Market is jittery so what the Mutual Fund investors should be doing ?

Market is jittery so what the Mutual Fund investors should be doing ?

Last some days Indian stock market seeing some big downside followed by some small upside and then game of upside , downside continuing . Reasons are Chinese and US market impacts about which we can do nothing . What will be happening is days to come , how long we will see the volatility , Is there more fall expected in market levels etc , these questions must be coming in the mind of Indian Mutual Fund investors . Experts have been airing their opinion . I have always held a view that these opinion on market levels in short to mid term are very difficult to predict . My observation has also been that looking at last very few days trend and news these experts air their view . How far they prove to be correct on continuous basis is again something which has not been always proved with full accuracy . My concern is not about market levels or experts prediction but what’s going in the mind of Mutual Fund investors and what their mindset should be .

Firstly when we say Equity MF is a long term investment i.e must have a minimum investment horizon of 3 years plus or 5 years plus ( for those who are more conservative ) it means that the short term volatility risk is well covered in this minimum time period . There are two type of transaction happens – first you invest i.e buy units of the equity mf scheme selected and after more than 3/5 years you redeem i.e encash your units purchased .

One mistake which most investors do is when they buy they look at market level or at least influenced by the rising market level and when they sell either it is due to need or to book profit or may to save the loss if market falling . Investment in Equity MF looking at market level is the wrong approach .

I will give you an example of onion which had caught the attention of whole India due to rising price. Suppose onion is priced Rs 6 per kg or Rs 60 per Kg or Rs 200 per kg . Does this changes the quality of onion or the taste of onion ? Definitely not . I might be buying less or more due to price but quality or taste is independent of it . Price is affecting my buying behaviour  . The benefit in terms of taste that the product gives is independent of the price. Lets assume in above example that price is reducing ,then will you buy less or more onions ? 

When you are investing in MF again market level or NAV is something which can affect you psychologically but you must understand that you are investing for the coming benefits i.e the growing earnings of the companies where fund manager has invested on your behalf . It will never happen that companies are growing in terms of earning and its market price will not grow . So in long term with rise in valuation of companies  stocks which are in portfolio , NAV will grow and so will grow your return. Generally most of the money invested by fund manager is with mid to long term view and some / few with short term view where he wants to take advantage of price/market volatility . What should affect you is the quality of portfolio or earning ( profit after tax ) generation capability of the companies . If that is what getting affected then yes there is a point to worry . If the earnings of the company is externally determined rather than internal ( domestic ) demand then yes some area of concern as investor . But even in the worst of recession situation ( 2008-09 ) we did not see any downswing in consumption patterns in India . When our economy is consumption led economy then the industries /companies catering to local demand will be less affected .

Indian investors who are investing in equity MF schemes should not worry about market levels as that reflects the instant buying and selling behaviour of the market participant which is in no way related to the earnings of companies . Ultimately as MF investors you will gain till earnings keep growing so be calm and stay invested . Don’t get affected by short term views of experts . It is more for day traders in equity and not for long term equity mutual fund investors .  

How much Equity and how much Debt should be in a Portfolio

How much Equity and how much Debt should be in a Portfolio

There is a thumb rule that Debt investment percentage should = age and Equity investment percentage should be 100-age . The more younger you are you should be more in equity . Alternatively the older you are your investment should be more in debt. We should take not take the mathematical proportion with complete rigidity but rather than evaluate profile of the individual . Thumb rule is relevant only when the networth or income level is inadequate to meet the day to day livelihood  . Does investment in debt make any sense for Mr Amitabh Bacchan or Mr Ratan Tata who are not young .

Income and Job stability is the key thing before thinking on portfolio allocation in debt . Lets take an example of an individual working in Government organisation , PSU and in a big reputed private sector brand like TISCO, TELCO , Infosys . Does he carries income risk or job risk . In my view No. His monthly income is there to take care of his routine expenses . For such investors opportunity of maximising gain should be the investment decision making .

