25 crore. For the Retail Plan, the minimum initial investment is Rs 5000. The Fund has no entry or exit loads.

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Value Mutual funds ride high

2006-11-28T20:13:00.000+05:30

Surprise! internet and telecom stocks are suddenly enjoying a resurgence. Double surprise! Among the big beneficiaries of the rally have been value mutual funds, which until very recently would never have gone near a technology stock.

As the US stock market has embarked on a strong advance since mid-year, the long-depressed Nasdaq Composite Index has played a starring role. The index, 11 of whose 12 largest components are tech stocks such as Microsoft, Intel and Dell, climbed 21% from July 21 through the middle of this week, including dividends. That eclipsed a 13% total return for the S&P’s 500 Index and a 14% gain for the Dow. While the Dow has been hitting record highs and the S&P 500 has climbed to a six-year peak this week, the Nasdaq remained more than 50% below the highs it reached in ’00.

Well, if a particular group of stocks is down, that doesn’t mean it’s out. In keeping with their long tradition of bargain-hunting among despised and neglected sectors of the market, several prominent managers of value funds began buying tech stocks a year or two ago. That put them in good position to reap the rewards of the Nasdaq revival.

No surprise to find growth-minded funds such as the Pin Oak Aggressive Stock Fund (largest holding: Cisco Systems) and the Fidelity OTC Portfolio (largest holding: Google) near the head of the pack with gains of 28% and 25%, respectively, since July 21. But look at some of the others keeping them company: the Longleaf Partners Fund, up 19%, the Oakmark Select Fund, up 16%, and the Legg Mason Value Trust, up 15%. Longleaf Partners’ largest holding, at last report, was Dell. Oakmark Select had good-sized stakes in both Dell and Intel. Legg Mason Value Trust — under manager Bill Miller — has long been an object of controversy among value purists with its taste for the likes of Google and Amazon.com.

Miller is also famous for “the streak” — an unrivaled run of 15 consecutive years in which his fund has beaten the S&P 500. The streak is in great jeopardy in ’06, with the fund’s year-to-date gain through Wednesday of 4.5% still trailing the index by more than 9% points.

Even so, as a holder of Value Trust shares in a retirement account, I’m glad I didn’t jump out of the fund a few months ago just because Miller looked to be having a sub par year. One obvious message in all this is that experienced value investors aren’t doctrinaire, insisting on sticking to old-line industries such as utilities or steel.

Richard Parower, manager of the Seligman Global Technology Fund, envisions a new cycle of business investment in high-tech equipment. “These cycles typically come around every seven or eight years,” Parower said. “Current systems have been fully depreciated and US companies are eager to start taking advantage of productivity gains from new software and services.” His specialised fund sports a 23% gain since July 21.

Back in the late 1990s, a runaway rise in tech stocks got out of hand. It set the market up for a painful letdown when many of the wildest hopes for the so-called New Economy proved impossible to fulfill. But there always was a solid core of real economic value there, created by the internet and other innovations. It doesn’t take an economics degree to see abundant chances today for more great productivity enhancements. Example? The crying need for a better system to store and transmit medical information. Tech stocks made trouble the last time they got hot.

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Review of SBI One India Fund MF

2006-11-28T20:06:00.000+05:30

SBI Mutual Fund (MF) on Wednesday announced the launch of 'SBI One India Fund' that would primarily invest in diversified equity stocks of companies across all four geographical regions of India and in debt and money market instruments.

"SBI One India Fund is a close-ended growth fund that would primarily focus on investing at least 15 per cent and not more than 55 per cent of its equity exposure in each of the four regions," said SBI MF's Head of Equity, Sanjay Sinha here, while launching the new fund.

"The new fund will benchmark itself against BSE 200 index, a tough index to outperform," Sinha said adding "but a study by SBI MF had shown that stocks picked region wise from the index in a particular year had outperformed BSE 200."

The portfolio of stocks selected from each region, would have a healthy mix of large, midcap and smallcap stocks. The 'One India Fund' would pick 15 stocks from each region.

The fund would invest a minimum of 70 per cent in equity/equity-related instruments and the balance 30 per cent in a mixture of debt and money market instruments.

The scheme, which opens for subscription from November 24 and closes on December 22 will have a minimum application amount of Rs 5,000 and in multiples of Re 1.

The new fund would be an aggregate of the four regional multicap funds.

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Fund houses launch many close ended NFOs

2006-11-28T20:04:00.000+05:30

The past couple of days have seen three fund houses launching three-year close-ended diversified equity funds. SBI Mutual Fund, Reliance Mutual Fund and LIC Mutual Fund are the latest to join the close-ended fund bandwagon.

While all three funds carry fancy names, how different these are from the existing bouquet of funds by the abovementioned houses remains to be seen. With benchmark indices at stratospheric levels, it appears that fund houses cannot seem to resist the short-term favourable climate for mobilising fresh assets from retail investors.

At the end of ’05, there was only one close-ended growth scheme. So far in ’06, already 10 close-ended growth schemes (excluding the abovementioned schemes) have hit the market. More are in the pipeline for regulatory approval.

Sebi issued a circular in April that said open-ended schemes would have to charge the initial expenses in the entry load of the scheme itself or should be paid by the asset manager. Earlier, funds could charge up to 6% of funds collected in a new fund offer (NFO) as expenses.

This means, if a fund collected Rs 1,000 crore, it could spend Rs 60 crore on advertising and marketing and charge it to the fund over six years, an accounting practice known as amortisation. This put long-term investors at a disadvantage as they bore the burden of expenses longer than those who exited earlier.

Off the record, asset management company (AMC) officials agree that the regulation, allowing close-ended schemes to amortise expenses over the life of the plans, is the primary reason why there is a spurt in NFOs of close-ended schemes.

Market watchers also allege that close-ended schemes, which are variants of their existing open-ended products, help fund houses skirt the Sebi diktat to trustees of AMCs to certify that a new scheme being launched is not similar to any of the company’s existing ones. But the regulator is closely watching the situation and some tightening of guidelines may be on the anvil.

“You haven’t heard of the last of it yet,” Sebi chairman M Damodaran told reporters on Wednesday, when this trend was pointed out to him. SBI MF on Wednesday announced launch of its region-specific equity scheme, One India Fund, which is to invest in diversified stocks, while aiming to pick best investment opportunities from all regions of the country.

The scheme will be looking for stocks based on region, where company’s headquarter is located or where maximum revenues come from. Besides, the fund house has set up a team of four fund managers and four sectoral analysts to decide the course of investments.

On being questioned as to how the fund was different from the several funds already under its mangement, SBI head of equities Sanjay Sinha said that the scheme will allow fund mangers to have better focus while choosing stocks. How first arbitrarily putting stocks into separate baskets and then pooling them with regular parameters will help, is anybody’s guess?

While explaining about LIC’s India Vision Fund, CEO N Mohan Raj explained, “The emphasis will be on undervalued stocks in the ‘mid and small cap segment’, especially in the infrastructure, agriculture, retail, services and hospitality industry.” LIC already has four existing open-ended equity diversified funds.

Reliance’s Long Term Equity Fund also claims to invest in select small and mid-cap stocks, which have the potential to grow and deliver attractive returns. Reliance already has five equity-diversified funds called Equity, NRI Equities, Equity Opportunities, Growth, Vision funds.

The objective of Reliance’s latest offering is “to offer attractive growth potential to investors who have a long-term horizon.” However, it is true that close-ended funds enable fund managers to have better flexibility while investing, since they do not have to be on their toes in case investors want to withdraw their money.

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Review of Reliance Long Term Equity Fund (RLTEF)

2006-11-28T18:38:00.000+05:30

Investment Objective

The primary investment objective of the scheme is to seek to generate long term capital appreciation & provide long-term growth opportunities by investing in a portfolio constituted of equity & equity related securities and Derivatives and the secondary objective is to generate consistent returns by investing in debt and money market securities.

The fund shall primarily focus on the small and mid cap stocks. However depending on the views of the fund manager and market conditions in the interest of the investors, the fund manager will have the flexibility to select stocks which he feels are best suited to achieve the stated objective.

The fund will have the flexibility to invest predominantly in a range of Small and Mid Cap companies/stocks with an objective to maximize the returns, at the same time trying to minimize the risk by reasonable diversification. However there can be no assurance that the investment objective of the scheme will be realized, as actual market movements may be at variance with anticipated trends. *Source: Offer document

Is this fund for you?

While a number of AMCs (Asset Management Company) have launched close-ended NFOs in the past, this is the first one for Reliance Mutual Fund. Reliance Equity Fund (launched in February 2006) was the last open-ended equity fund to be launched, before SEBI's (Securities and Exchange Board of India) clampdown on when and how entry loads could be charged.

Reliance Long Term Equity Fund (RLTEF) is a 3-Yr close-ended diversified equity fund with automatic conversion into an open-ended fund on maturity. The fund proposes to generate long-term capital appreciation by investing predominantly in small and mid cap stocks. It will also invest in debt and money market instruments in order to generate consistent returns.

Investments in small and mid caps hold above-average potential for risk-taking investors. If identified correctly at an early stage, these stocks can reap significant gains over the long-term. The oft-touted names by fund managers - Wipro, Infosys, HDFC Bank among others, were mid caps at one stage before blossoming into one of the most respected names in their respective sectors. Of course, it has taken them time to achieve that.

At the same time, investment in small/mid cap stocks is not free from risk; rather the risk is above-average. This is because for every Wipro, Infosys or HDFC Bank, there are some forgettable companies like Vikas WSP, Aftek Infosys, VisualSoft and HFCL to name a few that failed to graduate to large caps. In other words these companies lacked the mettle to join the big league. This only underscores that every small/mid cap is not necessarily a large cap in the making and therein lies the risk of investing in small/mid cap stocks.

Companies in the small/mid cap segment do not have established track records and data on them (which is critical for research) is not easily available. So, the chances of making a wrong investment decision are very high.

A word of advice - investors investing in small/mid caps need to be patient enough as it could be a while before these stocks unlock the potential that is expected of them. So flitting in and out of these stocks/funds may not be the right way to go about investing in mid caps.

With regards to Reliance Mutual Fund, we have not been able to get complete clarity on the investment proposition of some of their funds. For instance, Reliance Vision Fund until some years ago was predominantly invested in mid caps, while Reliance Growth Fund was the large cap offering. As things stand today, their investment mandates have reversed, which means Reliance Vision is a large cap fund, whereas Reliance Growth is a mid cap fund. The change in their mandates is inexplicable and given that they share the exactly same investment objective, we have no way to ascertain whether this change is only temporary or permanent.

In Reliance Growth Fund, Reliance Mutual Fund already has a fund that invests in mid caps in addition to large caps. RLTEF proposes to invest 'strictly' in small/mid caps; effectively closing the door on large cap investments.

In our view, the interests of risk-taking investors are better served by investing in well-established mid cap funds like Sundaram Select Midcap and Franklin India Prima Fund. Meanwhile, they can track RLTEF's performance over the 3-Yr period and then take a revised view on the fund.

Portfolio Strategy

RLTEF has a relatively straightforward portfolio strategy. The fund is mandated to invest 70%-100% of its net assets in equity and equity-related instruments. According to RLTEF's Offer Document, the equity investments will be made strictly in the small/mid cap segment. The market capitalisation ceiling for this segment is Rs 15 bn (Rs 1,500 crores), in other words, the fund is unlikely to invest in stocks beyond this ceiling under normal market conditions. However, as the Offer Document mentions, the fund manager can revise the ceiling depending on the market conditions and invest in stocks outside this universe.

Instruments	Allocation Range
Equity and equity-related securities	70%-100%
Debt and money market securities	0%-30%

Moreover, if in the fund manager's view, equity markets are unlikely to perform well and there is a dearth of investment opportunities, the fund can reduce its allocations to equities and instead invest in debt and money market instruments upto 30% of net assets.

Fund Manager Profile

Mr. Sunil Singhania, is Fund Manager - Equity at Reliance Mutual Fund. He is a CA and CFA from AIMR, USA. Before joining Reliance Mutual Fund, he was associated with Motisons Securities Pvt. Ltd, and Advani Share Brokers Pvt. Ltd. He also manages Reliance Growth and Reliance Equity Opportunities among other funds.

Outlook

It pays to invest in diversified equity funds with a long-term perspective, at least 3 years in our view. Investing for the long-term is particularly relevant for small/mid caps since, unlike well-established large caps, they take a lot more time to unlock their potential. In fact, we would recommend that investments in mid caps should be made with a minimum 5-Yr investment time frame. And over this period, investors should be prepared to witness above-average volatility.

RLTEF's fortunes will be closely linked to those of the small/mid cap segment. If anything, the fund may be exposed to higher risk levels since it plans to be invested strictly in small/mid caps and has a relatively low market cap ceiling of Rs 15 bn for that purpose. However, the flexibility to revise the market cap ceiling and invest in debt will prove useful.

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Review of HSBC Tax Saver Equity Fund

2006-11-28T18:36:00.000+05:30

To provide long term capital appreciation by investing in a diversified portfolio of equity & equity related instruments of companies across various sectors and industries, with no capitalisation bias. The Fund may also invest in fixed income securities.

Is this fund for you?

At least in the Indian context, timing usually plays a role in the launch of mutual fund products. With a little over 4 months left before the tax-planning season draws to a close, it is not surprising to see several AMCs (Asset Management Companies) launch their tax-saving funds (also referred to as Equity-linked Saving Scheme/ELSS).

HSBC Tax Saver Equity Fund (HTSF) is one among several tax-saving funds launched in the recent past. It is a diversified equity fund, which offers investors an opportunity for saving tax by providing Section 80C benefits.

Under Section 80C of the Income Tax Act, a taxpayer is eligible for deduction of upto Rs 100,000 in a year from his gross total income, provided the money is invested in specified instruments like tax-saving funds, for instance.

Tax-saving funds are particularly relevant for the risk-taking investor aiming to save tax. To begin with, it is the only equity-linked investment within the tax-planning gamut. ULIPs (unit-linked insurance plans) are also market-linked, but they have an insurance element. Tax-saving funds have a 3-Yr lock-in, which compels investors to take a long-term view on equity markets. At Personalfn, we maintain that investors must in any case consider equity-linked investment with a minimum 3-Yr investment time frame. To that end, tax-saving funds are right up their alley. Another positive with tax-saving funds is that even the fund manager can practice long-term investing by taking investment decisions that will benefit investors over the long-term.

Our view on HSBC Mutual Fund is that it's a process-driven fund house. There is relatively lower reliance on individuals, which is why the churn in its fund management team hasn't impacted its investment processes. Over the years, the performance of HSBC Equity Fund (a predominantly large cap) has caught our eye for its consistency.

However, it's still early days for the fund house; take away HSBC Equity Fund (launched in December 10, 2002) and there is little of note the fund house has achieved, at least on the equity side. Apart from HSBC Equity Fund, none of its funds have completed 3 years of existence, so it may be a little premature to comment on their performances. Add to this the fact that the last 3 years have seen a secular rise in equity markets, which has made it even more challenging to form an objective view on fund management processes as opposed to fund's performance. At Personalfn, we like to see an equity fund backed by credible sponsors and well-defined investment processes put in a consistent performance over 3-5 years over various market phases (particularly the downturns).

Portfolio Strategy

HTSF is mandated to invest between 80%-100% of its assets in equities and equity-related instruments. It can also invest upto 20% of its assets in debt and money market instruments.

Instruments	Allocation Range
Equities and equity related securities	80%-100%
Debt, money market instruments and cash	0%-20%

The fund proposes to invest in stocks from across market capitalisations i.e. it will invest in a mix of small, mid and large cap stocks across sectors to attain its stated objective of capital appreciation.

Fund Manager Profile

Mr. Mihir Vora, is Senior Vice President and Head of Fund Management-Equities. He is a CFA, B.E. (Mechanical) and also holds a Post Graduate Diploma in Management. Before joining HSBC Asset Management (India) Private Limited in July 2006, he was associated with ABN AMRO Asset Management Company Limited as Head-Equities.

Outlook

Theoretically, HTSF is well placed to benefit from its investment mandate of investing across market capitalisations and sectors. Also, as mentioned earlier, the lock-in period of 3-Yr will help the fund manager take a long-term view on his investments without worrying about redemptions. Moreover, the flexibility to invest in debt/money market instruments should see the fund tide over market turbulence relatively well.

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Indian real estate funds flow worth US$ 8 billion

2006-11-27T14:22:00.000+05:30

After the government’s relaxation of foreign direct investment (FDI) norms for the real estate sector in early 2005, the real estate sector has seen a foray of real estate fund launches. Sizable investments are expected to flow into these funds according to real estate services firm Jones Lang LaSalle (JLL).

Currently, these funds cater to institutional investors and high-net-worth individuals (HNIs). The HDFC India Real Estate Fund (HI-REF) was launched in 2005.

It was the first fund that gave individuals and institutions the opportunity to invest in multiple properties through a single-investment vehicle, with the minimum investment size of INR 50 million. JLL estimates that as much as USD 8 billion of private equity could flow into the Indian real estate funds over the next 18 to 30 months.

With factors such as long-term interest rates showing signs of alignment with the developed economies, strong investor sentiments, increasing rentals and improving transparency, the realty funds should continue to remain an attractive alternative investment vehicle for domestic and international investors.

In 2007, an estimated 50 million sq ft of new office space across the seven major metros is to be completed. This phenomenal growth in the commercial and residential real estate markets will further catalyse the growth of realty funds. Realty funds are expected to register double-digit returns on the back of these fast-growing investment options.

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Real estate ventures and mutual funds

2006-11-15T21:02:00.000+05:30

Funds are thriving and fund action continues unabated in India’s booming real estate market. TSI Ventures, an equal joint venture between Tishman Speyer and ICICI Ventures, has mopped up over $1-billion, barely 15-months after it was floated.

This, while there are even more mega funds in Indian real estate’s pipeline. We have Actis looking at an India specific realty fund, and US-based Apollo Real Estate Advisors teaming up with Sun Group, just so they can pump in investments into the domestic real estate sector, a market which is probably, throwing up better yields than its peers amongst the emerging markets.

TSI Ventures multiple closing fund, which came into existence with $500-600 million, is currently seen to be crossing $1-billion, according to sources in the know. TSI, focussing on from the ground up projects, recently closed its first $100-million investment for 1.5-million sq. ft. project in Hyderabad. The fund is now closing in on deals in Bangalore, Chennai and Pune, one of which is a large integrated township.

Prakash Gurbaxani, CEO of TSI Ventures says his firm hopes to be managing and operating between 25,000 and 30,000-million sq. ft. space, both residential and commercial, over the next five to seven years. This could make it one of the largest real estate asset management entities in the country, as it targets a figure far bigger, than some of India’s largest realty houses have come up with, to date.

Meanwhile, UK-based private equity major Acentis bullish on the consumer products space, is exploring the possibility of an India-specific real estate fund. This fund could look at pure play realty, hospitality and tourism sectors. Currently, Actis operating the $500-million India specific fund, made investments and effected buyouts in the consumer products and services domain.

Last week, US realty major Apollo Real Estate Advisors forged a joint venture with Khemkas controlled Sun Group for its India foray with a $500-600-million fund, which could show up as nearly $1.5-billion in the future.

A group of former Morgan Stanley executives has floated $500-million India fund, Old Lane, for the infrastructure sector, which would also look at financing commercial real estate projects. The others exploring the domestic real estate action include London-based $300-million Duke India and a $100-million Saffron fund. The industry experts are hinting at cross-border fund flows of roughly $4-5-billion into the country over the next 12-18 months.

While, the fund action in realty is expected to gather momentum, with about 50-60 new ones India bound, questions are being raised on the investment avenues available in the country. Industry observers’ note, publicly listed realty stocks are far fewer in India compared to China and Hong Kong, even though the domestic market is better placed in terms of transparency.

That is nothing to get into a tizzy about, just as the Indian real estate market gains greater transparency, publicly listed realty stocks may soon match China’s and Hong Kong’s. Indian realty is the best bet for your bottom dollar!

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Best performance of Index Funds

2006-11-15T19:40:00.000+05:30

In terms of fund management, mutual funds can be broadly classified into two categories: actively managed funds and passively managed -- better known as index funds. In an actively managed fund, the fund manager uses his expertise and skills to select stocks across sectors and market segments.

The sole intention of actively managed funds is to identify the best investment opportunities and exploit it in order to generate superior returns, and in the process outperform the benchmark index.

On the contrary, index funds are aligned to a particular benchmark index like the Nifty or Sensex. They attempt to mirror the performance of the designated benchmark index, by investing only in the stocks of the index with the corresponding allocations.

In developed economies like the United States for instance, index funds are very popular among mutual fund investors and are preferred over actively managed funds. This is because of the clear advantages they offer to investors, like no loads and lower expenses among others.

Moreover, in the United States, stock markets are more efficient, so investment opportunities are at a premium. They are relatively difficult to identify, because widely disseminated research makes just about everyone aware of these opportunities, so this blunts the first mover advantage.

As a result, a number of actively managed funds in developed economies fail to outperform the broader stock market indices thereby pushing the cause of index funds.

Investing in index funds is relatively less cumbersome. Here, the two most important points which investors have to look out for are the expense ratio and the tracking error (i.e., the difference between the returns clocked by the benchmark index and index funds).

Thus, unlike actively managed funds, index fund investors can forgo other aspects of investing such as fund house's investment philosophy and the kind of funds to choose -- a large cap/mid cap/small cap fund.

On the other hand, investors investing in actively managed funds have to assess all the above-mentioned criteria and more before investing. These funds have to capitalise on the opportunities in the market to generate superior returns. Thus, in the process they employ more resources (more analysts/fund managers) and in turn charge higher expenses than index funds.

In the Indian context, the mutual funds segment is dominated by actively managed funds. Index funds occupy a much smaller share of the market.

This is because Indian stock markets, being in a developing phase, still offer enough investment opportunities that if identified earlier on can outperform the benchmark index over the long-term (3-5 years). So well-managed actively managed funds have done a reasonable job of going one up over the index over the long-term.

We did a brief study wherein we faced-off the average category returns of index funds (passively managed) vis-�-vis those of diversified equity funds (actively managed). In a way, the results are on predictable lines.

Active Funds: Long-term bets

Categories	Average category returns
Categories	1-year (%)	3-year (%)	5-year (%)
Index funds	55.5	35.0	32.7
Diversified equity funds	40.4	42.6	45.3

(Returns as on October 16, 2006)

On comparing the category average returns of active funds and passive funds over varying time frames, one can conclude that it's something of a mixed bag, with each category performing well only over a certain time frame.

For instance, over 1-year, index funds (55.5%) are ahead of diversified equity funds (40.4%). However, extend this time frame to 3-year and even 5-year, and the scenario changes completely. Gone is the sheer domination of index funds over active funds.

Over 3-year, diversified equity funds (42.6%) have comprehensively outperformed index funds (35.0%) by 7.6%, and this gap further widens to 12.6 % over 5-year.

In a nutshell, even in the Indian context, index funds offer advantages like lower expenses (although they aren't quite as low as they should be compared to US Index Funds) and lower volatility in performance as compared to actively managed funds.

They can also outperform actively managed funds although usually only over shorter time frames (less than 3 years). But over longer time frames of 3-5 years (which is ideal for evaluating equity-oriented funds), actively managed funds more than hold their own against index funds.

Hence, for risk-taking investors, actively managed funds should occupy a larger share of the portfolio. Index funds can also occupy a smaller share, mainly from a diversification perspective.