Many experts also say when you have retired your investment should be almost all in debt . Again we need to look why . Its because may be you are dependent on that money in form of either dividend or withdrawal to meet your both end meet . Lets take present day example. Equity is giving or expected to give higher return than debt . So till that is happening or expected to happen  why one can not be in equity mutual fund and opt for monthly Systematic Withdrawal Plan from Equity MF scheme rather than investing in debt mf scheme and opting monthly SWP from debt MF . Take an example -- equity mf is giving a return of 13 to 18 % CAGR and debt MF 8 to 10% CAGR .  You are adding some 3 to 5 % extra return in Equity fund which creates a bigger base on year to year and money grows faster vis a vis debt fund . Also for same amount withdrawal from both type of schemes the corpus left in debt will reduce faster than in equity fund i.e when in equity fund sustenance period is longer .

Proportion of equity is not what someone should decide while doing asset allocation. Its the minimum proportion of debt to meet basic need and also giving a mental comfort level to be decided  . Rest all should go to growth asset. Minimum requirement will vary from individual to individual but the basis of decision should be similar. You should have debt investment to ensure you get the quantum of amount you require in short to mid term . Any need of money required in next 3 year should not be left to market risk but to be safe . For a period 3 to 5 year again one has to look at the market situation and take a call . So decision can range from debt to hybrid to equity i.e perception on probability of loss  due to market risk . Beyond 5 year no reason to worry on asset risk but go for equity. Having said all these there is a need to evaluate year to year performance of both asset i.e debt and equity. If equity showing a declining trend for 2 consecutive year then you need to understand the factors which is leading to that. If the factors are there to stay for long then still keep safety rule of 3-5 years and not beyond that . 

Zee Business Money Guru 06 July 2015 Mr Prakash Sinha Director, Nutur...

Drivers of business mobilisation for an AMC

There have been 3 drivers of business mobilisation for Mutual  Fund in India   - brokerage ,performance and value add .

Now with AMFI putting  cap of max 1 % on upfront brokerage and trail calculation on a defined formula i.e making a consistent percentage every year based on total expense ratio,  chances of differential payout is now less until unless AMC wants to circumvent the AMFI guideline . So again scope of creating a differentiating factor on brokerage front for AMCs is now almost over . 

Performance can be variable . Past performance can be taken as yardstick for consistency or volatility but cannot be taken as benchmark for future return .  A fund  can not be a top performer always  nor do all the funds of the same AMC be the best performers.  Creating a positive differentiating factors on basis of historical performance may not be always easy for an AMC and moreover performance is not always in AMCs control .

Now the only driver where an AMC can structure and strategise for big positive differentiator for business mobilisation is Value Adds . With brokerage shrinking , performance being market driven , client ‘s long term loyalty a major influencer for business sustenance , growing competition (from non risky traditional products , tangible assets and Insurance products ) there has to be enough motivation for distributor for selling MF products . This is where AMCs role comes in big way .

The most important Value Add could be Training , skill enhancement , competency development activities given to distributors . Client management challenges , beating the competition , earning the long term loyalty of clients , growing sustainable revenue all these can be resolved through a structured and focussed training activities which AMC should be taking . In fact my belief is one way of judging the seriousness of an AMC playing its role for industry growth is evaluating their training activities both from qualitative and quantitative perspective .  

I think it is a very good opportunity for each AMC to create a value added differentiating factor . We talk of relationship , bonding with distributors  but the underlying reason now for these are who helps most in developing the sustainable growing business model. 

Investment Advisory regulation has been brought almost 2 years back by SEBI but how many AMCs have really structured their training activities to create Investment Advisors? Why SEBI is not having some incentive for those AMCs who are using the resources meticulously on Training and creation of Investment Advisors . Unfortunately training for most in the business is of least priority as evident from the nos of resources put in force but now that should be something AMCs should be seriously looking to create a competitive edge over others and create a differentiating factor .

Advisors Alpha and Beta Management

When we invest we look at alpha and beta. Simply put, how much more is the fund’s return over normal benchmark and how well has the market risk been managed? Everyone wants a minimum return and alpha gives an indication of return above the minimum realistic expectation. All investment carries some risk and if one goes for more return i.e. through equity fund route, he has to counter the market risk and so beta gives us the measure of how the fund is placed vis.-a-vis. market risk. Tracking of beta not only gives an idea of riskiness of an equity fund but also how well the market risk is being managed.

Let’s use the two terms in an advisor context in a clients investment advice. An advisor who just helps to invest and get an above inflation return or a normal return is providing a positive alpha but is he good enough? A good advisor is one who understands all forms of risks well and helps his clients to manage that risk at the same time.

In reality the understanding of investment risk for a common investor is strikingly different from the text book definition of investment risk. The understanding of investment risk for a common man is loss or something that has probability of loss, whereas, investment risk actually means deviation of realised return from the expected return. This could be on the positive or on the negative side. Movement on either side creates new expectation in the mind of common investor. Unrealistic expectation of return or unnecessary fear of loss is also a form of risk which an advisor has to manage.

An advisor is supposed to do risk profiling and recommending as per clients risk bearing and risk taking ability. How can he judge risk bearing ability accurately? Three years back if an advisor said to anyone that you will get 15 % return in equity fund he would have been very happy but if he says the same statement today will his client be having same happiness? Now he has experienced over 50% return so his expectation might be different now.

Now if the expectation of a common investor grows due to his good experience in the recent past so now an advisor has to tackle a new range of risk i.e. new unrealistic expectation. For the client may be there is no risk ahead i.e. no visualisation of loss but the advisor knows well that if the recent deviation has been abnormally much more on positive side then in short term future the risk has increased i.e. there could be correction in market and stock prices. The more the positive deviation from normal return, the more is the risk on the expectation side. So now how can an advisor correctly judge the risk bearing capacity or risk tolerance level of an individual? Here the advisor with better beta management comes into play i.e. how well he convinces and normalizes his expectation.

An advisor’s risk management ability lies in is his advisory approach and communication- how well he evaluates all types of risks that are directly or indirectly associated with his client. Client can sometimes overlook his own financial status, fall into greed or fear stage. Is an advisor bold enough to differ with his client’s view or for the sake of appeasing the client agrees to what he is saying and not cautioning him with logical explanation? It’s now the advisor’s job again to not do something which can hurt client financially if things go wrong. Impact of notional and real return on clients mindset needs to be properly understood and ways and means to manage it with perfection is the advisor’s beta management talent.

He should be one who is cleaver enough to take the best of opportunities provided but at the same time protect the growth. He should be the one whose intent in long term is capital appreciation but capital preservation at every new stage is equally important.

The investment return growth path he should visualize for his client is not up and down but it could be the stair-case approach i.e. there is a vertical growth but that growth is preserved also. In other words, growth is vertical intent and preservation are horizontal intent at each successive level.

11 Ps for Success in Mutual Fund Investment

11 Ps for  Success in Mutual Fund Investment

11 players make a cricket team or a football team. They play different roles yet blend together for the team to win. Let’s identify your 11 such players which will help you win the game of Investment in Mutual Fund. Yes, market has volatility and we do see snake and ladder scenario .You have to play the game of investment like Chess with clear strategy leading you to winner position.

These 11 Ps to be followed for effective result. 

1 Priority – Why you need to invest, why it is important and what will happen if you don’t invest. The first thing you should ask yourself is if you are sacrificing present consumption need for investment for future need how distant is that need? How important is that need i.e. if not able to fulfill that need what will be the impact? Have you measured the extent of emotional and peace of mind loss ? How much money you desire to fulfill that need. Since inflation will reduce the purchasing power of your money you need to be adequately compensated for that also. So it is a choice between – capital preservation for liquidity need a sudden requirement which can happen anytime ( up to 6 month ) or safe and regular income to meet well known expenses in short to mid-term ( 6 month to 3 year ) or return with growth so as to beat inflation and meet huge requirement in mid to long term ( beyond 3 years ). So you should be very much clear on your investment objective which should be matching with your financial goals.