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Review of Franklin Templeton Capital Safety Fund (FTCSF)

2006-11-14T23:37:00.000+05:30

Franklin Templeton Investments (India) has launched Franklin Templeton Capital Safety Fund (FTCSF), the first of the many 'Capital Guaranteed' schemes slated to hit the markets soon.

The scheme endeavors to protect the capital by investing in high quality fixed income securities as the primary objective and generate capital appreciation by investing in equity and equity related instruments as a secondary objective. Franklin Templeton launches Capital Safety Fund)

Offer opens: October 31, 2006
Offer closes: November 30, 2006
Entry load: Nil
Exit load: Nil
Minimum investment: Rs 10,000
Type of fund: Close-ended
Tenure: 3-years and 5-years
Benchmark: Crisil MIP Blended Index
Fund Managers: Santosh Kamath (debt) and Satish Ramanathan (equity)

Franklin Templeton Capital Safety Fund offers a 3-year and a 5-year plan. Being a close-ended fund, the fund will not repurchase units of the scheme before the end of the maturity period. (Check out - New Fund Offers open now)

Experts believe that though such schemes offer the investor the opportunity to have his cake and eat it too, investors should note that this doesn't come without having to make some compromise.

1) Limited Equity Upside

“In Franklin Templeton Capital Safety Fund, capital guarantee would mean a minimum of 70% of the funds invested in fixed income securities for the 3 year plan and a minimum of 80% of the funds invested in fixed income for the five year plan. Therefore, equity upside, if any, would be limited to the 20% and the 30% portion invested in equity respectively”, says investment expert Sandeep Shanbhag.

However, Sukumar Rajah, CIO - Equity, Franklin Templeton clarifies that, “FTCSF allocates a major proportion of its portfolio to high quality debt investments in order to protect capital and the remainder is in equities so that investors can benefit from the upside potential of Indian equities over the long term.” “Investors comfortable with the near term volatility and looking for potentially higher returns should look to invest in well-managed diversified equity funds with an established track record over market cycles”, he added.

2) Capital Protection is NOT Guaranteed

The fund house, per se, does not guarantee that the capital will be protected. Instead what the capital guarantee means is that CRISIL has assigned a rating to the scheme that signifies a high degree of certainty regarding timely repayment of the face value of the investment.

Sukumar agrees as he says that regulations do not permit mutual funds to offer any “guarantee” pertaining to returns or safety of capital on their products. However, he assures that the portfolio structure of FTCSF is designed in such a way that investors are likely to get Rs.100 back for every Rs.100 invested.

He clarifies, “The chances of an erosion of capital are low given the structure of portfolio. The ability of this fund’s portfolio structure to deliver capital protection is also affirmed by CRISIL through an AAA (SO) rating, which indicates “a high degree of certainty regarding the timely repayment of principal”. Debt investments will be in AAA or equivalent securities that match the maturity profile of the fund, minimizing both credit & interest rate risk. The chances of a capital erosion from the debt portfolio are minimal given the near-zero default ratio for AAA rated securities by CRISIL.”

”The portfolio allocation is determined in such a way so as to provide enough cushion to mitigate credit, reinvestment, float and liquidity risks along with transactions costs. In addition, the portfolio will be monitored by the rating agency on a monthly basis to determine the probability of the portfolio value falling below the original principal value and this would necessitate any changes to the portfolio. As part of the investment process, we will be closely monitoring the credit quality of our investments and would proactively shift investments into good quality papers, if we sense a change in the issuers’ fundamentals”, he added.

3) Liquidity – A Concern?

Current Sebi regulations do not allow a fund house launching a capital protection scheme to provide for an exit window to the investors. “Though the fund is planning to get the fund listed on the NSE in an attempt to offer some exit option, it'll not be the same as having the facility of redeeming units directly with the fund house”, said advisor Hemant Rustagi.

Sukumar counters as he says, “This fund is not meant as an alternative to equity investments, it is positioned as an attractive alternative for conservative investors used to parking their long term money in traditional fixed income avenues, where there is a chance of getting low inflation-adjusted returns.”

Conclusion:

All said, experts believe that FTCSF would prove to be a good investment for the risk averse investor who doesn't mind compromising on his returns for the additional implied safety.

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Future investment for your child through Mutual funds

2006-11-14T22:49:00.000+05:30

All of us want our children to get the best education possible. By having a financial plan in place, you can make it possible for your child to have better options, both in terms of deciding the type of education as well as selection of colleges.

To achieve this very important goal of your life, investing early is a very simple yet powerful method. The earlier you start, the longer your investments have time to grow.

There are many who do not consider it necessary to start investing for their child's education when he or she is in pre-school. However, the fact is that investing early ensures that there are no short falls in the targeted amounts.

Besides, since building up assets for your child's education is a long term objective, it is important to ensure that you invest in those options that have the potential to give you better real rate of return i.e. returns minus inflation. This factor is crucial considering the escalating costs of higher education.

Remember, the way you save as well your investment strategy will depend on many factors like how much you wish to save, how long until the money is needed, and whether you have a lump sum or will be saving out of your current income.

Mutual funds can provide an excellent investment vehicle for your child's education. They offer diversification, flexibility and simplicity. Besides, investing through a tax efficient vehicle like mutual funds can help you accumulate more for your child's education.

Depending upon when you begin investing for your child, here are some model portfolios:

1. Age of the child: Newborn to 5 years

Investment horizon : 13 to 18 years

If you start investing at this stage, you allow your savings the maximum time to build up assets for your child's education. With time on your side, you can take higher risk and go for equity funds. However, if you choose to invest on a regular basis, try and increase the amount every year.

2. Age of the child: 6-12 years

Investment horizon: 6 to 12 years

While a part of the portfolio may still focus on aggressive investment options like equity funds, you will do well to include balanced funds also to reduce risk. The attempt should be to move money to lesser volatile investment options, as the child grows older.

3. Age of the child: 13- 18 years

Investment horizon: 1 to 5 years

At this stage, it would be advisable to invest in funds that are least volatile and overall the focus should be on preserving capital. Also, liquidity should be an important consideration while working out the strategy. While the open-ended mutual funds will ensure that the money is available to you as and when you require it, the key is to make the money grow at a reasonable rate.

As mentioned earlier, for those who wish to take the equity fund route and invest on a regular basis, a Systematic Investment Plan (SIP) is the best. It is a proven fact that a steady plan both in terms of savings and investments helps pursue financial goals.

What SIP really means is that you invest a fixed sum every month. When you invest a fixed amount, such as Rs 5000 a month, you buy fewer units when the share prices are high, and more units when the share prices are low.

Besides, you take advantage of the fact that over a period of time stock markets generally go up, so your average cost price tends to fall below the average NAV. This 'averaging' ensures that you buy at different levels, without having to worry about the market levels.

Here are some important points to remember before you establish your regular investment programme:

Decide how much you want to invest on a regular basis. It is important to choose an amount that you will be comfortable investing regularly over the long term.
Decide the frequency at which you want to invest-each month or each quarter.
Continue investing irrespective of whether the market falls or rises.
Remember the objective for which you are investing throughout the period. This will enable you to remain focused on this very important goal of your life.

For those who may not want to invest the entire money in equity funds, there are certain other options. Some of the mutual funds have established dedicated balanced funds for children, where in one has the option of investing in a ready made equity-oriented or a debt-oriented fund. Here is a glimpse of what these funds have offered to investors over a period of time.

Absolute Returns (in %) as on November 13, 2006
Hybrid: Equity-oriented
Scheme	1 Year	2 Years	3 Years	5 Years
HDFC Childrens Gift Fund (Inv Plan)	19.1	65.1	95.5	210.5
Principal Child Benefit - Career Builder	45.2	90.6	124.0	255.2
Principal Child Benefit - Future Guard	45.2	90.5	124.0	254.7
Pru ICICI Child Care Plan - Gift Plan	33.3	77.4	125.0	293.3
Hybrid: Debt-oriented
Scheme	1 Year	2 Years	3 Years	5 Years
HDFC Childrens Gift Fund (Sav Plan)	3.9	22.1	32.5	77.4
Pru ICICI Child Care Plan - Study Plan	15.0	30.3	40.7	89.5
Magnum Childrens Benefit Plan	12.0	26.3	32.7	--
LIC MF Childrens Fund	15.8	19.0	23.0	47.8
Tata Young Citizens Fund	27.4	58.6	82.6	191.8
Templeton (I) Childrens Asset - Gift Plan	37.0	47.4	54.5	93.0

(Past performance is no guarantee of future performance)

So, go ahead and start planning for your child today. Mutual funds have the right options to suit your requirements and the ability to help you realize your dreams.

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Review of HSBC Equity fund

2006-11-13T20:34:00.000+05:30

HSBC Equity was the first fund launched by the fund house in ’02. It follows a large-cap strategy. Over 85% of the fund’s portfolio consists of large-cap stocks. The fund has maintained a low-risk portfolio, while giving above-average returns in the diversified equity category. It got a Gold rating as per the latest ET Quarterly MF Tracker, based on risk-adjusted returns.

Since its launch, the fund has given a return of 62.1% per annum. ’05 was not a good year for the fund, with some of its stock calls backfiring. There are also concerns regarding stability of the management team, as fund managers keep changing.

To deal with this issue, the fund has brought in twin managers to ensure that even if one quits, the other keeps the boat afloat. Since June ’06, Mihir Vora and Jitendra Sriram have been managing the fund. If the three-month returns are any indication, the new managers seem to have brought stability to the fund.

Performance:

The fund’s three-month returns have beaten both the Sensex and its benchmark BSE 200, with returns of 18.9%. The fund’s higher exposure to IT services, telecom and automobile sectors have worked well, and so have low exposure to consumer durables and metal stocks. In the one-year period, the scheme gave a return of 48%. Though the fund’s returns are better than its benchmark and category average, it underperformed the Sensex by a margin of 10 percentage points.

’05 was bad for the fund as its exposures in oil and gas, commodities and banking stocks backfired. During mid-’05, the fund was underweight on capital goods and FMCG, which led the market rally. This affected the fund’s returns. But the three-year returns look better — the fund outperformed the Sensex by a large margin, and also bettered its category average over the three-year period.

Fund Management:

Since the beginning of this year, there has been a lot of churning in the fund management, as Anup Maheswari quit to join DSP Merrill Lynch. Viresh Mehta, who took over from him, quit in June ’06. Since then, Mihir Vora and Jitendra Sriram have taken over the fund. The new managers have made significant changes like exiting HCL Technologies in June ’06. Exposure to Bharti Airtel and RCL was increased.

Portfolio:

The fund’s portfolio is tech-heavy. IT and telecom stocks together account for 27% of net assets. While IT stocks led by Infosys account for 19% of allocation, telecom services account for 7.7%. In the past four months, the fund has increased its exposure to Infosys from 6.3% at the end of June to 8.6% in October ’06.

The other addition to its portfolio is banking stocks. From just under 5% in June ’06, the fund’s banking exposure has increased to 10.9%. The fund prefers PSU banks; PNB leads the pack with 3.7% allocation. The fund has exited ICICI Bank and bought BoI India and SBI. The fund prefers four-wheeler companies. It has 11% allocation in M&M, Maruti and Tata Motors.

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Comparison of investing in ULIPs and Mutual Funds

2006-11-13T20:32:00.000+05:30

So you have heard umpteen numbers of times from your agent the same old Ulip song — this is one instrument which will give you insurance and help you achieve your investment goals as well. In doing so, he does everything to talk you out of investing in mutual funds (MFs) and also throws in his favourite sales pitch for good measure — you have to pay premium only for three years!

But nothing can be far from the truth — and we have numbers to substantiate this. Suppose you are 25 years old and wish to get insured, as well as plan investments. All is well till you call one of the financial planners — who are supposed to give you the best financial plan. But since you are ignorant — they do suggest a plan, which will be in their best interests.

If you tell him that you have the capacity to invest Rs 10,000 annually, he will immediately suggest that you go for a Ulip, whereby, in Rs 10,000, you will get a cover of Rs 2 lakh and some units as per the prevailing NAV, which will appreciate in value over time as the India growth story is intact.

Then he will show a chart of how the units have appreciated over the past three years with annual returns over 35-40%. He will tell you if you feel the market is going down, you can switch from equity-heavy investments to a debt-heavy one. By now, you are almost jumping out of your chair to sign the cheque. And then comes the best part — Sir, you need not invest for 20 years, even if you invest for only three years and then stop paying premiums, your policy will not lapse.

For the uninitiated, words such as 35% annual returns and only three years of premium-paying facility are enough to get you bowled over. Here is where you should ask the following questions: At 25, I am earning close to Rs 2.4 lakh per annum. By the time I near retirement, after 25-35 years, my salary will be at least Rs 12 lakh.

I am promised a princely sum of Rs 2 lakh as insurance! What if something were to happen to me at the prime of my life — will Rs 2 lakh be sufficient to take care of my family? A more focussed question will be — where does my money get invested? Do I get to see the portfolio as in MFs (although MFs have to declare their portfolios monthly, how many of us look at it)? Moreover, since you do not understand about equity or debt markets — what is the use of your having the option of switching from equity-heavy investments to a debt-heavy one or vice versa?

If you were to opt for Ulip, then this is how your Rs 10,000 will be channelised in the first year. Around Rs 2,000 will go towards various expenses and your insurance (Rs 2 lakh) and the remaining Rs 8,000 is the amount which is actually invested.

Let’s see what happens if you decide to reject the option of this readily ‘available arranged marriage’. If you decide to split the sum of Rs 10,000 in two parts by buying a term policy for Rs 2,000 and investing Rs 8,000 in MFs you will be better off.

For Rs 2,000, you will get an insurance cover for Rs 8 lakh for 25 years. If you were to invest Rs 8,000 in an equity diversified fund (after paying the initial charge of 2%), the actual amount invested will be Rs 7,800 and you get the benefit of knowing the portfolio on a monthly basis.

Then why does your advisor want you to buy Ulips? The answer lies in the commissions. If you were to buy a Ulip for Rs 10,000 he will get Rs 750 as commission in the first year. But if you were to buy a term policy of Rs 2,000 — he will get Rs 500 as premium in the first year.

On your investment of Rs 8,000 in MFs, he will get around Rs 160 in the first year as commission. Hence, the total commission he will earn, if you were to go for a combination of term policy and MFs, will be Rs 500 + 160 = Rs 660, which is less than Rs 750!

Let’s see what happens from the second year onwards. The Ulip will fetch him Rs 200 per annum, whereas the combination of term insurance and MF will yield him Rs 150 and Rs 40, respectively, i.e. Rs 190, which again is less than a Ulip. In a nutshell, it’s always better to do some research before taking your planner’s advice at face value.

Your primary objective of getting the highest insurance at the cheapest price and also that of a sound investment is not his top priority — he will always look at his commissions. And as long as you are ignorant, he will continue to achieve his objective — whether you achieve yours or not!

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Investing in best diversified equity fund

2006-11-13T14:33:00.000+05:30

When it comes to making investments in mutual funds, it all boils down to which fund to invest in. There is no dearth of choices, but then not all the options available merit consideration. There are 30 asset management companies currently in the mutual fund industry, and many more lining up for launches.

The variety of schemes offered by these AMCs is enormous. So it can be a challenge for the investor when it comes down to identifying a handful of mutual fund schemes from this rather large universe. The good news for the investor is that based on performance, most of these schemes fall short of making the grade. Thus the real challenge lies in finding those few schemes that do make the grade.

Often when it comes to evaluating their investment decisions, investors appear confused. The simplest of decisions proves elusive to them. This confusion is further enhanced by misrepresentation made by 'commission-hungry' mutual fund agents.

With so many forces working against them, it's essential for investors to have a set of objective parameters based on which the performance of mutual fund schemes can be evaluated. These parameters should serve as benchmarks for investors while selecting funds for their portfolios. We present a 4-step strategy for selecting the right diversified equity fund.

Compare returns across funds within the same category
One of the most basic forms of benchmarking involves comparing funds within a category. For instance, if you are evaluating Franklin India Bluechip Fund for investment, you should compare its returns with other predominantly large cap diversified equity funds. Comparing it with mid cap funds for example, will deliver erroneous results, because the risk-reward relationship between mid cap and large cap funds are not comparable.

As equities are best equipped to deliver returns over longer time frames (3-5 years), investments in diversified equity funds should be made with a long-term perspective. Hence, while comparing returns, investors must consider longer time frames (of 3-5 years) before taking a conclusive decision about investing in a fund. Comparing a fund over a longer time frame will also give investors a good idea about how the fund has fared over a stock market cycle (boom and bust).

Compare returns against those of the benchmark index
Regulations demand that every fund mentions a benchmark index in the Offer Document. The benchmark index serves the dual purpose of being a guidepost for both the fund manager and the investing community. All eyes must be on the benchmark index and how the fund has fared against it.

Again with an equity fund, investors should consider the performance of the fund over the longer time frame, while comparing it to its benchmark index. In the Indian context, most equity funds outperform their benchmark indices over the long-term (3-5 years).

However, during market turbulence, like the one witnessed over May-June this year, investors will find many equity funds trailing their benchmark indices. This is something we have observed on more than one occasion. The funds that can outperform their benchmark indices during stock market volatility must be marked closely.

Compare against the fund's own performance
Besides comparing a fund with its peers and benchmark index, investors should evaluate its historical performance. Not all funds show stability in performance over the years. Many of them slip up; only a few manage to sustain the good work they have done year after year, market cycle after market cycle.

By evaluating a fund against its own historical performance, you ensure that you get the most consistent performers in your mutual fund portfolio. The inconsistent performers (the one rally wonders) are available a dime a dozen and must be filtered effectively.

Risk-related parameters
While NAV returns are important, one area, which should never be ignored by investors is the risk taken on by the fund. Mutual funds being market-linked, are prime candidates for stock market related risks. The two aspects that investors should take into account are volatility of the fund as indicated by the Standard Deviation and risk-adjusted returns as calculated by the Sharpe Ratio.

While SD shows the degree of risk taken on by the fund, SR shows the return generated by the fund per unit of risk taken. The SD (volatility) of a fund should be lower than its peers; on the other hand, the SR should be higher.

The best fund is the one with the lowest SD and the highest SR within its peer group. Again, it is advisable for investors to evaluate the SD and SR of the fund on a historical basis so as to identify the most consistent performers.

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Invest in Derivative Arbitrage funds

2006-11-13T14:28:00.000+05:30

Banks, sweating to mop-up their deposits from conservative investors, have a new adversary. In addition to capital protected funds and fixed maturity plans (FMPs), mutual funds are now lining up derivatives arbitrage funds.

Typically, these funds promise safety of deposits, but claim to provide better returns, tax benefits and greater liquidity. Pru ICICI is the latest to join the list with its equities and derivatives fund.

The open-ended equity scheme aims to generate low volatility returns by investing in a mix of cash equities, equity derivatives and debt markets. The fund seeks to provide better returns than typical debt instruments and lower volatility in comparison to equity.

As Nilesh Shah, CIO, Pru ICICI, and fund manager explains, “This fund is aimed at an investor who seeks the returns of small-savings instruments, safety of bank deposits, tax benefits of RBI Relief Bonds and liquidity of a mutual fund.”
Pru ICICI already has two plans under the ICICI Blended Scheme, which specialise in arbitrage trades.

This basically means the fund seeks to buy stocks in the cash market and sell the corresponding stock futures to lock-in the price difference between the two, i.e the arbitrage spread. However, this fund will have additional features as in use of options (covered), index arbitrage, pair trading and alpha generation.

This, Mr Shah, feels will mean returns better than a vanilla arbitrage fund. Currently, most arbitrage funds earn annualised returns of around 7.25%, which is nearly the same as that of one-year fixed deposits. Whether a retail investor should opt for such a fund when its returns only match that of a bank deposits is open to debate.

Prior to ’05, Sebi guidelines allowed only 50% investment in derivatives for a mutual fund. In February ’05, JM financial was the first to launch a proper arbitrage fund where the fund was positioned as a 50% in debt and 50% in hedged equity.

Since then quite a few arbitrage funds have mushroomed. Besides, stocks available in F&O counter have increased from 53 stocks in ’05 to 123 stocks now, increasing the opportunities for all funds. Such funds with its investments in cash segments hedged in the derivatives segment basically serve as a variant of a capital protection fund, feel analysts. However, capital protected funds are compulsorily close-ended. Pru ICICI has now stopped taking subscriptions for its Blended Plans as it feels the opportunities for arbitrage at this stage in derivatives market are limited. Asked whether entry of more MFs in this space will reduce opportunities for arbitrage, Biren Mehta, fund manager of JM’s arbitrage, said this is unlikely.

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Fund managers looks introducing new NFOs

2006-11-08T21:12:00.000+05:30

The domestic stock market is likely to continue its record-breaking journey with expectations of a robust response to the two public issues hitting the market today, strengthening the already upbeat investor sentiment. To raise about Rs 1,000 crore each, two companies – real estate developer Parsvnath and infrastructure provider Lanco Infratech – have launched initial public offerings (IPOs) today.

Analysts expect the underlying expectations of a strong investor response to both the issues to further boost market sentiments, which are already riding high on the back of impressive second-quarter corporate results and resumption of a record-breaking rally that has seen the benchmark Sensex crossing the 13,100 level. The Sensex – the market barometer – gained 223.98 points last week to settle at an all-time high of 13130.79.

The Parsvnath issue will also open the doors to foreign institutional investors (FIIs) in the real estate IPO segment, and analysts are anticipating impressive response from overseas investors. “The real estate sector has assumed a growing importance with the liberalisation of the economy. The robust demand scenario is driven by factors such as government policies, rising disposable incomes and exponential growth in certain industries like retail, IT/ITeS, entertainment and tourism,” domestic brokerage firm Sharekhan said in a report.

Parsvnath Developers is offering 3.32 crore equity shares in a price band of Rs 250-300 per share. Hyderabad-based Lanco Infratech is also planning to raise up to Rs 1,060 crore with an issue size of 4.44 crore equity shares in a price band of Rs 200-240 per share. Lanco, which plans to raise power generation capacity about seven-fold to 3,800 mw in the next five years, is also developing a 100-acre integrated IT park and township in Hyderabad at an investment of about Rs 3,600 crore. The impressive response generated by the IPO of Info Edge India, owner of job portal Naukri.com and matrimony website Jeevansathi.com, is also likely to enthuse investors. Info Edge IPO, which closed on Friday, was oversubscribed more than 55 times and received overwhelming FII response.

Strong buying momentum acquired by FIIs in the country’s equity market over the recent past has further raised expectations for continued uptrend on the bourses. In October, FIIs were net buyers for shares worth more than Rs 8,000 crore, against their net inflows of Rs 5,425 crore in September and Rs 4,643 crore in August 2006. In just three days in November, FIIs have already purchased shares worth Rs 831.4 crore from the equity markets. Analysts believe that the Sensex would see new peaks in the days to come as FIIs are on a buying spree. The market could extend its rally with stable crude oil prices providing another support pillar, they said. The recent economic data showing impressive growth in the infrastructure sector, which grew 9.9 per cent in September, has further raised the prospects for the two new IPOs, analysts said.

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Investing in New Fund Offers NFOs, Think twice

2006-11-08T20:42:00.000+05:30

The retail investor's fascination for something "new" in his portfolio is a phenomenon which has repeatedly confounded us. In fact, the most often-repeated request from investors tends to be for a new fund.