2 Profile - All assets are good and all investment products are also good. Key is what is more suitable to you considering your profile and need. You need to know yourself . Each individual is unique in terms of net worth, mental strength and ability to withstand loss. Investment is a continuous process and every investment you make  may not give same result even in same scheme as each will be subject to different market condition and dynamics. Ability to understand the different impact and withstand the temporary windfall or upsets will be test of your mental endurance. Are you aware about the risks that the fund is facing? Are you aware how well the risks are being managed? Are you being properly compensated for excess risk if taken by fund manager ?  So you need to know your risk taking ability and my risk tolerance level.

 You need to understand what makes you happy, what upsets you. What can affect you momentarily and what cannot. You should also know how rational or irrational you are in accepting or rejecting short term abnormal gain or loss. You should not be perturbed by notional loss or gain and more concerned about real gain or loss. Stick to your basic risk profile while building the core part of your investment portfolio. Take risk only to that proportion which you can accept in case adverse result comes.

3 Propensity to save – Most people know why they need to invest but many still don’t invest. Many times either you keep spending more and not left with any money to save. Many times you say to yourself, will start investing from next month and that next month never comes. So one has to be tough to self, get discipline and has to generate surplus. Pl always remember whatever you are investing it’s for benefit for you and your family members. Simply ask what is more important – spending on going out regularly to restaurant, buying new apparels or higher education of child, own retirement planning ? So you need to differentiate between basic survival need, discretionary needs and financial goals needs. Analyze discretionary expenses , scope where it can be spent less . Be tough to yourself, generate surplus for investment.

4 Product – Once you are clear on priority(investment objective) you decide on investment horizon. This will give you which asset to go for. You have to see which asset and investment product within that asset class have historically met your priority criteria.

Generally when doing asset allocation it is more of a passive strategy i.e. ratio between safe asset (debt) and growing asset (equity,gold, real estate) to a large extent is decided as per profile of investor. Better not to take extra risk while deciding asset allocation. For example if your asset allocation is 60: 40 (Debt: Equity) you should not move to 20:80 i.e. large deviation from your suitability level. Yes there can be some shift but not a large percentage.  Younger , financially stable investor can opt more for equity asset whereas older and financially not so secured need to be more in debt .

The 2^nd stage is product selection. Within both debt funds and equity funds you have variety of products, each meant for different objective and so has the portfolio structure accordingly. Investor investment objective should match with scheme investment objective.

Yes you can take some risk when going for product selection if a short to mid term opportunity is there . Example – You can increase the proportion in mid cap or some sector fund. Also may be in debt can look for duration management fund or fund with diverse credit  quality but within investment grade debt securities to enhance the yield . There can be lateral movement between defensive strategy to aggressive strategy depending on situation. Always start building a portfolio with a strong base i.e. funds which are less volatile due to market risks and slowly add some risk in the portfolio with later on investments. Whenever you are investing subsequently you should see how your asset allocation and investment portfolio looks and then invest to fine balance between taking advantage of short term opportunity and long term stability as well. Pl always remember at no point of time your portfolio should look risky ( e.g. – extent of mid cap & sector fund, concentration in few schemes , high duration fund or long term fund , debt fund having other than investment grade debt securities etc. )  

You also have to see given the present economic situation how these products are going to perform in short term to mid-term. You need to have conviction before you move ahead else you will fall prey to short term impact but once you are aware of short term impact, its presence will not affect you as you are convinced on ultimate result . E.g. in 2009-10 when equity was down there even knowing that equity gives good return in long term the short term volatility and losses did not evoke confidence in many and they stayed away from investment. But if the same person knew that he was getting quality asset at a discount and needs to have conviction in long term real and true story he would have kept investing and now his money must have grown few multiple times .  