So what makes the idea of investing in a new fund tick and does it make sense to do so? Let's find out.

Firstly, investors seem to have developed an insatiable appetite for new fund offers (NFOs). The huge asset sizes amassed by some of the NFOs bear testimony to the same. Simply put, an NFO is a new fund launched by an asset management company (AMC).

And investors are given the opportunity to invest therein at a price (termed as net asset value or NAV) of Rs 10 during the NFO stage. This is the clincher! The Rs 10 NAV is often perceived as a cheaper buy vis-�-vis existing funds with higher NAVs. Most investors make the mistake of confusing a mutual fund NFO with a stock IPO (initial public offering).

In a stock, the book value (its intrinsic worth) and market value (determined by market factors) are divorced from one another. Hence, a stock with a market value lower than the book value would be termed as an attractive buy.

Conversely, in a mutual fund, the book value and market value are the same and are represented by the NAV. Simply put, the NAV is computed by reducing the fund's expenses from the total assets and then dividing the result (this figure is called "net assets") by the number of units held.

Hence in a mutual fund, the NAV represents the assets backed by each unit. Effectively the Rs 10 NAV offered by a fund in the NFO stage is not cheaper than an existing fund with an NAV of say Rs 100.

However, this seemingly simple rationale is often lost on investors. Unscrupulous investment advisors and mutual fund distributors should be "credited" for the same. Investors are convinced to participate in every NFO which hits the markets, on the grounds that it is an opportunity to buy at a lower price.

Fortunately, for investors, the incessant NFO launches caught the regulator i.e. Securities and Exchange Board of India's eye. Sebi issued guidelines that made the launch of open-ended NFOs rather unattractive for AMCs and distributors alike.

Apart from NFOs, the urge to hold something new also surfaces, when an investor wants to invest in a fund that is distinct from the existing ones in his portfolio. Again the driving factor isn't what the new fund can add to the portfolio i.e. its potential utility; instead it's the "newness" of the fund.

An ideal portfolio is one which is comprised of funds/investment avenues that match the investor's risk profile and work towards achieving his predetermined objectives.

The performance of the funds (and thereby the portfolio) should be monitored regularly. If any fund fails to deliver the results expected from it, corrective steps need to be taken. The same could involve exiting the fund or reducing the allocation made to it.

Conversely, in a situation wherein the funds are performing in an expected manner, there is no need to consider another fund while making fresh investments.

Additions can be made to the existing holdings. Sure, diversification is important, but then we are assuming that the portfolio is already a well-diversified one.

A portfolio with an unduly large number of funds stands the risk of becoming an untenable one. Monitoring and managing a portfolio which is fragmented can prove to be a cumbersome and time-consuming task.

Furthermore, by investing in a new fund, instead of the existing ones, the investor forgoes the opportunity to invest in funds with proven track records and performance. And that may not be a smart move.

We aren't suggesting that investors should necessarily refrain from investing in NFOs or funds distinct from the ones presently held by them. However, the reason for doing should be the value-add they can bring to the portfolio.

The NFO/new fund should have an offering that is distinct from the existing funds and the same should also contribute towards making the portfolio a more comprehensive one. A Rs 10 NAV or the fact that the fund is distinct from your current investments don't qualify as good enough reasons for investing in a fund.

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Review of Principal Income Fund STP Mutual fund

2006-11-07T19:52:00.000+05:30

Principal Income Fund — Short Term Plan has delivered an annualised return of 7.9% in the last three months ended October 31. In comparison, the CRISIL Short Term Bond Index, against which the fund is benchmarked, delivered a return of 7.25%.

The short-term fund category gave an average return of 7% during the period.

Capital gains from G-secs and corporate bonds helped the fund deliver. Government bonds rallied on the back of lower US bond yields and a fall in energy prices. Also, yields on corporate bonds in the 2-3 year segment eased. One-year AAA-rated corporate paper rates fell to around 7.7% per annum from 8%-plus per annum levels in the last quarter.

Since the fund was able to anticipate this in advance, the fund’s three-month performance has been good and the corpus has swelled as a result.

In the one-year returns also the fund has outperformed the benchmark by quite a distance. The fund gave a return of 6.1%, while the benchmark returns was 4.8%. The category of short-term funds gave returns of 5.8%.
Portfolio

As per available data, the corpus of the fund as of October 31, ’06 was Rs 1,365.85 crore. Over 65% of this amount was invested in commercial papers of banks. Most of these instruments carried the P1+ rating denoting ‘very strong’ credit quality of these instruments.

The fund has also invested in corporate bonds to the extent of 24.5%. If credit off-take moderates, corporate sector issuances may come down. This could further reduce corporate spreads (difference between corporate bond yields and government securities) over the medium term.

One-year corporate papers are attractive from a carry perspective. If the yield curve flattens, the one-year bonds will lose attractiveness. The fund will have to shuffle to maintain returns.

It has taken full advantage of the bond rally to enhance returns in the last quarter. The fund has reduced long positions to moderate levels as the fund manager does not see an immediate upside in the curve. Going ahead, the fund is looking at investing in G-secs as the inflationary scenario is milder than before.

Principal STP is quite bullish on the one-year maturity. This offers investors an opportunity to
earn decent spreads over money market rates and also ensure higher capital gains if they hold for 3-6 months.

The fund, typically, buys into longer duration paper and earns higher interest rates; as the holding period falls, the fund earns capital gains accruing from the lower yields. This is because after 3-6 months, the one-year paper becomes a nine-month or six-month paper, which attracts lower yields.

However, with RBI hiking rates, though higher interest rates are still possible, capital gains accrual seems unlikely.

Investors looking to park short-term funds can consider this option as it is expected to generate higher returns than cash fund in a benign interest rate environment with 2-3 month investment horizon. Investments should be made with a time horizon of 3-6 months.

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What are Capital Protection Funds

2006-11-06T21:04:00.000+05:30

Capital protection funds have made their way into India and soon domestic investors will witness quite a few of these schemes hitting the market. Investors may be wondering how this concept operates and how these funds can provide a risk-free scenario for their capital. However, investors should realise that they can construct the same structure as that of the capital guarantee fund in a manner that is suitable for them. Here is how this can be done.

Capital guarantee

First, investors should understand what the term capital guarantee implies. Capital guarantee means the capital sum invested by an investor is intact at the end of a specific time period. For example, if a person invests Rs 20,000 in a capital guaranteed scheme, then at the end of a certain time period, say five years, he will get back a sum of at least Rs 20,000. There can be a higher payout depending on the earnings of the scheme, but this will be additional earnings. So, an investor can be sure that he will not lose his capital. Hence, there is a guarantee of protection of capital, but no guarantee of return.

How to evaluate

While evaluating such offerings, investors should not concentrate on the capital returns, but should consider the amount they earn. This is because there are additional options present in the market. Using these routes, they can earn a specified sum by investing in a fixed deposit (FD) where the capital is safe, and at the same time there is also a fixed earning. The earnings have to be higher to justify the investment, or else the investor will be better off by putting his funds in an FD and earning returns.

Final calculation

The investors should first consider the time period for which they want a capital guarantee. This can be around three year.
The other option is to consider a slightly longer time period of five or seven years. Let us consider the example of a three-year period. Consider the earnings on the various FDs available for a three-year period. Suppose the rate is 7%. Now, you need to figure out the sum of money that invested today at the above mentioned rate will yield Rs 10,000 over the time period under consideration.

The same objective can be achieved by doing a backward calculation from Rs 10,000. The whole idea is to figure out the amount of investment that is needed today to have a cash in hand of Rs 10,000 three years down the line. One also needs to consider whether this is a simple return or whether there is some compounding at the end of the period; this can change the amount required for investment.

Suppose an individual has an amount of Rs 10,000 and he wants to ensure that at the end of three years, he has a minimum capital guarantee. In such a situation, the amount that needs to be invested, which will provide a sum of Rs 10,000 at the given earnings rate on a simple interest basis, is around Rs 8,264. The remaining Rs 1,736 can be invested in equities. Depending upon the earnings generated, the total earnings for the investor can be determined.

Assume that at the end of three years, the equity invested is completely wiped out, which is an unlikely scenario unless one invests in low-rung scrips that stop trading on the exchange. Even if this happens, the individual will get his capital back. Any additional sum earned implies that the earnings of the investor continue to increase.

The key lies in selecting the correct rate of return for the debt instrument so that there is complete safety as far as the basic investment is concerned. After that, the investor only has to try and generate some earning from the equity part to ensure that the total returns are boosted.

The higher the rate and the time period, the lesser is the amount that is required to be invested in the debt part. As a result, the additional amount goes to the equity part, which has a better chance of generating higher earnings. While ensuring capital guarantee, one has to be aware of the tax impact. The earnings from the debt part will be taxed as normal income without any deduction.

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Fund managers confident on growth on small and mid cap

2006-11-06T21:02:00.000+05:30

Most fund managers have parked nearly half their assets in mid- and small-cap stocks despite their recent underperformance, data from a mutual fund tracking firm showed.

This, fund managers say, is because they expect these stocks to catch up with their large-cap counterparts in the next six-nine months.

"On a historic basis, mid-caps are looking cheap versus the large-caps. On forward basis they were always cheap. So there's definitely a valuation gap," Prateek Agrawal, head-equities, ABN AMRO Asset Management (India) Ltd., said.

Diversified equity funds had 43.79 per cent of their assets parked in mid- and small-cap stocks at end-September, according to data from Value Research.

While India's benchmark Sensex wiped out all its losses since its May 11 peak and was a net 5.27 per cent higher on Nov. 2, the BSE Mid-cap and BSE Small-cap indices were down 8.90 per cent and 16.32 per cent respectively.

"Money is coming in, market indices are at a high...mid-caps part of the markets should really do well," Agrawal said, adding that there was lot of opportunity in engineering, construction, real estate and mid-cap pharma sectors.

Not only have fund managers maintained their optimism for mid- and small-caps, investors too seem to believe that the mid-cap story is far from over, fund watchers said.

DSP Merrill Lynch Small and Mid Cap Fund's collection of more than 14 billion rupees during its initial offer period between Sep. 29 and Oct. 18 is an indication of investor interest, they said. The fund house said though it would take some time to invest these funds, it saw enough opportunities in the segment.

"We will take our time to do it (invest) and we do think there's enough choice across different themes and sectors," S. Naganath, President and Chief Investment Officer, DSP Merrill Lynch Fund Managers Ltd., said.

"In the next six to nine months we do expect that they (mid- and small-cap stocks) should play catchup," Naganath said.

The recent rebound in the markets has left a majority of mid- and small-cap stocks untouched, with 70 per cent of the BSE Mid-cap index constituents still trading below their May 11 levels.

Data compiled by broking house Sharekhan showed that while the earnings of the 30 Sensex constituents grew by 27.7 per cent year on year in the second quarter of 2006/07, the same was 35 per cent for BSE 200 companies.

"Over a long period of time in an economy like India, it is still likely that mid-caps will only outperform," said Ved Prakash Chaturvedi, Managing Director, Tata Asset Management Ltd.

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Know about Stock market and mutual fund basics

2006-11-06T20:54:00.000+05:30

How is the stock market today? The answer to this common question is in the form of a number, which is an index, such as the BSE Sensex or NSE Nifty. Imagine there is no index. How would we gauge the performance of the stock market?

How would we know whether the stock market has gone up or down? In fact, till 1986, there was no index in India. In 1986, the Bombay Stock Exchange compiled the Sensex. The base year for calculation was taken as 1978-79 and base value was 100. So, we can say that the stock market, which today is at around 10000 level, was at 100 in 1978-79.

An index is a representative number which indicates the current position and helps to compare the movement of the stock market. For example, when we say the temperature at noon in Mumbai has risen to 38 degrees celsius from yesterday’s temperature of 36 degrees, it is a movement of a representative number.

There could be some places like open grounds where the temperature could be more than 38 degrees today and could have been 35.5 degrees yesterday. Similarly, if we stand on the ocean front below a tree, the temperature could be 37.5 degrees today and could have been 36 degrees yesterday. However, as long as the majority of the region has a temperature of around 38 degrees today and had 36 degrees yesterday, it is a well-represented number.

Similarly, if the Sensex was at 10000 yesterday and is at 10250 today, it is an upward movement of 2.5%. This logically indicates that the majority of shares have moved up by 2.5%. Obviously, some stocks would have fallen, and similarly, there could be some stocks which have risen more than or less than 2.5%.

However, as long as the average has moved around 2.5%, the index is said to be well-represented and serves its purpose (the actual movement of the Sensex depends on the market capitalisation and weighted averages.)

The Sensex or Nifty are representatives of the stock market. If we were able to invest in these indices, we would get (stock) market returns. In 1992 — during Harshad Mehta’s time — there used to be a joke. A man who had come from a village wanted to invest in the stock market.

Not knowing which scrip to buy; he said he wanted to invest in the Sensex, as it kept going up routinely. That joke is a reality today. There are mutual fund (MF) schemes which are called index funds. An investor can invest in MF schemes which replicate index stocks in its portfolio. For example, the Sensex Index Fund will only invest in those 30 companies which are constituents of the Sensex. By investing in a Sensex Index Fund, the investor is indirectly buying the Sensex.

Index funds for the common investor were first introduced in the US in 1976 by Vanguard Group. The founder of the Vanguard Group, John Bogle, as part of his senior thesis in Princeton University, had studied the MF industry and its practices in detail.

He made several important observations: 1. The order of top-performing funds is continuously changing. This means there isn’t any MF which consistently remains the top-performing category year-on-year.

Also, it is only in hindsight that one will know which funds were top performers in the previous year. 2. Sales, marketing and other administration expenses are eating away returns generated by fund managers. 3. All fund managers are not consistently able to beat market returns (read indices returns).

Index funds are passive form of investing. This means the fund manager does not use any of his/her skills in stock-picking. There is absolutely no research needed. A fund manager simply invests money in all those companies which are constituents of the index.

This will save MFs huge costs. Funds where a fund manager uses his/her skills in stock-picking are called active funds. In India, active funds usually charge annual expenses in the range of 2-2.5%.

Compared to this, passive funds (index funds) charge around 1.1-1.4%, which results in a saving of about 1% every year. It is important to note that in mature markets, the difference in cost between active and passive funds is higher.

While it is true that active funds are usually top performers, it is also true that the same funds rarely retain their top slots continuously. The caveat that past performance may not be repeated is true. On the other hand, though index funds are not the best performers, they are consistently above-average performers.

In India, private sector MFs began their journey in 1993. The erstwhile Kothari Pioneer Mutual Fund Company — now Franklin Templeton Mutual Fund Company — was the first to launch diversified (active) equity funds. The past 13 years’ record suggests that fund managers are able to beat the index returns consistently; but as the market matures further, efficiencies increase and this becomes more and more difficult.

An efficient market is one where all the news and information about a company is disseminated to all current and potential investors equally and simultaneously. Therefore, all investors — big and small — take informed decisions. In developing markets, larger investors have better access to news and information and hence, they are able take more prompt action on the investments, thereby beating the market returns.

Over a period of time, as our market matures and becomes more efficient, fund managers will struggle to beat market returns (read indices). Under such circumstances, expenses will play a major role. Funds with lower expenses like index funds will turn out to be winners. Therefore, one must keep track of index funds too.

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Which Mutual funds to invest either Active or passive

2006-11-06T20:50:00.000+05:30

Will you put your money in an actively-managed equity fund or prefer to plough it in passively-managed index funds. But then what’s the difference, you may ask? Here’s a major one. While an index fund puts your money into the benchmark index — Sensex or Nifty, a diversified fund will invest in the broader market.

Index funds are likely to deliver returns in line with the benchmark indices and are, therefore, preferred by dynamic investors during volatile times, such as the present.

Passively-managed funds do not try to beat the index, but simply aim to track it by investing in companies in accordance with the constituents of an index. The managers of the fund have far lower expenses, and the charges to investors are lower than for active funds.

While investing in passive mutual funds, or index funds, investors should not choose just any fund. Not all passively-managed funds in India fail to deliver returns in line with the benchmarks.

An ETIG study since the beginning of the bull run showcases that almost half the passively-managed funds underperformed the benchmarks by a margin larger than acceptable. A little deviation is okay. But more than, say 1-2% per annum is too much. Some of this underperformance could be due to expense ratios, which are 1% to 1.5%.

This is too large compared to international trends. In the US, passive funds charge around 0.5%. This is fair, since passive funds do not require any active fund management. So, there is no reason they should charge high fees, which are not too different from active funds.

Blame that on the tracking errors. To that, add loads and you make a little less than 12%, on an average, of what the benchmarks deliver. On the other hand, pick the right active fund and you could rake in the moolah.

Take, for instance, Reliance Growth. If you invested Rs 10,000 in April ’03, just when the bull run started, it will now be a staggering Rs 78,338 as in October end. In comparison, the Sensex has gone up by only 3.2 times and your Rs 10,000 will currently be Rs 32,274.

Over varied periods of times, diversified funds have outperformed, though outperformance seems to have declined in these volatile times. In the West, where markets are mature, it’s seen that outperformance by actively-managed diversified mutual funds is minimal.

Most of these actively-managed funds actually underperform too. But in India, it’s seen that actively-managed funds always outperform the benchmarks by huge margins.

Many sectoral funds or small- and mid-cap funds, which may outperform during a bull phase, may start showcasing negative returns in volatile times when the sector starts underperforming. These may be high-risk high-gain funds. Therefore, an actively-managed diversified fund is perhaps the best bet for a lay investor.

The difference is huge when you look at returns from passive funds and the actively-managed ones. So what do you do? For those investors who want a product that closely mirrors a major index, such as the Nifty or the Sensex, going for a passive fund is probably the wisest move.

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Review on Tata Pure Equity fund

2006-11-06T20:49:00.000+05:30

Tata Pure Equity suits the profile of conservative investors. The fund has the mandate to invest mostly in large-cap companies. At this juncture, many mid caps are relatively undervalued and since it invests only in large caps, the fund may not be able to benefit from any mid-cap rally in future.

But given its past track record, its NAV is expected to be less volatile than the rest. As a fund house, its prowess in equity fund management has not been consistent across its own equity schemes. ET’s rating for its equity schemes varies from Bronze to Platinum. However, this scheme has been ET’s best performer till date in terms of risk-adjusted returns.

Profile: Tata Pure Equity is ET’s Platinum fund, the highest rating given for any fund, as per the latest ET Quarterly MF Tracker. Its above-average returns and low risk emanating from a large-cap-oriented investment strategy helped it get this rating. The fund was launched in 1998 as Tata Twin Option Fund.

It had a balanced option and pure equity option. In ’00, the fund house restructured the Tata Twin Option fund by merging balance option with Tata Balanced fund and renamed equity option as Tata Pure Equity fund. As on October 31, it had a corpus of Rs 290 crore. M Venugopal has been managing the fund since February ’05.

Performance: While its returns over three years have been above average, the fund couldn’t ‘fully’ capitalise on the large-cap rally seen in ’06. In the calendar year so far, the fund has given a return of 34.4%, which matches that of
ET 100.

This was better than the equity-diversified category, which gave a return of 27%. However, the Sensex gave a return of 38.7% during the period. Though it is a very short duration to assess the performance of the fund in the equity space, the fund’s performance has largely suffered due to the narrow-based rally the market has been witnessing since the crash in May.

The fund gave returns of 57.5% in the one-year period. This was lower than both the fund’s benchmark, Sensex, which gave a return of 65.1 and the broader ET 100, which gave returns of 60.4 %. It was relatively less exposed to the private sector banking and telecom space, which has been one of the reasons for its near-term underperformance.

While banks had a portfolio allocation of 10.2% as of September ’06, the private sector banking stocks, which have done well, comprised a meagre 2%. Telecom stocks accounted for 3.7% of the portfolio. However, over the three years, its returns have been phenomenal, beating the benchmark and category average. While the fund gave a return of 46.6% p.a., that of the Sensex was 38.5 % p.a. during the period. On the other hand, the equity diversified category as a whole has given returns of 43.7%. ET 100 gave a return of 38.9% p .a.

Portfolio: The fund’s allocation is predominantly large-cap-oriented and it intends to invest anywhere between 80% and 95% of its assets in large caps, as per the fund mandate. Over 80% of the portfolio is currently invested in large-cap stocks.

Sector-wise, the technology sector, which includes IT and telecom stocks, finds the highest allocation of 19.6%. Infosys Technologies (6.7%) and HCL (2%) are some of the stocks in this sector the fund has invested in. Index stocks like Infosys, Reliance and Airtel, which have driven the recent rally, accounted for 13% of the fund’s total portfolio.

The fund also has a high allocation in capital goods and basic engineering sectors. The fund manager is bullish on capital goods as he feels growth will continue to come from capex creation and strong exports.

As on October 31, the fund had an allocation of close to 5% in Bhel. The cement sector, led by Grasim (6%) and ACC (5%), continues to be a favourite for the fund. Though the fund is overweight on the cement sector, the latter has been a drag on its near-term performance.

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Investing in market using Quantitative techniques

2006-11-06T20:25:00.000+05:30

Investors are sighing with relief that the markets are up again after a frightening plunge. Those who have been in the market from the early days of the bull run are happy to have sat through the trough.

One class of investors who benefited from the fall are mutual fund SIP investors. They picked up the lows by default and averaged their costs down. Implementing a discipline in investing through mechanical tools is as old as investing itself.

Its merits shine through during periods of volatility, when decision-making becomes tough. The realm of quant-based investing extends beyond the SIP and is growing rapidly.

Fund houses, hedge funds and institutional investors have taken the application of quantitative models in investment decision making to a new high. Quant models use a variety of techniques, such as fuzzy logic, neural networks, genetic algorithms, Markov models, fractal methods, and clustering techniques. The investment techniques they use draw more from physics than from economics.

It is estimated that three out of 10 hedge funds are purely quantitative model-based funds. Barclays Global Investors, the world's largest money manager, is a pure quant investor with $1.6 trillion in quantitatively managed funds. This category of funds has grown at twice the rate of the world's mutual funds in the last year.

The Times magazine recently carried a story which found that large cap funds run by quants consistently beat those run by non-quants since the beginning of 2003, by up to 2 percentage points a year.

Quants take about half as much risk as non-quants and do not lose as much money in the down years, it noted. It is now widely believed that in contrast with the individual style-based investing that was dominant in the 1990s, going forward, sophisticated quantitative tools that take the emotion out of investment decisions are likely to rule.

It is not as if quantitative investing has not been criticised. Many argue that selecting stocks is more an art than a science, not amenable to being captured in computer programs.

Quant models use extensive back testing of past data to create their investment algorithms, raising the issue that the past may not accurately represent the future. Some of the early techniques that used simple technical rules based on past price behaviour have been accused of being exercises in 'torturing data until it confesses'.

Then there is the danger that models would simply be replicated once they succeed and, therefore, follow a path of self-destruction. Sophisticated tools that used quant models to identify arbitrage opportunities not visible to the human eye have suffered such a fate in the past.

However, the cycle seems to be turning, driven by three factors, in favour of the quants.

First, the huge growth in the size of markets has made it possible to invest in these models and still get benefits of scale.

The Indian derivative market has grown in volume from zero to Rs 20,000 crore (Rs 200 billion) a day in less than 10 years, and is dominated by mechanical arbitrage strategies.

Second, the availability of computing prowess at low costs and the penetration of Internet trading have moved quant investing from the realms of professional managers to retail investors.

Several geeks are creating programs that enable them to make quick bucks from stock trading.