5 Performance -- How you want return to come – periodic (dividend) or capital gain form? It is again based on your cash flow need. As your major concern is return, you need to be aware of past and must have realistic expectation. Don’t go for product which has done very well in short term and have been average to poor most times.. Consistent good performance in long term and lesser volatile in short term should be the key for fund selection. Don’t go for fund with high beta, high standard deviation unless you are aggressive investor i.e. ready to take high risk for more return.

Consistent performance is an outcome of sound portfolio and better fund management. There can be improvement or deterioration in performance and you need to watch it. If that trend is followed for long time you need to know the reason and take corrective action . Even in case one gets very high return in short term one need to have a rational and logical view of that. A one-time aberration cannot be an appropriate benchmark.  

6 Post Tax return – Return from investment is not the return to investor. Certain investment products enjoy tax benefit and certain products are taxable when dividend paid or when the investment redeemed so the net return to investor is post tax return. Tax implication is must to understand before investing. Now the period of short term has changed for debt fund (up to 3 years) whereas in equity fund it remains the same (1 year) for capital gain. Taxation on periodic return i.e. dividend also varies for debt and equity schemes. Though dividend is tax free in the hand of investor for both debt and equity schemes but in case of debt fund there is div for both debt and equity schemes but in case of debt fund there is dividend distribution tax . You need to be aware of your net post tax return as each individual falls in different tax slabs.

7. Process – When you are investing you have to follow certain process and procedure. There are online and offline application filling, payment procedure, transaction process are both tech based and paper based. You need to understand which process to go considering the time it saves for you. Better to opt for direct credit, ECS, Nomination, e-statement etc. .Opt for less paper work if you can . There is now direct plan . To invest directly or through advisor again is a matter of trade off between some minor cost advantage vs benefit of advise , information , sales and after sales services which you will be getting .

8.  Pattern of Investment – Should you be investing lump sum or on regular basis? Nothing wrong in lump sum but that investment if going to equity should be for at least 5 years. Also what is that lump sum as percentage of your accumulated investment till date? If it is very high proportion and if in short term return goes low or volatile it might affect your mental perseverance so alternatively you can invest in safer asset (debt / liquid fund) and then through STP route move to targeted Equity fund.

Should one go for NFO or in Ongoing scheme with proven track record ? . If the fund manager is a proven one, NFO with good prospect can also be looked into.

Systematic Investment plan (SIP) is the best way as you are regular, investing at different market levels so averaging your overall cost of acquisition. As your investment base is growing power of compounding in growing scenario adds to more growth in return.

9.  People – This is very critical. They can be your guiding source or misguiding ones also at times. If you are being advised by someone that person should understand your priorities, profile and suggests you what is proper for you. Your advisor should have a fair understanding of market and economic condition of today and the positives and negatives which are likely to affect the present economic or market condition. His knowledge or information should not be just hearsay but from credible, reputed source. Whenever you are investing ask your advisor why you should be investing in that fund .His answer should be logical, practical and factually convincing. Pl also remember your advisor is also a human being whose judgment also at times can go wrong but what is more important is when he recommended you that fund there were enough logical reason for investing in the fund . Decision is made on present based on past performance and on future outlook .

Don’t follow blind advice just because it is coming from your close friend or relative. Do some cross checking .  As each individual is unique so could be experience or interpretation. What fits for one need not be fitting another.

10. Patience -- Like any other decisions,  investment or redemption decision should not be done in haste but with cool mind .Don‘t rush for result to come early. Don’t panic if short term fluctuation or notional aberration. Once you have selected investment product after all due diligence backed by proven track record and historical trend don’t get swayed by short term impacts .There is a proverb – Patience always bear sweet fruit. But patience does not also mean to wait for eternity. Have regular portfolio evaluation and just don’t get influenced by short term temporary impacts. If cause is real and going to stay for long period then maybe you can have some moderation in asset allocation or lateral movement to safe fund but never stop investing. Investing should continue as habit.