Some have extended these programs to pick stocks. Third, the investment industry has formalised quant investing. It is no longer taboo to tell investors that quant models are doing most of the work. For those who like machines over men when it comes to managing money, a new world of opportunities beckons.

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Mutual fund houses tie with co-operative banks

2006-11-04T11:18:00.000+05:30

After a slew of tie-ups with commercial banks, domestic mutual fund houses are increasingly looking at joining hands with co-operative banks as part of their attempts to push the product sales in smaller towns and rural areas.

Industry officials attribute this trend to fierce competition in the Tier-I and urban areas, where mutual funds (MF) are fighting for the same pie. India’s rapidly growing MF industry now manages a little over Rs 3,00,000 crore between 30-odd asset management companies.

With equity markets doing well, an increasing number of retail investors are looking to tap the equity market through the MF route. “Revenues from main cities are showing signs of saturation and the industry is sensing the need to tap new areas. Co-operative banks seem to be next best option because of their large and loyal customer base,” said Jimmy Patel, CEO and COO of JM Financial Asset Management, which recently tied up with Saraswat Cooperative Bank for distribution of MF products.

While Franklin Templeton is believed to have tied up with Saraswat Bank for such an arrangement, Prudential ICICI Asset Management is also scouting for a partner for this purpose. Saraswat, which is Asia’s largest urban co-operative bank, has tie-ups with seven MFs including Kotak Mutual Fund, Reliance Mutual Fund, Franklin Templeton Mutual Fund, and ING Mutual Fund, UTI Mutual Fund.

Some argue that penetration through co-operative banks, barring the top few, could be difficult. “Most of the tie-ups that have happened are through a few top ones (co-operative banks), rather than a wide base. This is because most of the co-operative banks still need to grow in terms of technology and expertise,” said an official with a foreign mutual fund.

While industry officials feel opportunities with private sector and foreign banks for MF distribution are relatively saturating because of their pre-dominant presence in larger cities, they believe public sector banks have still a lot to offer.

“Though reach is extremely important for the industry, however, distribution has always been a major concern for this industry. New set of distributors will help to get new customers, which in turn will help the industry grow. PSU banks have advantage of reach and customer base.” said Bharat Ghia, vice-president & head — alternate banking channel, Prudential ICICI.

In recent months, domestic mutual funds have entered into partnerships with a number of public sector and old private sector banks to leverage products. Banks, especially with retail focus, also gain from such tie-ups, as fee-based income via selling of MF and other products boosts their bottomlines.

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ETs review on mutual fund schemes this quarter

2006-11-02T21:16:00.000+05:30

After a dismal June ’06 quarter, the new height scaled by the domestic stock market has benefited equity fund investors. ET’s Platinum funds among equity-linked savings schemes (ELSS) — Sundaram Tax Saver and Principal Punjab National Bank (PNB) Tax Savings Fund — held on to their prime positions in the ET Quarterly MF Tracker for July-September ’06, delivering around 14% each. Anoop Bhaskar (Sundaram Tax Saver) and R Srinivasan (Principal Tax Savings) are the fund managers for ET’s Platinum funds in the ELSS category.

During the September ’06 quarter, not many changes occurred in the fund classifications compared to the previous quarter. Birla Sun Life Tax Relief 96 moved up the ladder, bagging a Gold rating, while HDFC LTP Advantage was down with Silver.

ELSS, on an average, gave a return of 13.8% during the quarter, while ET 100 gave a return of 17.9%. Over a one-year period, ET 100 gave a return of 39.1% and surprisingly, none of the funds classified by ET outperformed ET 100 returns. However, ELSS funds performed better over the three-year period. Around 65% of the funds managed to outperform ET 100 by giving a return of 212.2%, while ET 100 gave a return of 183% over the three-year period.

In terms of absolute returns, Prudential ICICI Tax Plan was the top performer, giving 23.4% returns, followed by Birla Sun Life Tax Relief 96, which delivered a return of 21.8%. The latter has been promoted to the Gold category from Silver in the previous quarter.

The fund was overweight on telecom, banking, transportation, cement, auto and auto ancillary stocks, and underweight on metals, commodities and oil & gas.

Jayesh Gandhi, former fund manager, Birla Sun Life MF, says, “We create a diversified portfolio spread across sectors and avoid large stocks and sector-specific concentration. The fund focuses on quality companies with scaleable businesses and sustainable earnings with strong visibility.”

The assets under management (AUM) of ELSS touched Rs 2,643 crore at the end of the June quarter, and grew to Rs 3,331 crore at the end of the September quarter. The growth in AUM in the ELSS category has been almost entirely on account of appreciation rather than fresh flows. ELSS typically witnesses inflows towards the end of the financial year as investors flock to these funds for tax-planning.

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Getting most of Equity Mutual Funds

2006-11-02T21:05:00.000+05:30

The Sensex is at a new all time high after breaching 13,000 level. The stock market has had a remarkable run since touching its low of 8900. Needless to say, the last five months or so have been quite eventful for investors in equity funds.

If one were to analyse the behaviour of investors during this period, there are lessons to be learnt for existing investors as well as for those who intend to make equity funds an integral part of their portfolio.

Market ups & downs

When the market was going through the correction phase, some of the investors panicked and exited from equity funds. Needless to say, not many of them could re-enter and surely must be ruing their decision.

On the other hand, seasoned as well as those investors who believed that the best course of action was to hold until the markets made up the lost ground, did not react at all and held on to their investments in mutual funds.

However, the key here is that both the classes of investors failed to recognize the lower market values as buying opportunities. That's why, it is often said that the best way to benefit from equities is by having a long- term view as well as by refraining from timing the market.

Now, let us talk about those investors who were investing regularly through a Systematic Investment Plan during this period. Needless to say, they were best equipped to not only handle the downside but also benefit from lower market values.

Invest regularly

Though a lot has been written about SIPs, it is often perceived as an option only for small investors. The fact of the matter is that systematic investing has nothing to do with the size of the investment. It is a way of disciplined investing that allows investors to invest in the stock market at different levels without having to worry about the market levels and the market movements in the short-term. Remember.

When you opt for regular investing, you abandon any strategy that might control timing of your investments. In other words, you continue to invest irrespective of market conditions. This strategy works very well partly because of "averaging" and partly because in the long run markets move upwards, in spite of short-term falls.

It is not to say that one should not invest a lump sum amount in equity funds. For a long-term investors, making a lump sum investment is not an issue, however, a lump sum investment should not be the end of the story.

Instead, it should be taken as a beginning of an investment programme to build wealth over time and needs to be followed by regular investments as and when investible surplus is available. Either which way, the key to successful equity investing is making investments on a regular basis.

Don't try to time the markets

One often comes across investors who wait for months in anticipation of a correction in the markets. However, more often than not, they end up investing in a panic as the markets scale newer heights. At times, a small correction in the market seems like a great opportunity to them and as result they end up investing at much higher levels compared to the level prevalent at the time when they had originally planned to invest.

I am sure there are many investors who must be wondering whether they should be investing in the markets at the current levels or not. Though, the prospects of the markets look promising from the long-term point of view, it may be prudent for a new investor to adopt a strategy whereby a part is invested as a lump sum and the balance by way of systematic investing.

The exact proportion of the lump sum and systematic investment would depend on one's risk profile and time horizon. This way, if the market drops right away, one would suffer a smaller loss and can buy more units each month at the lower prices.

Take help of a professional to determine the right levels for you. For systematic investments, you can opt for a Systematic Transfer Plan. Under STP, you can invest the lump sum in a Floating Rate or a Liquid Fund. From there, you can instruct the fund to transfer a fixed sum at a pre-determined interval to an equity fund.

There are many investors who do not find regular investing very exciting. They also find the whole process a little cumbersome. It is important for investors to realize that investing in equity funds is not about excitement but a sensible way to build wealth through healthy real rate of returns. However, the key is to concentrate on selection and maintaining the disciplined way of investing.

It is often said that 90 per cent of the investment success depends on the quality of the portfolio and the right mix of funds investing in different market caps and the remaining 10 per cent on timing the investments. In reality, many investors spend 90 per cent of their time "timing" their investments.

Now, a few words on the selection process. It is important to select the funds after careful deliberations especially keeping your risk profile, time horizon and investment objectives in mind. You will find some brokers constantly approaching you with new products.

You need to learn to say 'No' to products you don't really want or need. In other words, be wary of 'buy now while the stocks last' sales pitch and always keep your long- term investment objectives in mind while building your portfolio.

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Biggest impact of returns

2006-10-30T23:58:00.000+05:30

Measuring the impact of the following charges on overall returns

Loading Charges

Admin Charges

Fund Management Charges

Used the following three plans in the comparision.

Bajaj Allianz Unit Gain Plus

HDFC UnitLinked Endowment Plus

ICICI Lifetime Plus

Loading Charges
HDFC - 60% first year
Bajaj- 24% first year
ICICI- 25% first year

Admin Charges
HDFC - Rs.240 per annum
Bajaj- Rs.240 per annum
ICICI- Rs.720 per annum

Fund Management Charge
HDFC - 0.80%
BAJAJ- 1.75%
ICICI- 1.50%

For an Investment amount of Rs.24,000 per annum assuming an annual return on investment of 10%, the following is how the returns look like

Investment Time Frame - 5 Years
Best Returns - BAJAJ (7% more than ICICI)
Second Best - HDFC (2% more than ICICI)
Last - ICICI

Investment Time Frame - 10 Years
Best Returns - HDFC (5% more than ICICI)
Second Best - BAJAJ (3% more than ICICI)
Last - ICICI

Investment Time Frame - 15 Years
Best Returns - HDFC (8% more than ICICI)
Second Best - BAJAJ (1% more than ICICI)
Last - ICICI

Investment Time Frame - 20 Years
Best Returns - HDFC (12% more than BAJAJ)
Second Best - ICICI (0.5% more than BAJAJ)
Last - BAJAJ

Investment Time Frame - 25 Years
Best Returns - HDFC (16% more than BAJAJ)
Second Best - ICICI (2% more than BAJAJ)
Last - BAJAJ

For an investment time frame of 5 years, Bajaj Allianz Unit Gain Plus seems to offer the best returns. For any investment time frame of 10 years to 25 years, HDFC seems to offer the best returns.

Regarding charges, on the long run, Fund Management Charges have the most significant impact on performance. You will notice the gap in returns between HDFC and other widening as time passes(inspite of 60% loading charge). This is because it has the least FMC. Even ICICI which offer slightly better fund FMC than Bajaj has been able to surpass the returns of Bajaj Allianz Unit gain plus on the long run.

CONCLUSION
Fund Management charges are the most important charges for long term investments. Chose a ULIP product that has the least fund management charge to maximize your returns.

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Allocate funds to equity and debt

2006-10-30T23:56:00.000+05:30

Many of you might have wondered how much exposure to equity is safe at any point of time. Raj Gopal suggesting two methods, one based on weighted average PE Ratio of Nifty or Sensex, and the second based on term of the policy.

Fund Allocation Based on Nifty/Sensex PE Ratio
In this approach, I decide my allocations to equity and debt based on weighted average PE Ratio of Nifty or Sensex. At higher PE Ratio levels, I advise reducing your exposure to equity. Similarly at lower PE Ratio levels increase your exposure to equity. You will be able to find weighted average PE Ratio Nifty or Sensex at bseindia.com or nseindia.com.

If weighted average PE ratio of NSE or Sensex falls in this band

PE Ratio    Equity     Debt
below 13   90 - 100   0 - 10
13 - 16    70 - 90   10 - 30
16 - 20    50 - 70   30 - 50
20 - 24    20 - 50   50 - 80
above 24    0 - 10   90 - 100

Most ULIPS give you free switches to transfer your investment across funds. You can use these free switches to re-adjust your allocation to equity and debt.

Fund Allocation based on the Term of the policy
In this approach, I would divide the term of the policy into two stages. The first being the aggressive wealth building stage and the second being a conservative wealth preserving stage. I would recommend maintaining a high exposure to equity for 50 to 65% of the term after which one would gradually reduce your exposure to equity. Let me try to clarify this with an example. If the term of your insurance policy is 15 years, I would suggest maintaining a high exposure to equity for 8 to 10 years. I would gradually reduce my exposure to equity for the balance of the term.

Term in Years     Equity       Debt
Upto 8 Years     70 - 100    0  - 30
8 - 10 Years     50 - 80     20 - 50
10 - 12 Years    25 - 50     50 - 75
12 - 14 Years    10 - 25     75 - 90
15th Year        0  - 10     90 - 100

In this case you are gradually reducing your downside risk by reducing your exposure to equity with time.

Best Investment Indian blogs

2006-10-30T23:38:00.000+05:30

As improbable as it may seem, you'll want to read more than my not-so-humble opinion on Personal Investment in India. Here's a list of places you can go to:

Journey to wealth by Amit
An interesting take on investments, though not updated very regularly (I know, people with glass houses...). Amit writes refreshingly well on subjects close to my heart, like real estate, stock market investing and the like.

Person finance in India - the not so obvious stuff
Vivek Venugopalan talks about taxes, banking, stock market investments etc. His take on "How to get financiall organised" is a good refresher - heck, I need to do some of them things!

Investment Guru by Rajesh Soni
Largely about stocks and IPOs, Rajesh dwells on company information, general stock news, and IPO updates. An interesting take for value investors.

Value Stock Plus by "Toughiee"
A well maintained, constantly updated blog about investments, largely links to articles elsewhere. The author works quite hard at updating posts and consolidating sites you, as an investor, should visit.

Arpit Ranka
Arpit provides an analysis of the behaviour behind investing, and lets your mind wander as he talks about intuition, reasoning, prediction, luck and so on. Interesting reading, and a financial perspective keeps material in scope.

Value Investing by Rohit Chauhan.
A well written blog on the fundas of value investing. Professing to be a Buffet fan, and quoting Ben Graham, Paul Fisher and so on, Rohit writes lucidly about value investing in India. Yes, there are some long paragraphs that stem more from his inability to induce correct formatting by blogger than from a fear of line breaks. But the site's well worth your time, and will hopefully continue to be as good!

ULIPs and MFs by Raj Gopal Vuppala.
A more recent blog about investing in Unit Linked Insurance Plans (ULIPs) and Mutual Funds. I personally don't like ULIPs but Raj comes across with strategies to invest if you're still hooked to the idea. He asks that you avoid endowment plans (a financial trap) and evaluate charges before you buy; something every investor must drill into herself to do.

Rupee Manager by Umesh Ladha
Umesh writes about Personal Finance for the young reader - the early twenties, I would imagine. Some of the concepts in there like TWINVEST and the like are quite interesting...it's a fairly new site, but I think it'll evolve. That's it for now. Post me more links if you like some other blogs!

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Comparisons of ULIP NAV

2006-10-30T23:36:00.000+05:30

Plan	Oct 6, 2005	Oct 6, 2006	Growth
SBI: Horizon	15.590	24.420	56.64%
Sensex	8,528.700	12,372.810	45.07%
Kotak aggressive	14.745	21.192	43.72%
Reliance Life (Equity)	14.724	21.105	43.34%
HDFC-Standard: All ULIPs	35.043	50.143	43.09%
ICICI-Prudential: LifeTime Plus	16.440	22.990	39.84%
ICICI-Prudential: LifeTime Super	30.860	42.790	38.66%
Nifty	2,579.150	3,569.700	38.41%
Bajaj Allianz: Unitgain plus	17.621	24.188	37.27%
Metlife Multiplier	12.474	16.646	33.45%
Kotak dynamic	18.795	24.699	31.41%
aviva Saveguard growth	18.970	23.988	26.45%
Max New York Growth	13.920	17.420	25.14%
TATA AIG Growth	14.218	17.660	24.21%
ING Vysya Growth	12.204	14.712	20.56%
Aviva Lifelong	24.459	28.375	16.01%
Birla Sun Life - Enhancer	19.427	22.384	15.22%

Mutual funds Growth and Dividend option explained in detail

2006-10-30T23:34:00.000+05:30

Most mutual funds have multiple options for investment, for the same fund:
1) Growth option
2) Dividend option
(with either automatic reinvestment or as a payout)

The "funda" behind Dividend is that the fund gives you "cash" regularly, and this can be either paid to you or reinvested in the fund (more units are purchased on the day of the dividend disbursement, at the NAV of that day). Note here that dividends are paid out of the assets of the fund, therefore the Dividend option's NAV will go down when dividend is paid.

Dividend payout is usually taken by people who want some cash return on their investments, which supplements their income.

The dividend re-investment and growth options are similar, in the sense that your dividend adds on to your investment and compounds itself. So why two different options?

That's based on history. Earlier, your capital gains were taxed at 20% (long term) and 30%(short term). Dividends were taxed at 10% and later, not taxed at all. Growth option funds only had capital gains (since there was no dividend) and when you wanted cash you would pay a HIGHER amount of tax. Dividend reinvestment ensured that your dividends paid lesser tax and the re-investment, being usually at a higher NAV since the fund is growing, will attract less capital gains tax.

But now the equation has changed. Currently, Dividends are not taxed in your hands. (and equity mutual funds aren't charged a dividend distribution tax) Also, with the Securities Transaction Tax regime, you pay a 0.25% STT on the sale of your fund units, and therefore the law says that short term capital gains tax is 10% and long term capital gains are not taxed!

So what's the difference now? One factor to consider is that some funds must pay dividend distribution tax at 12.24% - this does not apply to equity funds. Obviously this affects the dividend options but not growth options of funds.

Further, there's capital gains. Let's say you invested in a fund 5 years ago, in "dividend reinvestment" and now you want money urgently. Some of the units you got as part of the dividend reinvestment were perhaps given to you in the last one year; selling those will mean a short term capital gains tax of 10%! If you had chosen the growth option, you would pay no capital gains tax (as all gains are long term = greater than one year of holding).

Always choose the Growth option. If you need cash regularly, choose the Dividend payout option. Don't really bother with Dividend reinvestment (unless tax laws change).

Disclosure: I have, unfortunately, invested in the "dividend reinvestment" option myself also. I will slowly change over and further investments will go into growth options only.

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Sell your mutual funds at right time

2006-10-30T19:19:00.000+05:30

"Our favourite holding period is forever." This comes from the world's most successful investor, Warren Buffet. This also answers the question that forms the title of this article.

Therefore, before addressing the issue of when to sell your mutual fund, let us for a brief while dwell upon when not to sell it.

Most investors sell or at least reduce their stock exposure when valuations start falling. The market fell from 12,612 all the way to 8,929, a fall of almost 30%. How many investors refrained from selling during the interim? And how many investors actually made additional purchases?

And who amongst us knew that within four months the market would actually catch up with and even surpass the previous peak?

The answers lie in the questions themselves and therein emerges a lesson that we can all learn. And this lesson is best summarized by the following quote by Bernstein William in this book, The Intelligent Asset Allocator:

"There are two kinds of investors -- those who don't know where the market is headed, and those who don't know that they don't know. Then again, there is a third type -- the investment professional, who indeed knows that he or she doesn't know, but whose livelihood depends upon appearing to know."

History has repeatedly proven that it is impossible to 'time' the markets. The Bombay Stock Exchange's Sensex is flirting with the 13,000-mark even as I write this. But no human being is capable of knowing for sure when the milestone would be reached. And when it does, nobody can tell for how long will it be able to sustain that level.

So, if you invest or divest based on market movements or expected market movements, it amounts to pure speculation. And know this much -- you can either speculate or accumulate, but never both.

Which brings us back to where we started from. Just when do you sell your mutual fund?

Under Performance?

Yes, investing is all about long term. However, it has to be the right investment in the first place. Study the performance of your funds against their peer group and also the benchmark returns. Say, your fund has gained by 10%. While you may be happy, this doesn't actually tell you much.

To put the fund's performance in perspective, you have to compare and contrast it against its peer group as also to the benchmark returns. Be careful in selecting the correct peer group. One should not compare an equity diversified fund against a sectoral fund or a large cap fund against a mid cap aggressive fund.

Also, take care that you gauge performance over a reasonable period of time. Most information sources publish three month figures of fund performance. Three months is too short a time to come to any conclusion.

Moving on, another reason that you sell your investment is if it doesn't remain the same investment.

Change in the fund composition

For instance, balanced funds earlier qualified with a 50% exposure to equity. Now, as per the new tax laws, at least 65% ought to be invested to equity. Most fund managers, in an effort to spike the return, even take a higher exposure. Therefore if the investment has become riskier than what you would be comfortable with, it is time to sell.

Change of fund manager

Mutual fund companies will argue themselves hoarse that fund management is a process driven activity and the individual doesn't matter. However, successful stock selection is a matter of experience, perspective and instinct. These are human qualities that cannot be completely reduced to a process.

The fund manager's exit does raise a red flag. However, it could also be possible that the new guy is better than the earlier one. So keep the fund under your radar. A discernible blip in the performance may mean it is time for you to desert the ship too along with its erstwhile captain.

Realigning Asset Allocation

Every investor has his or her own risk tolerance. Say, you are comfortable with 50% of your funds invested in equity. Time to time, you need to check the asset allocation. With a substantial run up in equities, chances are that your total portfolio has become distorted towards equity. To bring it back, you would need to sell.

Here take care of the fiscal side. While selling, it makes more sense to sell funds over one-year old for the associated tax break in capital gains.

We have established so far that amongst all the reasons for selling your funds, falling or rising markets should in no way influence your decision. If anything, if the markets start falling, please buy additional units -- the cheaper deal will hold you in good stead eventually.

However, what if you need the money?

This then forms the foremost reason to sell any investment.

Apart from must spends like for medical emergencies or, say, escalating education costs, do once in a while indulge yourself. Take that foreign trip that you so wanted. Buy that new mobile. . .

You live only once and what is the point of all this if you can't pamper yourself once in a while? The other day, I bought myself an iPod, which might be a necessity for some. But a limited edition version with more gigabytes than I'll ever have time to listen to was perhaps overdoing it. But, hey, if you have to do something wrong, at least do it right!

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Billionaire club members in india

2006-10-30T11:34:00.000+05:30

The collective net worth of India's billionaires (those with assets of more than Rs 1 billion, or Rs 100 crore) has gone up by an unprecedented 74 per cent to Rs 6,33,457 crore (Rs 6334.57 billion), from Rs 3,64,000 crore (Rs 3640 billion) last year.

Membership of the Billionaire Club has also swelled, with 89 new businessmen crossing the billion rupee threshold, taking the total membership of the club to 391. There were only 99 people in the club when this listing began in 1999.

The Billionaire Club

Rank	Name	Wealth creation (Rs/cr)
1	Mukesh Ambani	76,509.22
2	Azim Premji	59,557.01
3	Sunil Mittal	33,034.24
4	Anil Agarwal	31,901.87
5	Anil Ambani	23,721.16
6	Tulsi R Tanti	23,664.84
7	Ramesh Chandra	12,670.49
8	Kumar Mangalam Birla	11,981.71
9	Dilip S Sanghvi	11,294.71
10	Shiv Nadar	11,146.84

Business Standard's annual magazine, The Billionaire Club ranks the wealth of India's billionaires.

The wealth is computed on the basis of the market value of direct holdings in listed companies and any share in cross-holding, with the valuation being done at the end of August 2006.

Of the 89 new billionaires this year, no fewer than 45 people have qualified by riding on the 4,000-point surge in the Sensex over the past year, while 35 new members are there by virtue of taking their companies public in the last 12 months.

Behind both events lie not just stock market swings but also solid work put in by the billionaires to add value to their companies.