11.  Precaution – It’s your money which is at risk. It you who is going to gain if taken right decision and lose if wrong decision. So you should have a list of clear dos and don’ts to be followed. This list you should have before you invest. That should act as a guiding principle to you . You should know what are the greed and fear and what has been the consequences when has fallen prey to it . You should refer to precautionary Do’s and Don’ts in case you feel at stressed due to notional loss or not able to take any decision or feeling tempted by greed or fear .

Investor Education

Last few years all MF related regulations and changes by SEBI and also some by IRDA for insurance have been for the benefit of clients and industry at large.  The regulators want better and quality advice to the investors from their distributors/ advisors. An industry exists because of clients only.

In spite of long term gain in reality, why there is just 4% of total investment in equity. If experience of most has been good then why short term losses and in some cases notional losses affects their long term investment decision?  Why retail investors are still averse of investing in equities? Yes today some are investing but frankly how many of them are doing with real conviction?

We all blame investor’s psychology – greed and fear in investment decision making. But who has created this greed and fear? They themselves or someone else. A strong conviction developed by correct understanding of risk can only counter the investor psychology.

How many know the real interpretation of risk? For most risk means only loss or chances of loss . We always talk risk of product or market but why not talk risk related to client also? Why not talk of risk of mismatching communication to client? Why not talk on risk due to too many communication to clients? Why not talk of changing communication pattern with changing situation to increase sale? The risk at best is expressed as, “ Mutual Fund investment is  subject to market risk pl read offer document before you invest “ but does any individual who is selling elaborates that when executing the deal?

Risk is capitulating to greed and fear at a wrong time . Risk is not understanding what you really want but opt for what influenced . Risk is in not understanding product sales communication properly and its suitability. Risk is straying from objectives and goals . Risk is not understanding own mental fortitude and preparedness in case of negative notional return or negative  realization in return from what expected .

The psychology of an individual keeps changing with changing situation and realization of notional or actual return on investment. Every individual is unique and so is his experience. Even the same amount of return on the same amount of investment can invoke different reactions.

Investor education is not only talking about inflation, financial planning and then positioning the product. Some add fund management concepts , explain market , economy etc. Yes these are good information for one to know . But more important is that these are changing dynamics and for a lay man understanding of change, various risks due to change and its impact on return on investment as also equally important .

In Investor education we have to make him aware of WHY, HOW AND WHEN to invest.  I would further extend it to WHY he should not be investing in ........., HOW he should not be investing in ......... and WHEN he should not be investing in .......... i.e care and caution also . So we have two extremes and between these two extremes the risk of losing money and risk of losing opportunity of making money lies and the whole needs to be explained to client . Asset risk has to explained in terms of withholding period .

Investor education objective should be creating right conviction and should be process oriented keeping the client more into focus . Yes it may be a long drawn one but the result will be there to stay and not short term one .

·         If the client has not made any investment till date why he has not done . Need to understand his psychology and ignorance level first . Remove small doubts and fear with logical and practical examples which he can correlate with his life easily.

·        Helping Client do some introspection of his own investment and disinvestment decision. Data are with the AMCs / Insurance Cos and they can help the client

·        Make them aware what right and what wrong they have done through analysis on return, product , time horizon.

·        Make the client feel what led to that decision. Was it a well thought one or impulsive .

·        End with learning for not to repeat some, be cautious from some and above all identify what is really wise and prudent.

I think SEBI , AMFI , AMCs , Insurance companies all have to play a vital role . We always learn better when we understand our mistakes. So the starting point for Investor Education is the one who are manufacturing the investment products. AMCs should not capitalise of investors ignorance for more sales. Any buy in has to have conviction of investor .They need to learn from the past from own actions and inactions. Use that learning a powerful tool for guiding investors and advisors. Investor education starting point should start with AMCs own education of Investors understanding of ............