Reliance Industries chairman Mukesh Ambani is the country's richest billionaire this year, replacing Wipro Chairman Azim Premji, who comes in second.

Ambani's personal wealth was Rs 76,509 crore, based on stock prices at the end of August. Premji is a distant second with Rs 59,557 crore (Rs 595.57 billion).

Mukesh Ambani's wealth has gone up by two-thirds in the last one year, partly because of restructuring in the wake of the split with his brother and fresh stock market listing. His younger brother Anil Ambani comes in fifth on the list with a wealth of Rs 23,721 crore (Rs 237.21 billion), but has done better in terms of percentage increase in wealth - 140 per cent. Between them, the Ambani brothers now have marginally more than Rs 100,000 crore (RS 1000 billion) of wealth.

Bharti Airtel Chairman and Managing Director Sunil Bharti Mittal comes third in the list (Rs 35,034 crore), followed by Anil Agarwal of Sterlite Industries (Rs 31,902 crore).

Tulsi R Tanti of Suzlon Energy is like Anil Ambani, a new entrant in the billionaires list, and ranking up there in the sixth position.

He is followed by Unitech chairman Ramesh Chandra, who has jumped from 114th position in 2005 to the seventh slot this year, with Rs 12,671 crore (Rs 126.71 billion) of wealth, courtesy a steep 2,100 per cent increase in Unitech's stock price over the last one year.

Kumar Mangalam Birla, Dilip Shanghvi and Shiv Nadar are the other three billionaires in the top ten.

There are now 23 Indians with wealth of over Rs 4,500 crore (Rs 45 billion), making them dollar billionaires. In 1999, there were only three dollar billionaires in the country.

The extraordinarily optimistic message that the list of 391 billionaires throws up is a simple one - with the opening up of the Indian economy, there has been no shortage of business opportunities, and entrepreneurs have grabbed their chances with both hands.

It is no wonder that over two-thirds of the promoters, who are now members of the Billionaire Club, are from small and medium firms. They added over Rs 1,89,800 crore (Rs 1898 billion) to their wealth last year, taking their aggregate to Rs 2,41,000 crore (Rs 2410 billion).

Which are the sectors that generate the greatest wealth at the top? While many of India's richest moguls continue to be from software and other service sectors (a total of 44 billionaires this year), pharmaceuticals, steel, automobiles and diversified businesses have spawned a large number of billionaires too.

But this is not just a story about winners, for there are also those who saw their wealth shrink, especially if their companies hit an air pocket. Jet Airways chairman Naresh Goyal is the most prominent among the losers.

The promoter of India's largest airline, who listed Jet last year to become the wealthiest new billionaire, has lost about Rs 4,500 crore (Rs 45 billion) on account of the Jet-Sahara episode and the downturn in airline fortunes.

The other major losers in what has been a bull market are the promoters of Ranbaxy, who lost Rs 1,560 crore (Rs 15.6 billion), and Habil Khorakiwala of Wockhardt, who lost Rs 1,066 crore (Rs 10.66 billion).

The Billionaire Club magazine also focuses on the highest-paid executives in corporate India, the cut-off being a minimum annual salary of Rs 1 crore. The noteworthy feature here is that salaries at the top have been going up faster (22 per cent) than the average increase in companies' salaries.

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Analysis and performance of IT stocks

2006-10-30T11:33:00.000+05:30

Taking a cue from the staggering September 2006 quarter performance, many information technology stocks, especially the frontline ones, seem to have cheered investors.

The BSE IT index has leapfrogged by 59 per cent zipping past the Sensex, which gained 43 per cent since June, when the markets were at a trough.

Having said this, would you bet on a sector whose valuations of 30 times its trailing 12 month earnings far exceeds that of the Sensex, which trades at 21.73 times?

Analysts have a mixed opinion at the moment. While some continue to be bullish on the sector, all of them emphasise that the future is going to be stock-specific.

They agree that most of the leading stocks have posted a stellar performance in the September 2006 quarter and their guidance for the next few quarters is positive. But there are concerns that valuations are stretched.

Though analysts expect robust demand growth, they are looking for better pricing and margin expansion despite the wage pressure, which is likely to continue as companies scramble for skilled manpower, and that too in large numbers, while attrition rates remain high.

Analysts are biased towards the larger IT companies like Infosys, TCS, Wipro and Satyam, as they will be able to deal with any possible shock better than their smaller counterparts. Most domestic and foreign brokerage firms maintain a 'Buy' on the sector.

Says Manoj Shroff, analyst Parag Parikh Financial Advisory Services, "While large caps are expected to continue their robust growth trend, which is to an extent built in the price on FY07 basis, however they look fairly attractive on FY08 basis."

So far, so good

Almost all the companies, big or small, that have announced their results, have exceeded analysts' expectations.

While robust volume growth of around 10 per cent, modest price rise of about 1 per cent and rupee depreciation in the September 2006 quarter (2 per cent, 5 per cent and about 4 per cent against the dollar, pound and euro respectively) have led to the strong rise in the top line, higher operating expenses, especially employee costs, has led to margin crunch for most of them.

Infosys undoubtedly has led the pack outperforming its peers on all parameters followed by TCS. However, how sustainable are these growth rates?

As far as demand growth is concerned, there is a clear visibility for top line growth of Indian companies not only in case of the traditional business of IT services, but also in business like BPO and package implementation. A rise in the US corporate profits in the first half of 2006 suggests that IT spending will continue to rise.

According to IDC estimates, global IT services spend will grow at a 5.7 per cent CAGR in 2005-10 to $589 billion with offshore IT services growing faster. NASSCOM-Mckinsey forecasts that Indian IT-BPO exports will grow at 25 per cent in the same period, with India leading with a 50 per cent share.

Thus, volumes are expected to continue growing. Staffing these volumes too is not likely to be a problem in the near-term. Software companies have recruited large numbers in the past year or so, and utilisation rates, which had declined to 72 per cent in the December 2005 quarter, can go up to 400-500 basis points, say analysts.

However analysts feel that the volume growth seems to have been factored into the stock prices. Going forward, what could positively impact the movement of stocks is the price increase and improvement in operating profit margins.

As the large Indian tech companies get larger, the order size is also becoming big. Companies are looking to large multi-year, multi-million-dollar contracts to improve growth.

While these orders are large, there will be pricing pressure on such deals. As a result, some foreign brokerage firms expect limited pricing power due to large deals. Another sign to watch for is the slowdown in the US.

But the guidance from tech companies suggests that they are witnessing better pricing negotiability. They expect a 3-5 per cent rise from new contracts, although these form a very small share (around 10 per cent) of overall revenues.

Also, as more work moves offshore, average billing rates will improve. A higher proportion of value-added services will also improve pricing. Does all this mean that margins will better?

Margins to be flat or decline a bit

Analysts expect operating profit margins of companies to decline gradually over time as international majors like IBM Global, Accenture and EDS will increase their size, resulting in wage pressure for software professionals.

Analysts are unanimous in their expectation that despite better pricing and cost efficiencies, margins will reduce. Salaries form 80-85 per cent of costs and about 50 per cent of revenues of Indian IT companies on an average. And they have been steadily on the rise year on year.

Also, higher tax rates is also going to be an additional burden on the bottom line of companies going ahead. The industry will lose tax benefits under Section 10A/10B on 31st March 2009. So companies will gradually move to 33 per cent effective tax rates from the current 13-16 per cent.

However, with most of the incremental expansion in the sector coming through Special Economic Zones, which have full tax benefits until 2014, the effective tax rate would move up only marginally over the next few years.

In order to protect margins, companies are adopting various measures like cost efficiencies, change in the employee mix tilted towards more fresh graduates or lesser experienced people and even acquisitions to enter new businesses or new geographies, increase scale of business and be globally competitive. In a nutshell, price and margins will be the key driver for future stock price movements.

Impact of US slowdown

Since almost 70 per cent of Indian IT services exports are to the US, which is showing signs of slowing down, will the breakneck speed of IT companies' growth come to a screeching halt?

Most analysts rule out fears of the impact of slowdown in the US given India's cost competitiveness (Costs in India are one-sixth of that of US), value addition and diversification in new services like consulting, testing and infrastructure.

Says Anurag Purohit, analyst, BRICS PCG, "Companies in the developed market would look at outsourcing more work to cost competitive countries like India to leverage on costs and maintain the return on investment in case of a US slowdown."

However, leading foreign brokerage firms feel that the slowdown in the US cannot be ignored and will pull down the overall IT spending. The risk becomes large only in case of a hard landing of the US economy, though the probability of such an eventuality appears low right now.

Moreover, companies are increasingly reducing dependence on US as demand from other regions, mainly Europe, has been gathering pace. European business, though a small portion of the total revenues, is rising faster than the total revenues for most IT companies.

In terms of stocks, analysts prefer large companies because of their geographical reach, pricing power, employee management and ability to sustain margins.

Infosys: This stock has gained the most in terms of price appreciation. With the highest top line and operating profit growth followed with an improvement in operating margins, most analysts feel that it is the best stock despite stretched valuations.

"Infosys is a total organic growth story and hence the safest bet," says Purohit. The company raised its EPS guidance for this fiscal once again by about 6 per cent to Rs 66 in September 2006 quarter translating to a growth of 47 per cent y-o-y.

TCS: TCS is trading at a lower valuation relative to Infosys, despite being India's largest IT services player. This is partially due to lower growth rate and operating margins as compared with Infosys. However, the company makes a sound investment for its robust business model and management quality.

Wipro: In September 2006 quarter, though the company reported strong top line growth, operating margins were a tad lower on a sequential basis.

Analsyts see limited upside in the stock price saying that larger players with much higher growth rates are quoting at similar valuations.

However, the company cannot be ignored just on the basis on valuations as it has the third largest Indian IT services operations, the largest third-party BPO operation in India and is also the largest third-party R&D services provider globally.

Satyam: Satyam posted subdued September 2006 quarter performance as it witnessed pricing pressure marginally and its margins declined thanks to an aggressive salary hike.

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Be aware of Income funds

2006-10-28T14:56:00.000+05:30

Ever since the trend of rising interest rates started in mid-2003, income funds have moved out of investors' radar and have been replaced by short term, floating rate, fixed maturity and liquid funds.

The reason is obvious: income funds have been the worst performers over the last one and three years giving returns of just 4.24 and 3.14 per cent a year, respectively (Value Research).

Keeping them company at the bottom are medium and long-term gilts, which have given returns of 4.49 and 4.09 per cent over the same period. Liquid and short-term funds in comparison have given returns of nearly 6 per cent in the one-year period. Should investors ignore income funds and focus instead on short-term funds?

Investment options

Three months ago it would have made more sense to not invest in income funds, as interest rates were peaking.

However, yields on the ten-year benchmark government security have fallen, which has boosted the net asset values of income funds. But, with rates having come down, would investment in these be warranted?

There are votaries for both, short and long term funds, but in large parts it also depends on the investor's risk appetite, investment horizon and other investment options.

Asks Ritesh Jain, fund manager, Kotak Mutual Fund, "With fixed deposits offering 8 per cent over a one year period, would investors wish to take on an interest rate risk for a 50-basis point incremental return from income funds? Moreover, if interest rates go up, investors in income funds would have to reconcile to lower returns. With fixed deposits, they score only when the tax adjusted returns are taken into consideration."

With a tightening of liquidity due to the festival season, a possible hike in rates and volatility, an investment in income funds does not seem to have many takers.

Horizon and returns

While there is a lack of clarity on which way interest rates would move, on the longer term they will average out over a longer period.

Says Devendra Nevgi, head of fixed income at Quantum Mutual Fund, "Interest rate cycles last for three to five years and you need this time frame to catch a rate rally."

Over the long term, income funds tend to generate better returns than short-term funds. Over a five-year period, category returns have been 7.11 per cent as compared to 5.73 per cent for shorter tenure funds.

"Over a five-year period you can expect a return of 8-12 per cent," says Sandeep Bagla, head, fixed income Principal PNB Asset Management.

And it is not just on the returns front that income funds score. "They not only give a better risk adjusted return as compared to other risky and volatile asset classes, but also serve as a partial hedge against inflation," says Nevgi.

Investments in these funds, suggests Nevgi, should be done at the peak of the interest rate cycle. While that is ideal, one is not sure of where the rates will move.

"Systematic investment plans are a good way of capturing growth instead of committing upfront. If rates move above 8.25 per cent, you could look at a larger one-time investment in these funds," says Bagla. If interest rates do not dramatically move up, do fund managers have the flexibility to make hefty gains?

Trading gains

Income funds are primarily invested in bonds, debentures, government securities and short-term instruments like commercial papers and repos. The regular income for these funds comes from coupon payments and the trading gains accrue from interest rate movements.

Typically, today, between 50-70 per cent is invested in CPs/CDs of a one-year maturity giving a return of 7 to 8 per cent (fixed component), while the rest is parked in government securities over varying tenures.

Kotak's Jain says, "The kicker for these funds comes from the 30 per cent cash component that is invested in gilts and gains from interest rate movements."

With volumes and liquidity in gilts showing a sudden jump, trading profits could start making an impact on returns. And with corporates likely to tap the debt market to finance expansion, opportunities in the bond market will only increase. Since AAA-rated paper are more risky than gilts, they offer higher yield than gilts.

Hike may happen

With RBI's goals of containing inflation, credit growth and money supply, it is likely that a hike may be in the offing.

With credit growth at 29 per cent year-on-year instead of 20 per cent as of September 2006 and showing no signs of slowing down, money supply growth at 19 per cent instead of RBI's 16 per cent target and consumer demand led inflation likely to be over 6 per cent, a hike might be around the corner.

Unless you can stomach volatility, do not mind a longer waiting period, you are better off parking your funds in shorter tenure funds.

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Investing in MFs then consider these points

2006-10-28T14:53:00.000+05:30

Investors in mutual funds should, however, be aware that investing in mutual funds does have a few disadvantages too. They must, therefore, do adequate research to minimize the impact of such negative factors.

Over Diversification

The fund may become very popular and attract lot on investments. Therefore at some point the corpus size may become too large vis-�-vis the investment opportunities available. The fund manager would, then be forced to invest in average stocks also, as he would have already reached the prescribed limits for the quality stocks.

Or the fund manager may take a cautious route and invest in much larger number of stocks than what is actually warranted for the purposes of diversification.

This can hurt the overall returns that the fund could have otherwise generated by limiting its exposure only to above-average stocks.

Higher concentration

Contrary to the above, it may also happen that the fund manager may take a much larger exposure to select industries, thereby exposing the fund to concentration risk.

If your risk appetite is low or possibly you have already invested in a few sector-specific stocks, then this particular fund may no longer be suitable to your overall investment pattern.

Idle Cash

All funds must keep some amount of the corpus in cash/cash equivalents to take care of the day-to-day redemptions. If this amount is large, it means that the fund is forgoing the opportunity to earn higher returns.

However, care must be taken to see whether this is a permanent feature of the fund or only a temporary phase. It is possible that the fund manager expects the markets to fall. Therefore, he might have booked profits by selling off a part the portfolio and is waiting for an opportune moment to re-enter the market at lower levels.

Fancy Names

Mutual funds have been marketing their funds under very fancy and catchy brand names. These could sometimes mislead the investor in understanding the real objective of the fund.

The investor, therefore, must read the prospectus to find out the exact nature of the fund and then decide whether it suits his investment objective or not.

Moreover, there could be a perception difference in what you believe the name stands for and what the fund's intention actually is.

Higher expenses

As compared to direct investing into equity, one has to generally pay a higher cost at the time of investing. Typically, brokerage for direct purchase could be about 1% maybe even less, whereas entry load in a mutual fund could be around 2.25%.

Second, in mutual funds one would have to pay on-going annual fund management charges of about 2.5%, which is nil if you have brought shares and these are lying in your demat account. Moreover, these fund-management expenses are payable even if the fund has failed to perform, which would further reduce your already below-normal profits or maybe even add to your losses.

Loss of control

When investing in a mutual fund, you are effectively handing over the charge of your money to a fund manager. You are, therefore, dependent on the fund manager's investment philosophy to generate returns for you.

Some investors may not be comfortable with this kind of passive investing. They would rather like to be in full control of their investment decisions.

One must keep the above issues in mind, when investing in mutual funds. However, given the fact that the advantages of a mutual fund far outweigh these negatives, they are still the best alternative available.

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Midcap sector may rule the market in future

2006-10-28T14:45:00.000+05:30

The focus will remain on quarterly earnings announcements, though volumes are expected to be lower because of the truncated trading week. The stock market will remain closed on Tuesday (October 24) on account of Diwali and on Wednesday (October 25) on account of Ramzan Id.
Brokers said the outlook continues to be bullish because of better than expected quarterly numbers from frontline companies and Tata Steel’s acquisition of Anglo-Dutch Company Corus, which has catapulted the latter to the number five slot among steel producers.
Key results for this week include those of ICICI Bank, Hero Honda Motor, India Cements, Mahindra & Mahindra, TVS Motor Company, Zee Telefilms, Maruti Udyog, Suzlon Energy, BHEL, Century Textiles, Dr Reddy’s Laboratories and Pantaloon Retail.
However, the action is now likely to shift to the mid-cap sector.
Most brokerages are advising their clients to book profits in frontline shares as these are beginning to look expensive at current levels, and buy into second line shares, which look reasonably priced.
Market watchers in the US are predicting that the Federal Reserve officials may leave interest rate unchanged at 5.25% when they meet this week, satisfied by signs of core inflation declining slowly.
Crude oil fell below $57 a barrel in New York — the lowest in nearly 11 months — as traders are betting on Opec members not cutting production by 1.2m barrels a day as planned earlier. Prices have plunged 28% from the record of $78.40 a barrel touched on July 14.
US crude oil inventories surged 5.02m barrels to 335.6m last week, the US Energy Department reported recently. It was the biggest increase since March and left stockpiles 14% higher than the five-year average for the week.
This is leading to increasing confidence among traders, even as Opec members threaten to cut oil production to boost oil prices. But any increase in crude oil price may prove to be a dampener. FII inflows for October ’06, till October 19, ’06, totalled a healthy Rs 2,155 crore.
Meanwhile, mutual funds were net sellers to the tune of Rs 303 crore in October ’06, till October 19, ’06. Brokers expect foreign fund flows to remain robust this week as quarterly numbers of most companies have been on track

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Leading open ended mutual funds

2006-10-27T21:32:00.000+05:30

Unfortunately for investors, the festive season commenced on a sorry note with markets slumping sharply. After being poised to breach the 13,000 level (12,928 on October 16, 2006), markets corrected to settle at 12,737 points (BSE Sensex).

However, week on week (up 0.01%), markets were stagnant. On the same lines, the CNX Nifty appreciated marginally (0.22%) to close at 3,684 points. In a small reversal of sorts, the CNX Midcap (-0.19%) turned the other way to close at 4,767 points.

The results were no different from the other comparisons we have done in the past -- over a 3-5 year period, sector/thematic funds have failed to beat diversified equity funds lending credence to the view that it's best to be with diversified equity funds over the long-term.

Leading open-ended diversified equity funds

Diversified Equity Funds	NAV (Rs)	1-Wk	1-Mth	1-year	SD	SR
Ing Vysya Atm G	10.31	1.48%	6.40%	-	10.99%	0.03%
Pruicici Dynamic G	57.76	1.41%	5.90%	64.73%	7.36%	0.54%
Kotak Global India Scheme G	23.96	1.36%	6.03%	41.52%	6.29%	0.40%
Pruicici Emerging Star G	25.00	1.30%	6.79%	51.15%	7.99%	0.45%
Kotal Mid-Cap G	17.99	1.14%	5.22%	40.05%	7.91%	0.34%

(Source: Credence Analytics. NAV data as on Oct. 20, 2006. Growth over 1-year is compounded annualised)
(The Sharpe Ratio is a measure of the returns offered by the fund vis-�-vis those offered by a risk-free instrument) (Standard deviation highlights the element of risk associated with the fund.)

In a surprising development, we have ING Vysya ATM (a contrarian fund) at the top of the heap with 1.48% appreciation over last week. It was a particularly good week for equity funds from Kotak Mutual Fund and PruICICI Mutual Fund as they had two funds each in the top 5 rankings.

Leading open-ended long-term debt funds

Debt Funds (LT)	NAV (Rs)	1-Wk	1-Mth	1-year	3-year	SD	SR
Grindlays Super Saver G	16.59	0.34%	0.52%	3.94%	2.08%	0.36%	-0.55%
PruICICI Flexible Income	13.27	0.14%	0.59%	5.30%	3.66%	0.25%	-0.34%
Kotak Flexi Debt G	11.25	0.14%	0.59%	6.69%	-	0.07%	-0.42%
Principal Income G	17.2	0.14%	0.81%	6.25%	3.83%	0.38%	-0.15%
Birla Dynamic Bond Retail G	11.16	0.13%	0.74%	5.81%	-	0.17%	-0.59%

(Source: Credence Analytics. NAV data as on Oct. 20, 2006. Growth over 1-year is compounded annualised)

Grindlays Super Saver (0.34%) led the long-term debt fund rankings by a significant margin. Its closest competitors were -- PruICICI Flexible Income, Kotak Flexi Debt and Principal Income -- all at 0.14%.

The 10-year 7.59% GOI yield closed at 7.66% (October 20, 2006), 3 basis points above the previous weekly close. Bond yields and prices are inversely related with rising yields translating into lower bond prices and net asset value (NAV) for debt fund investors.

Leading open-ended balanced funds

Balanced Funds	NAV (Rs)	1-Wk	1-Mth	1-year	3-year	SD	SR
Kotak Balance	22.58	0.79%	3.66%	41.50%	38.83%	4.70%	0.56%
Birla Sun Life 95 G	165	0.73%	3.18%	34.17%	34.28%	4.54%	0.49%
FT India Balanced G	30.64	0.36%	4.11%	40.63%	31.78%	4.76%	0.43%
LIC Balance C G	42.42	0.30%	2.56%	40.56%	23.99%	5.21%	0.35%
DSP ML Bal G	35.98	0.28%	3.54%	41.65%	33.48%	4.49%	0.46%

(Source: Credence Analytics. NAV data as on Oct. 20, 2006. Growth over 1-year is compounded annualised)

With Kotak Balance (0.79%) heading the balanced fund rankings, this was a bumper week for Kotak Mutual Fund with its schemes featuring among the leaders across the three categories under review.

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Look Investing on Pharma funds

2006-10-27T21:27:00.000+05:30

The most important benefit that mutual funds offer to investors is the opportunity to diversify across sectors and market segments.

They work on the principle that the fund stands a better chance of delivering by investing in stocks belonging to various sectors and market segments. As a result, the fund manager is at liberty to choose stocks from an unrestricted investment universe.

Sector funds on the contrary, deprive investors of the benefit of diversification, which is the mainstay of diversified equity funds. The intention is to clock growth by capitalising on attractive growth opportunities from the designated sector.

The fund manager managing a sector fund is restricted in terms of selection of stocks, as he can invest in stocks only from the earmarked sector/theme.

Portfolio strategy

Because of the sectoral constraints, sector funds typically have a limited number of stocks to choose from. As a result, they show the tendency to hold concentrated portfolios; and pharma funds are no different.

Broadly, the number of stocks in their portfolios hovers around 15-20, with the top 10 stocks accounting for over 70% of the assets in most cases.

In the pharma funds segment, Magnum Pharma (76.8% in top 10 stock holdings) emerges as the most concentrated fund followed by Franklin Pharma (73.7%) and UTI Pharma & Healthcare (70.1%).

On the contrary, funds from the diversified equity funds category score much better in terms of diversification across stocks. HDFC Top 200, with a top 10 stock holding of 40.2% is the most concentrated fund among diversified equity funds, while DSP ML Opportunities (34.7%) fares the best on this parameter.

Performance

Pharma funds have failed to impress on the returns front as well. As is evident from table above, over the 1-year time frame, the performance of pharma funds has been poor. Not only have the funds been comfortably outperformed by diversified equity funds, Franklin Pharma (21.8%) and UTI Pharma & Healthcare (15.7%) have failed to match the benchmark index BSE Healthcare (23.5%).

The 3-year and 5-year rankings paint a similar picture. Over the 3-year period, the only saving grace for the pharma funds segment is Magnum Pharma (44.1%), which has pitched in a performance comparable to that of diversified equity funds. In fact, it even outscores Sundaram Growth (43.2%).

Over the 5-year period, the performance of pharma funds is dismal and they substantially lag their peers from the diversified equity funds segment.

Volatility and risk-adjusted return

Pharma funds have also faltered in controlling volatility, which is evident from their high Standard Deviation figures.

Even the worst performer in the diversified equity funds segment i.e. Sundaram Growth (Standard Deviation 6.53%) fares better than all the pharma funds. Magnum Pharma (7.21%) pitches in the worst performance across segments.

In terms of risk-adjusted returns (which is measured by the Sharpe Ratio), diversified equity funds have again delivered a markedly superior performance. Effectively, pharma funds have failed to deliver despite having exposed investors to higher levels of risk.

Expenses

In terms of expenses, pharma funds rank above their diversified equity fund counterparts. This is mainly because pharma funds have relatively lower net assets. SEBI guidelines for expenses are loaded in favour of larger funds, i.e. larger funds incur lower expenses and vice versa.

Therefore the larger diversified funds in our sample -- HDFC Top 200 (2.13%) and DSP ML Opportunities (2.10%) have proved to be relatively more cost effective.

Conclusion

Our advice for investors remains unchanged -- unless you possess the necessary "expertise" to invest in a pharma fund, steer clear of it and instead invest in a well-managed diversified equity fund with an established track record.

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Advice on mutual funds turns dangerous

2006-10-27T21:25:00.000+05:30

Investors are now at the "receiving end" of advice from newer sources like magazines and banks. While the retail investor's access to advice has grown exponentially, the quality of advice has remained poor, and in some cases it has even deteriorated.

Recently, a money magazine carried an article authored by an expert. The article deals with how retail investors should deal with mutual fund distributors and beat them at their own game. Nothing wrong with that.

But during the course of the article, the expert goes on to teach investors how to make the most of new fund offers (NFOs), by investing and exiting from them on a continuous basis. Also investors are required to demand rebate from the distributor while getting invested. The expert relies on rising markets for his "modus operandi" to succeed.

Now we aren't questioning the expert's intentions or even his credentials. But the bit about rebates and churning the portfolio is something we find hard to digest.

Firstly, the practice of 'rebating' or 'passing commission' is explicitly prohibited. Secondly, equity-oriented investments should be made from a long-term perspective (at least 3 years), since it is over such a period that equities are best equipped to deliver.

Advising investors to continuously churn their portfolios and maintain an investment horizon of 3-4 weeks is inappropriate. Effectively retail investors have been prompted to violate a regulation and act against the very fundamentals of investing in an endeavour to make easy money.

The second instance occurred when the author of this article visited a private sector bank. Although the author was there to make enquiries about his fixed deposit investments with the bank, the bank employee was more keen on getting the author invested in a mutual fund NFO.

The rationale for investing in the NFO was -- it is from a reputed financial institution (the bank employee was perhaps not aware of the difference between a fund house and its sponsor) and that there is no entry/exit load.

Investors on their part need to be careful about the advisors they are associating themselves with and the kind of advice they are acting on.

It was a 'record' week for investors with markets soaring to all-time highs. The BSE Sensex rose by 2.93% to close at 12,736 points, while the S&P CNX Nifty ended the week at 3,676 points (up by 2.97%). The CNX Midcap rose marginally (0.02%) and closed at 4,776 points.

Leading open-ended diversified equity funds

Diversified Equity Funds	NAV (Rs)	1-Wk	1-Mth	1-Yr	3-Yr	SD	SR
UTI - India Adv. Equity	7.35	4.11%	6.21%	14.31%	28.30%	8.49%	0.24%
HDFC Core & Satellite	24.64	3.64%	7.61%	47.75%	-	8.49%	0.41%
Birla India Opportunities	47.48	3.60%	7.40%	41.48%	37.91%	7.92%	0.33%
UTI Mastergrowth	41.53	3.41%	6.13%	38.02%	37.95%	7.74%	0.34%
Franklin Prima Plus	123.92	3.27%	7.23%	52.86%	47.43%	8.74%	0.39%

(Source: Credence Analytics. NAV data as on Oct. 13, 2006. Growth over 1-Yr is compounded annualised)
(The Sharpe Ratio is a measure of the returns offered by the fund vis-�-vis those offered by a risk-free instrument)
(Standard deviation highlights the element of risk associated with the fund.)

UTI � India Advantage Equity (4.11%) surfaced as the top performer in the diversified equity funds segment. HDFC Core & Satellite (3.64%) and Birla India Opportunities (3.60%) occupied second and third positions respectively.

Leading open-ended long-term debt funds

Debt Funds	NAV (Rs)	1-Wk	1-Mth	6-Mth	1-Yr	SD	SR
Tata Income	24.55	0.23%	0.77%	2.55%	8.41%	1.38%	0.02%
Deutsche Prem.Bond	12.03	0.20%	1.17%	2.69%	2.69%	0.65%	-0.25%
Templeton Inc. Builder	24.61	0.19%	0.94%	2.50%	2.83%	0.45%	-0.58%
Tata Income Plus	12.28	0.18%	0.98%	2.74%	4.73%	0.32%	-0.35%
Birla Income Plus	29.98	0.18%	0.74%	3.44%	5.01%	0.29%	-0.78%

(Source: Credence Analytics. NAV data as on Oct 13, 2006. Growth over 1-Yr is compounded annualised)

The 10-Yr 7.59% GOI yield closed at 7.63% (October 13, 2006), 4 basis points above the previous weekly close. Bond yields and prices are inversely related with rising yields translating into lower bond prices and net asset value (NAV) for debt fund investors.

Tata Income (0.23%) topped the debt funds segment, followed by Deutsche Premier Bond (0.20%). Templeton Income Builder (0.19%) and Tata Income Plus (0.18%) also featured in the top performers' list.

Leading open-ended balanced funds

Balanced Funds	NAV (Rs)	1-Wk	1-Mth	1-Yr	3-Yr	SD	SR
HDFC Balanced	30.81	2.82%	5.51%	28.57%	27.45%	5.46%	0.34%
ING Balanced	17.39	2.54%	5.59%	20.51%	26.90%	6.97%	0.30%
Sundaram Balanced	30.60	2.26%	5.47%	29.82%	27.52%	5.87%	0.30%
PruICICI Balanced	32.25	2.15%	4.74%	30.88%	31.82%	6.20%	0.38%
FT India Balanced	30.53	1.82%	4.14%	33.91%	31.49%	6.24%	0.34%

(Source: Credence Analytics. NAV data as on Oct 13, 2006. Growth over 1-Yr is compounded annualised)

Balanced funds drew from the rising equity markets. HDFC Balanced (2.82%) led the pack; ING Balanced (2.54%) and Sundaram Balanced (2.26%) occupied second and third positions respectively.

Now that we have discussed the topic of advice in great depth, we have some advice of our own for investors � "5 things to do with your money". While most of us would find this hard to digest, there are many individuals out there, who have a lot of wealth at their disposal but don't know what to do with it. Conversely, there are some who don't own a great deal of money, but are in complete control of their finances.

For those in the first category, conducting the tax-planning exercise, planning for retirement and getting insured are some of the most important objectives. While it's nice to have wealth, it is equally relevant to know what to do with it and to put it to good use.

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Sensex may reach 13500 by december

2006-10-17T10:43:00.000+05:30

The Sensex hit an all-new high and markets have been trading in the green since then. While this is market environment is definitely inviting for traders, the question is how should potential investors react to the early fireworks this year, and what is further in store.

Hitendra Vasudeo of Stockmechanics.com says that there is very good opportunity from a trading angle, but one should be prudent while investing now. "To invest at these levels one needs to be really cautious and selective and see whether new breakouts are coming in and new consolidations are happening, " he says.

"There are some stocks where breakouts and consolidations are happening on fresh moves. Most of the stocks have run up so one needs to be a bit cautious," he adds.

Vasudeo sees the Nifty moving in tune with the Sensex too.

Looking ahead, he says expects their targets to be achieved before the anticipated time. "For January we have indicated a yearly target of 13,500 on the Sensex, and looking at all factors, that looks possible now," he says.

"In spite of all the volatility coming in, at some point we had doubts as to whether it would happen or not, but with the way things are moving, it should be able to happen by December," he added.

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Invest in Arbitrage Funds

2006-10-12T11:19:00.000+05:30

There has been a spate of derivative or arbitrage funds being launched, the most recent one being SBI Arbitrage Opportunities Fund. What is an arbitrage fund and what should investors look for before investing in one? The article addresses these and related issues.

But first a little background. Sometime back the markets were at an all time peak. And then the much feared correction arrived. Just when investors were almost giving up hope, the market turnedaround and crossed the 12000 mark again. In such volatile situations, what is an investor supposed to do?

Most astute investors book profits at regular intervals and milestones. And then when the valuations fall, they buy into bargains. Buy low and sell high is the only way to make money on the stock markets and those who actually do end up making the money follow this mantra regularly.

Income funds are not the answer. Interest rates being on the upswing investors would have to undertake a heavy "interest rate risk".

Interest rates and prices of fixed income instruments share an inverse relationship. In other words, when the overall interest rates in the economy rise, the prices of fixed income earning instruments fall and vice versa. Therefore, in the past when interest rates were falling linearly year after year, most income funds yielded returns that even a well doing equity fund would be proud of. This is done by adjusting the portfolio to the market rate of returns is called 'Mark to market'. However, this article is not about the mechanics of the interest rate risk.

Enter Arbitrage Funds

Investors not familiar with this type of scheme might just end up thinking that these are just equity-oriented schemes with another fancy name. However, this is not so. What such funds aim to do is to take advantage of the arbitrage opportunities between the cash and the futures market to generate fixed income. Therefore, these are a type of income scheme.

The arbitrage is sought by taking advantage of the mispricing between the cash and the derivatives market. Let's understand how this works.

Suppose the stock price of XYZ Ltd. is quoting at Rs. 600. Let's say the stock is also traded in derivatives segment, where its future price is Rs. 610. In such a case, one can make a risk-free profit by selling a futures contract of XYZ Ltd. at Rs. 610 and buy an equivalent number of shares in the equity market at Rs. 600.

Now when settlement day arrives, it wouldn't matter which direction the stock price of XYZ Ltd. has taken in the interim. In other words, it is irrelevant whether the share price of XYZ Ltd. has risen or fallen, one would still make the same amount of money.

This happens because on the date of expiry (settlement date) the price of the equity shares and their stock futures will tend to coincide. Now, all one has to do is to reverse the initial transaction i.e. buy back the contract in the futures market and sell off the equity. So four transactions have taken place --- buy stock, sell futures, sell stock, buy futures. In this manner, irrespective of the share price, the investor earns the spread between the purchase price of the equity shares and the sale price of futures contract.

The first hurdle is the presence of arbitrage opportunities. In a given period of time, the market may or may not provide any meaningful arbitrage opportunities. And as explained above, it is these arbitrage opportunities that hold the key to the amount of money the fund will earn. No doubt, the fund management team will have to be extra vigilant in identifying such opportunities.

Of course, nowadays, they have sophisticated softwares that flag such mispricing the moment it occurs. However, investors do have to take into account the uncertainty of the supply of arbitrage as a hurdle in earning returns. For this very reason, such schemes cannot assure returns, the returns totally and completely depend upon available opportunity.

Secondly, there is the issue of costs. Each transaction in the stock market involves payment of brokerage and security transaction tax (STT). These costs directly dilute the earnings. Each leg of the entire transaction i.e. buying stock, selling future, selling stock and buying futures will entail the payment of these costs. Therefore, it again comes down to the presence of the arbitrage opportunity and it being meaningful enough i.e., after the payment of the expenses, the left over profit if any, should be material enough to make the transaction worth entering into.

To Conclude

Investors should note that by definition such schemes will always yield limited returns. However, the risk free nature of the returns is the USP of the product. Like mentioned earlier, if you want your funds to take a pit stop from the jet setting pace that the stock market has set, such a scheme will be an ideal shelter. Also, with the abolition of Sec. 80L, most fixed income earning avenues won't cover inflation post taxes.

However, in the case of non-equity MFs, dividends are subject to only a 14.025 per cent distribution tax, thereby again creating an arbitrage opportunity for taxpayers in the highest bracket. If one chooses the growth option and stays invested for over 1 year, capital gains tax @10 per cent or @20 per cent with indexation has to be paid.

This then becomes another alternative apart from Fixed Maturity Plans & Floating Rate schemes to beat the risks inherent in income schemes. Those wanting a breather from the equity market and those looking for safe fixed income should invest.

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Advice on Nectar Lifesciences stock

2006-10-10T12:10:00.000+05:30

Nectar Lifesciences came out with its IPO last year. It was priced at Rs 240. The stock is available at roughly 55 per cent of that price at Rs 130-135. Again, this company had come out with a GDR too, about a year back, where it issued optionally convertible debentures with the conversion price of close to Rs 330. So the stock looks grossly undervalued compared to its IPO price and the GDR price.

Given the fact that the company has been reporting strong earnings and good visibility of good earnings in future to take place, this company made EPS of close to Rs 28 for the financial year 2005-06. In the first quarter too, it has shown significant improvement in its topline and bottomline.

This company is undertaking various expansion projects in Baddi in Himachal Pradesh and at Derabassi, where its existing plant is located. So after those projects go on stream, this company is expected to log on much higher revenues and profits.

The company's subsidiary, which is located in Sri Lanka does a decent turnover and makes a profit of close to Rs 35 crore. So given all these factors, this stock trades as a substantial discount to its IPO price, and at Rs 130 with a P/E of 5x and with good visibility of future earnings, this stock looks underpriced.

Is it worth to buy Venky's india at Rs 137

2006-10-10T12:09:00.000+05:30

Venky's India is a contrarian pick in the poultry industry. This company faced a very tough time in the last one year, this was primarily because of the bird flu that spread in the January-March quarter. As a result of that the operations of the company was severely affected.

The company reported a loss of about Rs 4 crore (Rs 40 million) in the January-March quarter. Inspite of that loss, the company has managed to make a profit of about Rs 11 crore (Rs 110 million) for the full year.

Now the fears of bird flu have started receding and the company seems to be getting back on track. This company is the largest player in the poultry industry and it is an integrated player in the sector.

This company is strong in the institutional segment and supplies its products to all major hotels and Indian and multinational food chains like McDonald, Pizza Hut and KFC.

When one talks of the poultry industry, Venky's is the only large player. There may be other players, but they are all small players. Venkys is probably the only national player in the sector. When one talks of the poultry industry, one cannot even recall a number two.

So Venky's is a company where, given its size and scale of operations, it has the potential to attract institutional investors. Ofcourse they will get in after the marketcap has gone a couple of times from these levels, and after there is more visibility in terms of the company's earnings.

This company otherwise has been a consistent dividend payer and it has been paying regular dividends to its shareholders for many years now. Even when the company was faced with the worst of its times, it paid dividend to shareholders.

Investors can use this sentiment in the company and accumulate this stock. It may turn out to be the McDowell of the poultry industry.

Know more about the UTI Mutual Fund new launch UTI Wealth Builder Fund

2006-10-10T11:58:00.000+05:30

UTI Mutual Fund has launched UTI Wealth Builder Fund, a 5-year close-ended plain vanilla fund with an inbuilt hedging option whereby, depending on the index level, a certain percentage of the portfolio will be hedged through derivatives.

Experts believe that the performance of the fund will depend on the capability of the fund manager in making the right calls.

Investment expert Sandeep Shanbhag says, "Being close-ended, the fund manager is allowed to manage the money in a much better way as it remains locked in and hence he can take long-term calls. But, the performance of the fund will basically boil down to the competence of the fund manager in making the right calls. Also, since the fund plans to partially hedge its portfolio, it becomes critical for the fund manager to decide which stock to hedge and which not to."

On the flipside, investment advisor Hemant Rustagi warns, "The fund being a closed ended, one aims to provide investors with the benefits of long term equity investing. This by itself does not guarantee better performance than the on-going open-ended funds." "Besides, the existing funds provide investors with multiple options in terms of different investment strategies and track record", he adds.

A section of the media has pointed out that there are no new features in UTI Wealth Builder Fund except that it is close ended. However, Shanbhag says, "The simpler the mutual fund product, the better it is. This should not be a factor in the decision making. The performance of the fund will solely depend on the quality of the fund management team and only time will tell whether UTI Wealth Builder lives up to its name or not."

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Choose the Mutual funds based on your goals

2006-10-10T11:55:00.000+05:30

We can choose mutual funds based on our goals. If funds need to be parked for contingencies, we can choose either liquid funds (if amounts are large) or short-term debt funds. There are some fund houses which gives ATM access to debt based funds.

For goals, which are 1 to 3 years away, choose debt-based funds. In a rising interest rate scenario, consider floating rate funds, while if interest rates are falling invest in pure income/bond funds.

For goals, which are likely to happen between 3 to 6 years, use combination of debt and equity based funds.

When goals are 8 to 10 years away, equity is the best option. Over the long-term, equity has usually beaten inflation by vast margins and probability of losing money is very low.

If you are new to equity investing, start with index funds. Index funds replicate the index. For example, Sensex-based index funds will invest in only those companies, which are constituents of the Sensex.

As and when you get comfortable with equity investing, move to diversified equity funds, which invest in large cap companies. Large-cap companies are well-established companies having long presence.

They are usually less volatile than small-mid companies and can withstand downturns in economy better than newer companies.

Small- and mid-cap companies rise and fall faster. On risk ladder they are more risky compared to large companies but can also give higher returns (and severe fall.) Having gained confidence with large cap companies, move to mutual funds, which invest in small-mid companies.

Once you are a 'fish in water' with volatility of equity markets, consider sector funds. These funds invest in single sector as IT, banks, FMCG. They are very high on risk ladder.

Mutual fund as an investment vehicle is the most convenient vehicle for investing in various assets classes. It gives benefit of professional management, option of investing in smaller amount, quick liquidity and diversification benefit.

Is it wise to invest in index mutual funds?

2006-10-10T11:54:00.000+05:30

With the market climbing above 12,0000 levels, the NAVs of most equity funds are looking better than before. However, many investors are realizing that some of the funds in their portfolio have not been able to keep pace with the market. While it may have surprised new investors, most seasoned investors know that this is a normal phenomenon.

In other words, it is an established fact that different funds react differently at a time when the market is on its way up and when the market is on its way down.

It's all about the portfolio composition of the scheme i.e. the quality of the portfolio as well as exposure to different market segments that influences the level of fall and rise in the NAV. Since actively managed funds have varying degree of exposure outside index, the impact of its movement on the NAVs differs from fund to fund.

No wonder, some funds that react slowly during the initial phase of the recovery in the market, outperform others as the rally spreads to all the segments of the market. (Also read - 7 investment tips to improve your returns)

The moot question, therefore, is whether it is possible for investors to ensure that their portfolios move in line with the market. Index funds are, at times, projected as an answer to this need of certain section of investors. Considering that Index funds have been doing well on one year basis, I am sure many investors must be wondering as to why these funds should not be a part of their portfolio.

Before we analyse as to whether Index funds merit inclusion in every investor's portfolio or not, let us first understand what an Index fund is and how does it differ from actively managed funds.

An index fund is a type of passively managed fund that seeks to track the performance of a benchmark market index like BSE Sensex or S&P CNX Nifty. To achieve this intended result, the fund maintains the portfolio of all the securities in the same proportion as in the benchmark index. The offer document of an index fund clearly states as to which index the fund would track.

The major advantage of investing in an index fund is that one knows exactly the shares the fund would invest in. Besides, for an individual investor, it is practically impossible to create a portfolio that matches an index fund portfolio. The downside of investing in an index fund is that one forfeits the possibilities of earning above average returns that a good quality diversified fund may be able to provide over the longer term. (Also read - Learn how to tackle risk through diversification)

Index funds differ from an actively managed diversified fund in that trading is done not in an effort to sell non-performing securities and buy the better performing ones but to mimic a changing index and to deal with fresh inflows and outflows on account of redemptions.

Let us now analyse as to how index funds generally perform vis-�-vis actively managed equity funds. In a rising market, vast majority of actively managed funds under-perform the index funds. However, over the longer term, most actively managed funds out-perform the index funds. This happens because actively managed funds may hold superior stocks that perform better than the average and the fund manager may ride the upswing and miss the falls by actively managing the portfolio.
If we analyse the current performance data, Index funds have given an average return of 41.4 per cent on one year basis as against an average of 35.55 per cent given by actively managed funds during the same period.

However, the picture is very different over the longer term. Index funds managed to give a return of 39.58 per cent and 34.14 per cent as against 48.71 per cent and 46.15 per cent given by actively managed funds over three year and five-year period respectively. (Also read - How to build your MF portfolio?)

Though Index funds provide an inherent advantage to investors as they are charged lower expenses compared to actively managed funds, not many are able to enjoy this benefit as the holding period of Index fund investors is generally much shorter than that of investors in actively managed funds.

Besides, the ability to move in and move out gives an active fund manager a great advantage over a passively managed fund. Considering that index funds are effectively run by computers and the fact that price sensitive information keep appearing regularly, the actively managed funds have to be the mainstay of a long term investor's portfolio.

Never mind the little extra that one has to pay to an active fund manager. One needs to give one's investments a chance to out-perform the market and a portfolio of good quality funds can achieve that over the longer term.

However, for an investor who does not monitor his portfolio regularly, a blend of active and passive funds can be a good strategy. However, before investing money in an index fund, one has to be careful about the selection of the index.

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The growth rate of Mutual fund industry in india

2006-10-10T10:54:00.000+05:30

As on September 30, 2006, the domestic mutual fund industry held assets under management of over Rs 290,000 crore (Rs 2,900 billion); a growth of nearly 46% over the last 12 months.

Other statistics reveal that a higher portion of investors' savings is now invested in market-linked avenues like mutual funds as compared to earlier times. Media reports suggest that a number of new fund houses will commence operations in the near future.

Hence investors will have an even wider range of products to choose from. Meanwhile the existing ones are keeping investors occupied by regularly launching new fund offers (NFOs).

In effect, one would be tempted to conclude that the domestic mutual fund industry has finally "come of age". However, we at Personalfn have a slightly different view on the state of affairs. Sure, the industry has grown in terms of asset size and Rs 300,000 crore (Rs 3,000 billion) could well be the next landmark. But that's hardly a reason to celebrate. More fund houses or funds don't make the industry, existence of the right ones does.

We believe that the mutual fund industry has only grown in terms of size or choices available, but is still a long distance from being regarded as a mature one. For example, for all the NFOs being launched incessantly, there are very few that can truly claim to be unique or have the ability to add value to investors' portfolios.

In fact, the industry's functioning style could well classify as a classic example of herd mentality at work. Products like monthly income plans (MIPs), mid cap funds, flexi cap funds and derivatives-based funds have found favour with various industry players at the same time.

Is it a case of all fund houses thinking alike? Similarly, the launch of NFOs has largely coincided with conducive market sentiments (read upswing in markets) and investor euphoria.

In the recent past, close-ended funds have emerged as the season's flavour. Fund houses have been quoted as saying that the close-ended nature promotes long-term investing and enables the fund manger to make investment decisions with a long-term perspective.

While we don't dispute this argument, the timing of launch of close-ended funds does make us curious. It coincides with a regulation issued by the markets regulator, the Securities and Exchange Board of India (Sebi), that only close-ended NFOs will be permitted to charge initial issue expenses.

Conversely, open-ended NFOs will be required to meet sales, marketing and other related expenses from the entry load and not through initial issue expenses. Weren't long-term investing and the other virtues of close-ended funds relevant earlier?

Another initiative which is conspicuous by its absence is investor education. It would be safe to say that most fund houses have done precious little to further the cause of investor education.

Mutual fund distributors who help fund houses garner monies continue to rule the roost. They have been lavished with attractive brokerage structures, regular NFO launches (read opportunity to make "big bucks") and other incentives.

In turn, these distributors have on numerous occasions been guilty of mis-selling and acting in their own interest, rather than the investor's. Despite this, the investor, who should be at the very core of every fund house's activity, has been left to fend for himself.

In recent times, Sebi has been forced (at an alarming frequency) to step in to aid the investor. For issues like lack of uniqueness in NFOs, method of declaring dividends, issue expenses on NFOs among others, when it seemed like the investor's interests are being compromised with, the regulator introduced measures to safeguard the investor.

This doesn't reflect too well on the mutual fund industry. Instead of playing "follow the regulator", one would expect the mutual fund industry to proactively take steps and act in the investor's interests.

Don't get us wrong, we aren't suggesting that every fund house is guilty of transgression, but most of them have erred on one front or the other. Sure some fund houses have been responsible and acted in a forthright manner; sadly, they are in a minority.

An asset size of Rs 300,000 crore shouldn't be seen as a milestone or even a reason to celebrate. Instead, fund houses should get their act in place and work towards revamping the mutual fund industry into a better and "mature" investment destination.

Mutual funds are a versatile investment avenue and hold the potential to emerge as preferred investment avenues for retail investors. Few would dispute the fact that a large section of the investing community remains untapped as far as mutual funds are concerned. Should this potential be tapped, fund houses (along with investors) stand to emerge as the biggest beneficiaries.

However, for this to happen, the mutual fund industry must finally come of age. And the onus for achieving this rests with the fund houses.

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Beware of investing in Close ended mutual funds

2006-10-09T18:17:00.000+05:30

The almost-dead close-ended equity funds are making a comeback in the Indian market.

The mutual fund industry did begin its innings in India with close-ended equity funds. But after the initial euphoria, almost all of them ended as unmitigated disasters. As a result, the MF industry remained inconsequential for a long time.

The first sign of the industry's revival came with the introduction of open-ended funds. Since then the industry has grown quite admirably. In fact, a lot of the earlier close-ended funds have since been converted into open-ended ones.

Given the fact that things were going so well for the industry with the open-ended funds, why this sudden about turn? Why is the MF industry suddenly launching mainly close-ended funds, which were earlier resoundingly rejected by investors?

The reason is not far to seek. The answer lies in the recent changes brought in by the Securities and Exchange Board of India (Sebi) as regards the appropriation of the issue expenses of a New Fund Offer.

Before the Sebi circular came in, the MFs were allowed to write-off issue expenses of a New Fund Offer, from the fund, over a period of 5 years. Therefore, marketing expenses on new funds, usually about 6% of the corpus raised, were incurred and written-off from the fund over the next five years.

Since, these expenses were written-off over a period, the NFOs could open at par. Also, quite a few of them were introduced with no up-front entry load.

With the new guidelines, this has been stopped. Now in an open-ended NFO, all the expenses have to be either met out of the entry-loads or netted off from the fund on day 1.

It is difficult to assume that anyone would be willing to pay 6% entry load, especially after being used to the so-called no-load funds. As a result, an open-ended NFO will always open at NAV below Rs.10. This will attract the ire of the investors and they will, over a period of time, stop investing in NFOs.

Or alternatively, the AMCs (asset management companies) would have to bear such expenses, eating into their profits.

Since the rules of the game have not changed for close-ended funds, there is a sudden newfound love for such close-ended NFOs.

A part of the blame, of course, lies with the investors too. They have all along believed that an NFO at Rs 10 NAV is cheaper than an existing fund with an NAV of say Rs 100. As a result, they have been willing to invest thousands of crores (billions) in an NFO, but will not invest even Rs 1,000 in an existing fund with a proven-track record.

Hence, the only avenue available to the MFs to increase their AUMs (assets under management) was to come out with NFOs, similar to the ones they were already having. And as a marketing strategy, some of them were introduced with fancy names to attract investors.

As it is, investing in NFOs makes little sense, unless they have something different to offer from the existing funds. Without the benefit of a known track record, one cannot make an informed judgment. And to compound the problems, in a close-ended fund you can't even get out and rectify your mistake in case the fund does not perform well.

SIP (Systematic Investment Plan) is the best way of investing in equity markets, especially in today's volatile markets. Close-ended funds, by their very nature, do not facilitate SIPs, thus taking away a very important risk-mitigating strategy.

One small advantage of a close-ended fund is that it makes the investor take a long-term view of the markets.

But all the other negatives far outweigh this benefit. Moreover, a smart and well-informed investor can derive this benefit by staying invested in an open-ended fund too.

As regards the fund manager being able to take a long-term view instead of having to manage short-term performance, fund managers have done a commendable job in the past in managing open-ended funds and there is no reason why they cannot continue with the same performance in future too.

All in all, there is a need to look at the close-ended funds really hard before putting in one's hard earned money.

The solution lies in investor education and MF distributors have to play a very important role. Instead of looking at short-term profits at the cost of the investors, whose interests they are supposedly serving, they must work towards building a strong and ethical MF industry.

This is in everyone's interest: the mutual funds, the investors and the distributors.

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Canara bank launches a 5 year close ended equity fund

2006-09-22T11:34:00.000+05:30

Canbank Investment Management Services Ltd on Thursday filed initial papers with country's market regulator to launch a 5-year close-end equity fund.
CanMulticap Scheme will invest at least 75 per cent of its assets in equities and derivatives and the rest in debt and fixed income instruments, the fund's offer document said.
Within equities, the fund would allocate at least 60 per cent to large-cap stocks, 15 percent to mid-caps and not more than 10 per cent to small-cap stocks.
The fund will not charge entry or exit loads but will recover proportionate unamortised initial issue expenses from investors redeeming before maturity.
The fund house managed assets worth Rs 32.46 billion at the end of August, data from Association of Mutual Funds in India showed.

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Crain Energy issues shares to CIL at same price as IPO

2006-09-19T12:41:00.000+05:30

Cairn Energy, which has drawn up major plans of establishing its Indian chapter, has got the Foreign Investment Promotion Board (FIPB) clearance to acquire shares of its Indian arm Cairn India (CIL).
The company will issue shares to CIL at the same price as the IPO share price. With this approval, the two companies will be able to enter into a share swap aggregating to 70% of the post-IPO capital. The proposed move will involve financial transactions to the tune of $1bn between the two companies.
The proposal was made by the company as it planned to have a publicly quoted subsidiary in India which will help in sharing production costs. Cairn has discovered large reserves in Rajasthan and is keen to start commercial production there. Since the move involves huge investments, the company will also allow national and international investors to make investments in the Indian arm.

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Choosing the right stocks with PEG

2006-09-18T18:37:00.000+05:30

PE ratio, that is the Price/Earnings ratio is a common valuation number used by investors in stocks. The PE number gives an idea as to whether the stock is under-valued or over-valued.

It is defined as: PE ratio = market price of the share / earnings per share.

However, the problem with PE ratio is that it is a meaningless number, by itself. Is PE of five good or bad? Or should it be 10? Or possibly say 25? Mathematically speaking, the lower a PE stock appears, it's considered better than a higher PE stock. But is it really so?

Why do we buy a stock? We buy it so that when its price goes up, we can sell it and make profit. But why should the price of the share go up? Again simple, the price would go up if the company makes higher profits i.e. higher earnings per share (There are, of course, many other reasons for share prices to go up, but from the fundamental perspective, the price of a share is ultimately a reflection of it's profits).

In other words, it is the growth in the earnings, which gets reflected in the share price. And since we are buying a share in anticipation that its price will go up in future, we must look at the expected growth rate of its earnings, especially over the next two-three years.

Comparing the two i.e. the PE ratio and the EPS growth of a company gives a more meaningful picture. PEG ratio or the Price Earning Growth Ratio is defined as: PEG ratio = PE ratio / EPS growth rate

PEG ratio=1 This means that the share price is fully reflecting the company's future growth potential i.e. the share at today's prices is fairly valued.

PEG ratio>1 This indicates that the share price is higher than the expected growth in the company's profits i.e. the share is possibly over-valued.

PEG ratio<1 This indicates that the share price is lower than the expected growth in the company's profits i.e. the share is possibly under-valued.

Therefore, the PEG ratio tells us something more about the future potential of the company. It tells us whether the high PE is a superficial number or is supported by future growth prospects.

Let us look at an example to get a better perspective. We have an information technology company whose PE ratio is 30 and expected EPS growth rate of 40 per cent. And then, we have a banking stock, with PE ratio of 12 and EPS growth rate of 8 per cent.

On the face of it, if we only look at the PE ratio, the banking stock looks cheaper and attractive. But what about the PEG ratio? Let's do the simple math:

IT company PEG = 30/40 = 0.75
Bank PEG = 16/8 = 1.50

Going by the definition of PEG ratio, we find that the IT company's share is undervalued considering its future growth prospects. And so its share price is likely to appreciate more than the bank stock.

However, as usual, there is a word of caution. Like any other financial number, the PEG ratio is not a law, but a very useful indicator of a whether a share price is under or over-valued. It cannot be looked at in isolation. One must:

Look at other numbers such as

P/B value, operating margins, return on equity etc.
Compare it with the peer group
Consider other non-financial factors too, such as brand value, management quality, barriers to entry etc.

This is so because we are only estimating the EPS growth. If our expectations of growth do not materialise, the share prices can fall. Or sometimes the market gives more value to things like brands.

This is so because, even if the growth rate does not justify a high price, the brand value acts as protection. Say there is a fall in the demand, then it is likely that large reputed companies will be less affected, than relatively unknown companies. There is a sort of stability of returns expected.

Therefore, to get the best out of this PEG Ratio, it may be prudent to follow investment guru Peter Lynch's advice - first, find the companies whose long term prospects look good and have good management quality and then check whether their share price is under-valued using the PEG Ratio. Get more information

Points to consider before investing in Mutual Funds

2006-09-18T18:19:00.000+05:30

Most of us like to try out new things whether its dining at restaurants, buying mobile phones and cars to name a few. Some go to the extent of changing mobile phones every one year and a car every three years. Well this is a matter of personal preference and lifestyle and might give you some kind of emotional happiness which is good in some sense.

But when it comes to most new funds, there is hardly anything different, unique or really NEW about it. It's just that the name gets more exotic, dressing gets much better or a new marketing ploy such as Invest in India's Growth potential as if other options available are not investing in India's growth potential.

Securities and Exchange Board of India on its part took a series of steps. First, Sebi objected against the use of the word IPO (initial public offer) and instead had every fund house use NFO, to confuse with stock IPOs, to curb rampant mis-selling of new funds.

Secondly, Sebi had Mutual Funds launching open-ended New Funds charge the initial issue expenses within the entry load itself whereas close ended funds could still charge 6 per cent initial issue expense.

3 common mistakes all investor should be aware of:

Too less or too many aren't good enough
I have seen many investors having anywhere between 16-85 funds or some who have just one or two. Having too many in the name of diversification is no good and in fact defeats the very purpose of diversification.

After all the one of the reasons you opt for a mutual fund is to diversify your investments but having all large cap funds in your portfolio is unlikely to do any good.

At best based on the size of your portfolio, spread your investments across in 4-9 different funds spread across different mutual funds, fund managers, investing styles, expense ratios, portfolio turnover, market capitalization and whether its an all equity, balanced, or tax planning fund. Give Sectoral funds a complete miss unless you are very bullish on the sector and understand the risks well.

Rs 10 NAV is not cheaper than Rs100 NAV
What you should be concerned about is the per cent fall or per cent rise. A Re. 1 fall in a NAV 10 fund is the equivalent of Rs.10 fall in a NAV 100 fund. In fact Rs.100 means proven competence and a long track record of capital appreciation.

Don't fall for fancy terms
Don't fall for fancy and general terms such as 'investing in India's growth potential', 'options and derivatives to diversify your portfolio'. See if there are any existing funds with longer track records with similar investment objectives and strategies.

If there are, opt for the tried and tested ones rather than going from newer exotic ones.

How to decide if the new fund is an appropriate one for you?

Take a look at your Financial Plan if you have one or at your existing portfolio. What kind of funds do I have in my existing portfolio? Are they large cap funds, mid cap funds, flexi cap funds, balanced funds, tax planning funds?

The next to see is how does this new fund really add value to my existing portfolio? How does this New Fund fit into my portfolio, my asset allocation, and help achieve my goals? This is a million-dollar question.

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Retail investors are back investing

2006-09-18T18:16:00.000+05:30

Retail investors may have been staying away from the stock market after the May meltdown, but the flow of household savings into equities has grown over four times in the past year.

The share of the country's household savings in equities and debentures has grown from 1.1 per cent in 2004-05 to 4.9 per cent in 2005-06.

During the Harshad Mehta-led bull run in the early 1990s, the share of household savings in the equity market had touched 5 per cent, before the securities scam drove retail investors away.

In real money terms, the flow of household savings into equities last year was Rs 29,008 crore (Rs 290.08 billion), against Rs 4,967 crore (Rs 49.67 billion) in 2004-05, according to the latest statistics by the Reserve Bank of India. The figure includes the amount invested in the equity market through mutual funds.

In developed countries, the share of household savings in the equity market is as high as 15-20 per cent.

"In India, pension and provident funds are not allowed to invest in the equity market. However, some of the largest pension funds in the US have entered the Indian stock market," S Muhnot, managing director and CEO, IDBI Capital Markets, said.

It is estimated that if 5 per cent of the pension fund corpus is allowed to be invested in equities, about Rs 30,000 crore (Rs 300 billion) will flow into the stock market.

In 2003-04, the household savings in equities and debentures was as low as Rs 492 crore (Rs 4.92 billion), or just 0.1 per cent of the gross financial assets.

The stock market had a tremendous run in 2005-06 with the bellwether Sensex rising 70.11 per cent from 6,605.04 on April 1, 2005 to 11,279.96 on March 31, 2006. In comparison, the Sensex had posted only a modest 13 per cent growth in 2004-05. Get more information

Tata Tea's latest acquisition

2006-09-18T18:11:00.000+05:30

Tata Tea's latest acquisition promises fantastic growth over the medium-term but for now it will only hurt the bottomline.

Tata Tea is seeing renewed optimism armed with new products and newer markets thanks to its recent acquisition. After three global acquisitions � Tetley, Good Earth and Jemca � this time the company has announced a bigger and novel one - Glaceau Water Company.

This acquisition is Tata Tea's biggest in the US and novel because, unlike the other acquisitions which are of tea companies, this one is of an enhanced water company.

"The acquisition is in line with the global expansion strategy of Tata Tea in the beverage segment," says Percy Siganporia, managing director, Tata Tea.

Late last month, Tata Tea announced the acquisition of a 30 per cent stake in the US based Energy Brands, the parent company for Glaceau � a pioneer in the enhanced water business.

The management describes the acquisition as a directional change to capitalise on the convergence trends in the beverage sector. "Consumer demand is shifting from carbonated soft drinks to non-carbonated, functional beverages," says Siganporia.

Glaceau has grown at a CAGR of 200 per cent since its inception in 1996. The company's revenues have grown from $1.6 bn in 2001 to $3.1 bn in 2005. Glaceau today sells around 50 lakh bottles daily and still leads the industry in innovation with natural, low-and-zero calorie beverages.

The enhanced and flavoured water market grew 57 per cent in 2005 to $1.9 bn (Rs 8,740 crore) and is expected to grow at a CAGR of 31.8 per cent to touch $8.6 bn (Rs 39,560 crore) in 2010.

This sounds great for Tata Tea considering the fact that tea, as a segment, is showing muted growth. Another advantage is that, this space has very few players like Glaceau, Gatorade and Hansen. Also, as an analyst points out, Coke's internal resistance to get into this category augurs well for other players.

The acquisition will help Tata Tea to strengthen its foothold in the 'exciting' (as the company describes it) US markets given the strong distribution network Glaceau has. It will set the platform to distribute its teas in US.

The company's distribution network spreads across 40 states in the US where the company is the market leader. It has the third largest distribution network in the US beverages industry, after Coca Cola and PepsiCo. Although currently Tata Tea is looking at growing only in the US markets, it plans to look at other regions in the future. Get more information

Good Mid cap stocks to consider investing

2006-09-18T18:08:00.000+05:30

Companies whose share prices had fallen by at least 15 per cent, almost twice the fall in the Sensex as compared to its May 11 peak, and whose valuations looked attractive were considered. This, to some extent, helps in keeping a tab on the price one pays for a stock -- basically to ensure that one does not end up paying a huge premium for growth.

Quantitatively, key financial parameters like debt-equity ratio (we considered companies for which this figure was less then one), return on capital employed (greater than 15 per cent) and positive cash-flow from operating activities were analysed. (In Dishman's case, the actual debt-equity ratio is higher than one since it raised FCCB of $50 million last year for expansion and acquisition. A good part of that -- Rs 124 crore -- was kept in cash till March 2006, which when adjusted for, gives a net debt-equity ratio of less than one.)

Finally, only companies with good growth prospects were considered. Given below are five companies from the mid-cap category which we believe have the ability to grow at a fast clip and the potential to deliver healthy returns.

1. Blue Star

It is India's largest central air-conditioning and commercial refrigeration company, well-known for delivering quality products, and has a six-decade-long history.

The company has a network of 23 offices, four modern manufacturing facilities and around 1,800 employees. Blue Star supplies large central air-conditioning plants, packaged air-conditioning systems, split and window air-conditioners, cold storages and water coolers for commercial and residential use.

The boom in sectors like IT and IT enabled services, healthcare, entertainment, retail, hospitality, telecom, power and banking has created a strong demand for Blue Star products in the commercial air-conditioning space. The prospects are good too, as this segment is expected to grow at over 20 per cent, at least over the next few years.

2. Clariant Chemicals

Clariant Chemicals (India), earlier Colour-Chem, now represents the merged operations of the five companies of Switzerland-based Clariant in India. A specialty chemicals company, Clariant Chemicals enjoys dominant positions in pigments (used by manufacturers of paints, printing inks, plastic, rubber, detergents and cosmetics, among others), dyes and speciality chemicals (used to manufacture textiles, leather, pape and, personal care products) and diketene-based intermediates.

Dyes and speciality chemicals account for 57 per cent of revenues, the other two categories 41 per cent and the balance comes from master-batches. The company's strategy of working closely with its customers and its ability to innovate and deliver new products that meet their requirements has helped it achieve a dominant position.

3. Dishman Pharmaceuticals

This Ahmedabad-based company manufactures intermediates, APIs (active pharmaceutical ingredient -- the ingredient with the curative property) and quaternary compounds (Quats, catalyst compounds).

Since 1998, Dishman has diversified its interests to the contract research and manufacturing (CRAM) sector. Within a span of five years, Dishman has achieved several CRAM projects and is a contract manufacture outsourcing organisation. As a business strategy, Dishman typically establishes relationships with MNCs through sales of low-margin Quats and later tries to move up the value chain by entering into high-margin CRAM for intermediates and APIs.

4. Kirloskar Oil Engines (KOE)

Even after 60 years KOE is going strong and figures among the largest manufacturers of engines in the country with a broad product portfolio -- engine capacity ranges from 3 horsepower (HP) to 1,100 HP.

The company's engine business can be categorised into three separate strategic business units that service different market segments. While the smaller engine segment (3 HP up to 30 HP) caters primarily to the agricultural segment, the medium engine segment (30 HP up to 600 HP) addresses the industrial, tractor and power generation industries.

5. Taj GVK

It is no secret that the Indian hospitality sector has been booming over the last two years, occupancy levels have been rising and room rates have been moving up year after year. For Taj GVK, which operates three hotels in the rapidly growing Hyderabad, the boom has been even better.

Revenues have grown at a scorching pace from Rs 70 crore in 2002-03 to Rs 188.7 crore (in 2005-06), while net profit has jumped from a measly Rs 9.2 crore to Rs 46.2 crore during the same period.

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Global investors prefer companies having better risk management

2006-09-18T17:56:00.000+05:30

Global investors prefer companies that have better risk management capabilities, as they rate this aspect on top of the list while making investment decisions, says a survey by Ernst & Young (E&Y).

According to the 'Global institutional risk survey,' released at a function organised by the Bombay Stock Exchange on Friday evening, majority of the global respondents (69 per cent) identified transparency as the top priority when considering an initial investment in a company.

'Investors feel that they might be making investment decisions based on incomplete information about how companies are managing risks and stress the importance of a detailed investor communications program to make them aware about these risks,' the survey said.

Of the respondents, 61 per cent avoided investing in companies which lack a risk programme, while 48 per cent actually de-invested from firms where risk management was insufficient.

At the same time, 82 per cent investors were willing to pay a premium for companies with good risk management. The E&Y report is the compilation of studies conducted on 163 institutional investors across 16 countries. Of those studied, more than 30 per cent manage funds of over $1 billion.

The BSE has also launched a six-part series in association with E&Y on mastering risk.

The series will span over four months and will focus on themes such as operationalising enterprise risk management, role of internal audit in corporate governance, managing treasury risk and clause 49 & risk management -- maximising benefits of compliance initiatives.

The series was inaugurated by G Anantharaman, a whole time member of the Securities and Exchange Board of India, in the presence of Rajnikant Patel, MD and CEO, BSE, and Sunil Chandiramani, national director, risk and business solutions at E&Y. Get more information

Sensex 12000 - investing now

2006-09-18T17:52:00.000+05:30

It was another positive week for investors as markets closed in positive terrain (for the eighth successive week) to breach the 12,000-point barrier. The BSE Sensex appreciated by 0.76% and closed the week at 12,010, while the S&P CNX Nifty ended at 3,479 points (up by 0.23%). The CNX Midcap posted a gain of 0.38% and closed at 4,522 points. Chola Growth (2.03%) emerged as the top performer in diversified equity funds segment. Fidelity Equity (1.73%) took the second position, closely followed by Birla India GenNext (1.72%).

The 10-year 7.59% GOI yield closed at 7.83% (September 15, 2006), 13 basis points above the previous weekly close. Bond yields and prices are inversely related with rising yields translating into lower bond prices and net asset values (NAVs) for debt fund investors.

Funds from Birla Sun Life Mutual Fund dominated proceedings in the debt funds segment. Birla Income Plus (0.15%) and Birla Sun Life Income (0.15%) shared the top position followed by Birla Dynamic Bond (0.14%). Tata Income (0.14%) and PruICICI Flexible Income (0.13%) also featured in the list.

UTI Balanced (1.23%) surfaced as the best performer in the balanced funds segment. Birla Sun Life 95 (1.00%) and Birla Balance (0.95%) came in at second and third positions respectively.

Investment opportunities continue to compete for a share of the investor's wallet. You have a leading private sector AMC (Asset Management Company) filing for the much-touted Gold ETF (Exchange-Traded Fund), a new AMC planning to launch its very first NFO in the market, some new funds (NFOs) that are still on offer and in the midst of all this, investors have to contend with looming tax-planning commitments.

In terms of priority, our vote goes for tax-planning. Often investors are so 'enamoured' by the steady supply of investment opportunities, that critical investments related to tax-planning get sidelined until it's too late. Our advice � with a little over 6 months left for March 2007, first tie up your tax planning investments and then focus on other investment opportunities. Get more information from this article.

Points to consider before investing in SIPs

2006-09-15T19:42:00.000+05:30

1. SIP is a 'means', not an 'end'

Investors would do well to realise that the SIP is a means for achieving one's financial goals and not an end by itself. Starting off aimlessly with an SIP in isolation may not be the right step. The SIP needs to be a part of a broader financial plan (like planning for retirement or child's future for instance) and should be targeted at achieving a predetermined objective.

A directionless SIP could well turn into a financial burden at a later stage and instances of the same being cancelled are not uncommon.

2. SIP in the wrong fund

An investment in a poorly managed fund remains just that irrespective of the investment mode i.e. lump sum or SIP. Hence it is imperative that investors first select a well-managed fund which has a track record to show for. Simply making an investment through an SIP will not eliminate the inadequacies of the underlying investment i.e. the mutual fund scheme.

Similarly, investing in a sector/thematic fund using the SIP route doesn't necessarily reduce the risk associated with that investment. Hence before joining the 'SIP band wagon', address the most pertinent question - 'what's the right mutual fund scheme for me?' The investment advisor should ideally aid investors at this stage.

3. SIP performance

In their fact sheets, fund houses are known to flaunt the performance of their schemes assuming that investments had been made using the SIP route. It is not uncommon to see 5-year or even longer time periods being considered for this purpose.

While per se, there is nothing wrong with the same, this is often used as a ploy by poor-performing funds to window-dress their performances. Over longer time frames when equity markets have been through more than one cycle (a bull run followed by a bear phase or vice-versa), the benefits of rupee-cost averaging become apparent.

For example, let's consider an open-ended diversified equity fund which has been in existence for over a 6-year period. Since inception, the fund (8.4% CAGR) trails its benchmark index (12.9% CAGR). However an SIP performance over the same time frame could show the fund (28.1% CAGR) outperforming its benchmark (26.4% CAGR).

Hence the SIP performance can actually be misleading. Of course, the fund house is unlikely to reveal that its fund looks better on the SIP performance front because it fell harder than the benchmark during the lows, which in turn aided the SIP calculation to lower the cost of purchase.

4. The investment advisor effect

While most fund houses now charge entry loads on lump sum and SIP investments at the same rate, some continue to subsidise investors by charging lower entry loads for SIPs.

Investment advisors are known to use this to their advantage by pushing schemes with lower entry loads. Sure, investors do benefit if the entry loads are lower, but that doesn't qualify as a good enough reason for getting invested. Instead, investors should aim for investing in schemes that fit into their portfolios and match their risk appetites.

Another reason for investment advisors' promoting SIPs is the cash incentives offered by fund houses. Schemes like 'garner SIPs worth a predetermined amount and get a cash incentive of Rs 100 to Rs 2,000 per SIP clocked' are routinely offered to distributors.

Although, there is nothing wrong with the distributor earning a cash incentive or the investor bearing a lower entry load, getting invested in a scheme only for the same is certainly out of place.

5. SIPs are not foolproof

As a mode of investing, SIPs aren't necessarily foolproof all the time. While over longer time frames (3 years and more) and across market cycles, an investment via the SIP mode is likely to prove more lucrative vis-�-vis a lump sum investment, the same may not necessarily hold true over shorter time periods.

6. Beware of banks

If individual distributors are peddling SIPs to win contests, can banks be far behind (remember banks are among the biggest distributors). And because banks have access to your account details, you need to be even more careful of them.

In one instance, we came across an insurance (yes insurance, not investment) consultant representing a leading private sector bank (that had access to the author's bank account details), who made a pitch for a Rs 2,000 monthly SIP.

On being told that the minimum SIP amount for that particular AMC (Asset Management Company) was Rs 1,000 and not Rs 2,000, he pleaded ignorance. On checking with that AMC, we learnt that indeed the minimum SIP amount was Rs 1,000, but the bank in question had internally raised the SIP limit to Rs 2,000 for its clients!

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Mutual Funds benifit through Derivatives

2006-09-15T19:39:00.000+05:30

In the last few months a lot has been said and heard about the use of derivatives by mutual funds. A plethora of new fund offers (NFOs), which propose to invest in derivatives, has caught the attention of investors.

Derivatives have become a much-discussed topic in the investment community and investors are curios to learn more about it.

Simply put, derivatives are financial instruments whose value is derived from the value of underlying assets. These underlying assets can be equities, commodities, currency, and bonds among others. Derivatives like futures & options are used by mutual funds for hedging their portfolio to manage the risk, for speculation to clock profits and for arbitrage to earn risk-free profits.

Although, derivatives trading in India has been in existence for more than five years, their use by mutual funds is of a relatively recent origin. Previously mutual funds could use derivatives only for hedging purposes; also, they could deploy no more than 50% of their assets towards hedging.

Now as per new guidelines released by Sebi (Securities and Exchange Board of India), mutual funds can increase their net assets exposure up to 80% in the futures and options segment. This amendment in the regulation has cleared the path for mutual funds to use derivatives in their portfolio more effectively.

Hedging

The only thing that is certain about stock markets is the uncertainty. In recent months, we have witnessed volatility at its best. This has impacted mutual funds and other investors alike. In such a scenario, the two most likely alternatives for mutual funds are:

Sell the stocks immediately (i.e. distress selling). If the stocks have been purchased at higher prices, such an action could prove to be detrimental for the fund and its investors.
Remain invested and continue to bear the brunt of volatility. This could lead to interim losses (although notional) till the stock market recovers. But with derivatives, there is a third and smarter alternative:
Over shorter time frames, index futures can be used to reduce or eliminate stock market fluctuations.

Every portfolio has a market-linked risk associated with it. As a result, the portfolio reacts to market volatility. To insulate the fund from the same, the fund manager can hedge his portfolio by taking a contrary position in the futures market.

For example, if the fund manager foresees a downturn in the stocks held in his portfolio, he can hedge the same by selling (stock/index futures) in the derivatives segment.

Hedging should not be considered as a vehicle for making money. The best it can achieve is minimising the risk. Also the hedged position will typically make lower profit than the unhedged position. Alternatively there might even be instances where the hedged position incurs a loss, but this loss will be much lower than what an unhedged portfolio would have incurred.

Speculation

Speculation is a strategy in which a position is taken on the future movement in the prices of the shares. Previously mutual funds were not permitted to speculate in the derivatives market. They were allowed to use derivatives only for the purpose of hedging. But with the recent amendment in the regulations by Sebi, mutual funds can also use the opportunity of speculating in derivatives.

A fund manger may have a view that markets are going to rise and that he can benefit by taking a position on the index. Based on his view, he can buy Nifty futures and hold on to that position until the price rises to his expected level. If the fund manager's view about the market proves to be correct (i.e. the market rises), the fund will make a profit on its Nifty future position.

On the contrary, if his view proves incorrect then the fund will end up making a loss. Conversely, if a fund manager feels bearish about the market, he will sell Nifty futures and will hold on to it until the markets moved southwards. Similarly, the fund manager can also speculate in individual stocks by buying or selling stock futures/options.

Arbitrage

Arbitrage is a strategy, which involves simultaneous purchase and sale of identical or equivalent instruments in two or more markets in order to benefit from a discrepancy in pricing. This strategy normally acts as a shield against market volatility as the buying and selling transactions offset each other.

Recently UTI Mutual Fund and JM Mutual Fund have launched arbitrage funds, which will employ the arbitrage strategy of buying in cash and simultaneously selling in futures market.

In an arbitrage transaction, returns are calculated as the difference between the futures price and cash price at the time of the transaction. Ideally the positions are held till the expiry of the futures contract when the offsetting positions cancel each other and initial price difference is realised.

This arbitrage strategy makes the fund immune to market volatility i.e. the fund will not be affected by market fluctuations. Since the portfolio of arbitrage funds is completely hedged at all times to lower the risk of loss/erosion of gains, it also in turn caps the returns that the fund could have clocked if the portfolio was unhedged i.e. these funds have a limited upside.

Despite the fact that arbitrage funds offer investors the opportunity to benefit from investments in equities by making use of derivatives, the fund cannot be compared to conventional diversified equity funds, especially on the returns parameter.

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What is NAV - Its effect on Mutual Funds

2006-09-05T11:22:00.000+05:30

The NAV (net asset value) of a mutual fund has not been correctly understood by a large section of the investing community.

This is quite evident from the fact that mutual funds had been recently collecting huge corpus in their New Fund Offers, or NFOs, whereas the collections in the existing schemes were negligible.

In fact, investors sold their existing investments and invested in NFOs. This switch makes no sense, unless the new fund has something different and better to offer.

Misconception about NAV

This situation arises from the perception that a fund at Rs 10 is cheaper than say Rs 15 or Rs 100. However, this perception is totally wrong and investors would be much better off once they appreciate this fact.

Two funds with same portfolio are same, no matter what their NAV is. NAV is immaterial.

Why people carry this perception is because they assume that the NAV of a MF is similar to the market price of an equity share. This, however, is not true.

Definition of NAV

Net Asset Value, or NAV, is the sum total of the market value of all the shares held in the portfolio including cash, less the liabilities, divided by the total number of units outstanding. Thus, NAV of a mutual fund unit is nothing but the 'book value.'

NAV vs Price of an equity share

In case of companies, the price of its share is 'as quoted on the stock exchange,' which apart from the fundamentals, is also dependent on the perception of the company's future performance and the demand-supply scenario. And hence the market price is generally different from its book value.

There is no concept as market value for the MF unit. Therefore, when we buy MF units at NAV, we are buying at book value. And since we are buying at book value, we are paying the right price of the assets whether it be Rs 10 or Rs.100. There is no such thing as a higher or lower price.

NAV and its impact on the returns

We feel that a MF with lower NAV will give better returns. This again is due to the wrong perception about NAV. An example will make it clear that returns are independent of the NAV.

Say, you have Rs 10,000 to invest. You have two options, wherein the funds are same as far as the portfolio is concerned. But say one Fund X has an NAV of Rs 10 and another Fund Y has NAV of Rs 50. You will get 1000 units of Fund X or 200 units of Fund Y.

After one year, both funds would have grown equally as their portfolio is same, say by 25%. Then NAV after one year would be Rs 12.50 for Fund X and Rs 62.50 for Fund Y. The value of your investment would be 1000*12.50 = Rs 12,500 for Fund X and 200*62.5 = Rs 12,500 for Fund Y. Thus your returns would be same irrespective of the NAV.

It is quality of fund, which would make a difference to your returns. In fact for equity shares also broadly this logic would apply.

An IT company share at, say, Rs 1,000 may give a better return than say a jute company share at Rs 50, since IT sector would show a much higher growth rate than jute industry (of course Rs 1000 may 'fundamentally' be over or under priced, which will not be the case with MF NAV).

Tips for buying Stocks, Mutual funds

2006-09-02T16:23:00.000+05:30

Investors often face this dilemma -- should they invest in equity (stocks) directly or should they opt for the mutual fund route. The answer to us is pretty simple, really. However, for starters, let us examine the various costs involved in adopting any one route.

Comparative Analysis between Equities & MFs

Transactions	Equities	Equity-based MFs
Purchase � Brokerage	Around 0.5%	Nil
Securities Transaction Tax	0.125%	Nil
Entry Load	Nil	Around 2%
Sale � Brokerage	Around 0.5%	Nil
STT	0.125%	0.25%
Dividend -- Income Tax	Nil	Nil
Distribution Tax	14.025%	Nil
Capital Gains -- Short-term	10.2%	10.2%
Long-term	Nil	Nil
Loads	Nil	Loads may be applicable on entry or early exits
Effect of Dividend on Price / NAV	Full Reduction	Full Reduction
Annual Recurring expenses of AMC	Around 1%	Around 2.25%
Risk	High	Medium

If you compare the two avenues, item by item, you will find at least on the cost front, both are more or less even:

1. No brokerage for mutual funds either on purchase or on sale. This is more than offset by the entry/exit loads and AMC fees of mutual funds.

2. No Securities Transaction Tax for mutual funds during purchase. This is compensated by double the STT at sale.

3. Mutual funds are exempt from Dividend Distribution Tax (DDT) of 14.025%! But let us not get lured by this. DDT is charged to mutual funds when they receive dividends on the shares they own in the portfolio. Charging DDT to you when you receive the dividend from the mutual funds would be double taxation.

So this brings us back to square one. What does the investor do?

As mentioned in the beginning of the article, the answer is simple and it doesn't depend upon the expense or the tax structure -- instead it depends upon you.

There are more than 5,000 stocks out there out of which around 2,500 are actively traded. If you know any of these 2,500 stocks in detail -- that is, if you understand the business dynamics and the prospects of any industry and the companies within that industry -- then by all means you should invest directly.

For example, a friend of ours works with a pharma company. He has had decades of experience within the industry and knows the positives and negatives of each company within the industry fairly well. He would be a fool to waste such knowledge, thus very appropriately most of his stock investments are in the pharma sector.

Incidentally, the returns on his portfolio beat any pharma fund hollow. However, for exposure to the rest of the industries in the economy, he opts for the mutual fund route. Needless to add, his portfolio is thriving.

Similarly, one may be working in the auto, cement, engineering or even IT, use your inside knowledge -- and by inside knowledge we don't mean inside information, we mean use your domain expertise of your industry -- to invest well. Do not touch any stock that you don't know the business of too well.

Buy these smallcaps

2006-09-02T16:19:00.000+05:30

1. Ratnamani Metals:

Ratnamani Metal is a manufacturer of tubes and pipes of stainless steel and carbon steel. These pipes are used in industrial applications, in crude handling industries like refineries and power. Looking at the capex that the refinery industry has lined up, around Rs 85,000 crore in the next 3-4 years, the investment scenario looks positive.

The company too is proactively expanding their capacity, almost doubling capacity of both of its segments, stainless steel and carbon steel. It has capex of around Rs 65 crore.

The first phase of the capex is already implemented and the next phase is expected to get over by this year end. This is expected to grow the revenues as well as the earnings.

Based on FY07 earnings, we expect the company to report an EPS of around Rs 46 in FY07 and around Rs 56 in FY08. Based on current valuations at current prices, the stock is trading at around 7.5 times FY07 and 5.5 times FY08.

We would value the company as a capex ancillary, and a fair comparison would be a company like Adore, which is also a capex ancillary and which is trading somewhere around 9-10 times FY08 earnings.

We have valued the company on the same basis and we have put in a price target of around Rs 520. So it's a substantial upside and even the order book at around Rs 350 crore is almost at an all time high and it's almost around 1.2 times FY06 sales.

2. WS Industries

WS Industries manufactures porcelain insulators, which are used in power, transmission and distribution sector. The company has a very big plant at Chennai. They are about to set up a new plant for which they are looking at some locations in Gujarat and Andhra Pradesh. It will be a new plant, which will entirely manufacture the holocor insulator, which is a huge 20% margin business.

We have valued this company at around 8 times FY08 earnings, we expect an earnings of around Rs 7.5. So the business will be valued at around Rs 60, the company has lot of upside to offer from the potential realty venture.

They are developing around 15 lakh square feet of IT park near their current facility at Chennai, for which they have tied up with TCG. This 15 lakh square feet area will come up in four phases in the next four years. The first phase is expected to start around June 2007, the first phase will be around 2.5 lakh square feet.

Therefore, the land value itself is around Rs 100 per share and even if you discount it by 50%, the realty value per share works out to around Rs 50.

3. Transport Corporation of India

Transport Corporation of India or TCI has got an ideal strategy for its two businesses. The first business is Supply Chain Solution where it offers supply chain solutions to clients like Mahindra & Mahindra, Bajaj Auto, Cadbury's, Amul India.

This is an extremely higher margins business of around 10-12% on EBITDA basis as compared to 2-2.5% for the pure transport business. So basically the growth in this business will be exponential, of around 40-45% for the next 3-4 year.

The second business they are concentrating on is the courier division wherein they offer specialised services for the courier industry. So overall they have got a capex of around Rs 400 crore over next 4 years.

The company is also merging their group companies TCI Sea Ways, which is into coastal shipping. So on a historical basis, the merger is earnings accretive; for example on a standalone basis TCI has reported around Rs 14 EPS for FY06.

On a consolidated basis, after the merger of TCI Sea Ways the EPS works out to Rs 18. On an historical basis also, the merger is earning accretive by around 30%. They also have a dedicated capex for TCI. So going forward, they have got good amount of capex for both the transport as well as the shipping division.

We expect around Rs 25-26 EPS in 08 for the consolidated entity. But this company charged depreciation on an accelerated basis, so cash EPS is substantially high.

How to choose the right mutual fund

2006-08-31T12:19:00.000+05:30

Mutual funds have emerged as the best in terms of variety, flexibility, diversification, liquidity as well as tax benefits. Besides, through MFs investors can gain access to investment opportunities that would otherwise be unavailable to them due to limited knowledge and resources.

MFs have the capability to provide solutions to most investors' needs, however, the key is to do proper selections and have a process for monitoring. Let us see how MFs can make a difference to an investor's financial planning and its results.

Planning for long term objectives

Many people get overwhelmed by the thought of retirement and they think how will they ever save the huge money that is required to lead a peaceful and happy retired life. However, the fact is that if we save and invest regularly over a period of time, even a small sum of money can suffice.

It is a proven fact that the real power of compounding comes with time. Albert Einstein called compounding "the eighth wonder of the world" because of its amazing abilities. Essentially, compounding is the idea that one can make money on the money one has already earned. That's why, the earlier one starts saving, the more time money gets to grow.

Through mutual funds, one can set up an investment programme to build capital for retirement years. Besides, it is an ideal vehicle to practice asset allocation and rebalancing thereby maintaining the right level of risk at all times.

It is important to know that determination and maintaining the right level of risk tolerance can go a long way in ensuring the success of an investment plan. Besides, it helps in customising fund category allocations and suitable fund selections. There are certain broad guidelines to determine the risk tolerance. These are:

Be realistic with regard to volatility. One needs to seriously consider the effect of potential downside loss as well as potential upside gain.

Determine a "comfort level" i.e. if one is not confident with a particular level of risk tolerance, then select a different level.

Regardless of the level of risk tolerance, one should adhere to the principles of effective diversification i.e. the allocation of investment assets among different fund categories to achieve a variety of distinct risk/reward objectives and a reduction in overall portfolio risk.

It helps to reassess risk tolerance every year. The risk tolerance may change due to either major adjustment in return objectives or to a realization that an existing risk tolerance is inappropriate for one's current situation.

Market cap of a company signifies its market value, which is equal to the total number of shares outstanding multiplied by the current stock price. The market cap has a role to play in the kind of returns the stock might deliver and the risk or volatility that one may have to encounter while achieving those returns.

For example, large companies are usually more stable during the turbulent periods and the mid cap and small cap companies are more vulnerable.

As regards the allocation to each segment, there cannot be a standard combination applicable to all kinds of investors. Each one of us has different risk profile, time horizon and investment objectives.

Besides, while deciding on the allocation, one has to keep in mind the fact whether the allocation is being done for an existing investor or for a new investor. While for an existing investor, the allocation that already exists has to be considered, for a new investor the right way to begin is by considering funds that invest predominantly in large cap stocks. The exposure to mid and small caps can be enhanced over a period of time.

Tags: mutual funds, liquidity, investors, gain, investment, retirement, long term, planning, market cap, risk profile, portfolio, invest funds, large cap, middle cap, small cap

2 stocks you could buy

2006-08-29T14:44:00.000+05:30

Investment analyst, Ashish Chugh recommends Deccan Gold Mines to the long-term investor, who has an appetite for high risk.

He also likes Shalimar Paints because he sees the 100-year-old company sitting on assets, which are valued at historical cost. The replacement value of these assets can benefit the company going forward, he predicts.

Excerpts from CNBC - TV18's exclusive interview with Ashish Chugh:

Why do you like Deccan Gold as a prospect?

Deccan Gold Mines is a speculative pick in the gold mining sector. It has got no revenues as of now. With a marketcap of Rs 80 crore, it may look to be highly expensive. But if you see the potential of the sector, it maybe an interesting story going forward.

This company has been promoted by Australian investors through a Mauritius subsidiary, where the promoters hold about 70 per cent stake.

If you see the gold mining business now, it is like the oil exploration business, where there is a high degree of uncertainty involved. Nobody knows whether the amount that is being spent for the exploration process will really yield any results or will have to be written off. So from that perspective, this is a stock for the long-term, high-risk investor.

The advantage Deccan Gold has is that it is the first listed company and the first private sector company in the gold mining sector. It is sitting on some of the most prospective blocks in the country.

This company has got close to about 10,000 square kilometer of blocks in different states like Karnataka, Andhra Pradesh, Rajasthan and Kerala. The company has also done a lot of exploration for the past four years. It has received encouraging results from its blocks in Karnataka, particularly the Hutti block and the Shimoga belt block.

Gold mining is a business, which still is in its infancy in India. India produces just 3 tonne of gold per annum as compared to 300 tonne, produced by Australia. So there is a huge unexplored potential in the sector. And with Deccan Gold being one of the first players, sitting on the most probable blocks, has got a first mover advantage.

Shalimar Paints is your other recommendation. How does it compare to the rest of the listed stocks and why do you like this one?

If you see the paints sector, there are five major players there. The largest, of course, is Asian Paints , which does a turnover of close to Rs 2500 crore and commands a marketcap of Rs 6200 crore. Then comes Nerolac Paints, Berger Paints, ICI and Shalimar Paints.

If you see the valuation of these companies, there is a huge valuation gap between the fourth and the fifth largest player, even though there may not be such huge differences in the size of their business. Berger does a turnover of Rs 1000 crore and has a marketcap of Rs 1500 crore, while ICI does a turnover of close to Rs 950 crore and has got a marketcap of Rs 1250 crore.

Shalimar does a turnover of close to Rs 220 crore and has a marketcap of just Rs 60 crore. There is a huge valuation gap between the fourth and the fifth largest player in the sector, which I believe should narrow down.

Shalimar Paints has got three manufacturing plants, which are located in Howrah, Buland Shaher and Nashik. They are putting up another greenfield facility in Tamil Nadu, which is expected to go on stream in the next six months.

Not many people are aware of the fact that this is a company, which belongs to the Delhi-based Jindal group. This is a 100-year-old company, which was acquired by the Jindals along with an NRI investor in 1989. Since the company is 100 years old, it is sitting on assets, which are valued at historical cost.

Tags: investment, gold mines, CNBC TV18, deccan gold, oil exploration, stocks, high-risk investor, long term, paints sector, nerolac, shalimar, asian paints, berger paints, ICI, manufacturing plant, NRI investment